Mechanic's liens are a significant source of claims. This bulletin advises you of required procedures relating to mechanic's liens and mechanic's liens coverage only on Loan Policies during construction (including rehabilitation, renovation, and the like). It should be read in conjunction with other National and state-specific Bulletins relating to mechanic's liens.
(A).Do not delete the general mechanic's liens exception from the Loan Policy during construction without underwriter approval.
(B).Require documentation described in paragraph B below if no visible commencement of work done.
(C).Require Mechanic's Liens Documentation described in paragraph C below if visible commencement of construction has caused loss of priority.
(D).Include our Pending Disbursement Clause as described in paragraph D below if the Loan Policy is issued during construction.
(E).Other forms of coverage, including an acceptable Down Date Endorsement, are described in paragraph E below.
(F).Any Future Advance Endorsement must contain a mechanic's liens exception as described in paragraph F below.
A. The General Mechanic's Liens Exception
All commitments and policies should contain a general mechanic's liens exception for "Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records."
Before or during construction, or if you are unable to determine that no construction has been or will be performed, you may not delete the general mechanic's liens exception from a Loan Policy without underwriter approval.
B. Visible Commencement if Mortgage Recording before On-Site Work Establishes Priority: Documentation that No Lienable Work has been Performed
Many state statutes provide that mechanic's liens relate back in time to the date of commencement of the work. Some statutes also permit all liens of all potential lienors to have equal priority, and to relate back to the commencement of the first work performed on the project by anyone. The definitions of "commencement" and "work" vary. For example, commencement may or may not include demolition or site preparation work or services of architects, engineers, and surveyors. It may even extend to work performed off site. You should be familiar with your state's definitions and requirements and you should determine that the mortgage complies with state law for future advances and for a construction loan.
In your state, recording of a construction mortgage prior to commencement of work can in certain cases establish the priority of the mortgage - including the priority of future advances - over subsequently-filed mechanic's liens. In such situations, as a condition to providing mechanic's liens coverage, you must confirm that no work was performed during the applicable period. This should be accomplished by the documentation ("Visible Commencement Documentation") in Exhibit 1 below.
Approval: An underwriter must approve issuance of the Loan Policy.
You must retain these documents and approval in your file
C. Mechanic's Liens Documentation if No Priority or Loss of Priority/Lost Priority
Initial priority of the mortgage can be established by recording the mortgage prior to commencement of work. However, the failure to record the mortgage before commencement of work can jeopardize such priority ("loss of priority" / "lost priority"). These "no priority" or "lost priority" situations present the potential for substantial claims.
In "no priority" or "loss of priority" situations, the Mechanic's LiensDocumentation (consisting of "Financial Documentation and Indemnities" and "Project Documentation"), all in a form acceptable to the Company, are required as a condition to providing mechanic's liens coverage, unless otherwise approved by an underwriter (Exhibit 1 below):
Approval: An underwriter must approve issuance of the Loan Policy.
You must retain these documents and approval in your file.
D. Pending Disbursement Clauses/Endorsements (See Exhibit 2 below)
A pending disbursement clause, either inserted as an exception or added as an endorsement, must appear in all Loan Policies issued prior to and during construction. This requirement applies whether you have been able to document the absence of construction or not. You should use PDCX06, or PDCX07, if approved by an Underwriter. You may not modify the clause and an Underwriter must approve the clause. You may only use PDCX08, if the Visible Commencement Documentation establishes that no visible commencement of work has occurred when the Insured Mortgage is recorded and if an Underwriter approves use of PDCX08.
PDCX06 provides limited coverage for mechanic's liens arising from non-payment of bills for labor performed or material furnished prior to a specific date, which date may be the date of the current disbursement. PDCX07 provides limited coverage for mechanic's liens by those persons or entities receiving payments directly from the Insured pursuant to written disbursement authorization approved by the Insured. PDCX08 does not require ongoing receipt and review of lien waivers, or documentation of payments, etc., as a condition of issuing a down date endorsement; however, as a condition of each disbursement, title must be continued and no liens must be of record.
E. Other Forms
(1) If approved by an Underwriter, you may add the general mechanic's liens exception to Schedule B and additional include the following in a General Endorsement (TIRBOP-PA ENDORSEMENT 1070) if approved by an Underwriter: "Notwithstanding the mechanic's lien exception in Schedule B ("any lien or right to lien for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the public records"), the Company hereby insures the Insured against loss or damage by reason of the lack of priority of the lien of the Insured Mortgage over any lien imposed by law for services, labor, or material furnished through _______ [e.g. Date of Policy] for an improvement to the land. This endorsement does not insure against loss or damage by reason of any act or omission by the Insured with respect to the Insured's rights against non-insured obligors with respect to the Indebtedness, which act to the Knowledge of the Insured results in an impairment of the Company's rights of subrogation to collect the Indebtedness secured by the Insured Mortgage as set forth at Condition 12."
Use of any other form of pending disbursement clause, or any other endorsement providing mechanic's liens coverage, or issuance of a "clean" policy (i.e., where the general mechanic's liens exception is deleted but no suitable pending disbursement clause has been inserted, although the Exclusions still apply) requires approval of the Senior Underwriting Committee.."
(2)Down Date Endorsement. During construction, upon satisfaction of the requirements stated in the pending disbursement clause, you may issue an endorsement dating down the Date of Policy and increasing the Amount of Insurance. You should use STG Construction Loan Endorsement 1 or a substantially similar endorsement. Any other form of Down Date must be approved by an underwriter.
F. Future and Future Advance/Revolving Credit Endorsements
Some states purport to provide priority only to "obligatory" future advances made by the lender as opposed to discretionary (non-obligatory) advances. You may not rely upon obligatory advance protections to provide mechanic's liens coverage without Senior Underwriter approval.
You may not issue a Future Advance/Revolving Credit Endorsement (such as PA 1000 [Mandatory Advance Endorsement], PA 1010 [Revolving Credit/Open End Mortgage], and PA 1150 [Future Advance - Line of Credit]) or PA 1015 (Open End Mortgage/Construction Endorsement) on a Loan Policy insuring a construction loan mortgage unless the endorsement includes a mechanic's liens exception, such as the general mechanic's liens exception, or the endorsement is made subject to Schedule B exceptions that include the mechanic's liens exception or Pending Disbursement Clause. Issuance of PA 1015 (Open End Mortgage/Construction Endorsement) may occur upon receipt of an affidavit from the borrower that the proceeds of the open-end mortgage will be used exclusively to pay all or part of the cost of completing erection, construction, alteration, or repair of the mortgaged land secured by the open-end mortgage.
If you have questions relating to this bulletin or any of the referenced bulletins, please contact Stewart Legal Services or your local underwriting personnel.
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