3.44 Construction Loan Policies

3.44.1

Exclusions From Coverage (Construction Loan Policies)

The Exclusions From Coverage in the ALTA construction loan policy (10/21/87) are the same as those in the ALTA loan policy 1987, 1990 and 1992 except:

  • Item 3.(d) thereof is amended to read, in part, as follows:

    "(d) attaching or created subsequent to _____ Date of Policy."

  • Item 6. is added, which reads as follows:

    "6. Any lien or right to a lien imposed by law for services, labor or material, heretofore or hereafter furnished, except for any lien the assertion of which by claimant is recorded in the public records at Date of Policy."

  • Item 7. is added, which reads as follows:

    "7. Any lack of priority of the lien of the insured mortgage over any lien or encumbrance because, and to the extent that, the proceeds of the loan secured thereby may not have been fully disbursed at Date of Policy."

Schedules A and B

Schedules A and B are the same as Schedules A and B of the ALTA loan policy.

Conditions and Stipulations

The Conditions and Stipulations are the same as the Conditions and Stipulations of the ALTA loan policy 1987, 1990 and 1992 except Item 7(a)(ii) thereof is deleted and the following substituted therefore:

"(ii) the amount of the proceeds of the loan secured by the insured mortgage disbursed at Date of Policy plus the amount of each succeeding disbursement made in accordance with the terms of the insured mortgage until the aggregate of all disbursements is equal to the Amount of Insurance stated in Schedule A, plus any amount advanced to protect the lien of the insured mortgage and secured thereby, plus interest on those amounts, as limited or provided under Section 8 of these Conditions and Stipulations or as reduced under Section 9 of these Conditions and Stipulations."

Paragraph 8(d) of the Conditions and Stipulations of the ALTA loan policy 1987 and 1990 is deleted from the ALTA construction loan policy (1987, 1990 and 1992).

3.44.2

Mechanic's Lien Exception In Construction Loan Policy

When issuing an ALTA construction loan policy, it is not necessary to raise the standard Schedule B exception as to unfiled mechanic's liens.

3.44.3

Pending Disbursement Clause In Construction Loan Policy

When issuing an ALTA construction loan policy, it is not necessary to insert a pending disbursement note because it is already part of the policy.

3.44.4

Mechanic's Liens Coverage When Construction Loan Policy Issued

Under special circumstances, and based on state law, the Company is willing to issue certain endorsements to the construction loan policy, which will provide the insured with a limited form of mechanic's lien coverage. However, prior authority to issue any endorsement providing such coverage must be obtained from a Senior Underwriter.

There are four ALTA endorsements, each of one having been designed to be responsive to a class of state mechanic's lien laws.

3.44.5

Endorsement A To Construction Loan Policy

Endorsement A (rev. 6-1-87) insures against loss of priority over mechanic's liens for services, labor, or materials for which the insured has disbursed funds for an improvement on the land prior to the policy date.

Endorsement A is designed to be used in those states in which there are no statutory provisions for priority of the construction mortgage over mechanic's liens or in those cases in which state laws have not been complied with.

The affirmative coverage provided is against loss of priority of the insured mortgage over mechanic's liens (whenever filed) for work and material furnished prior to the policy date, provided the lender has disbursed funds with the intention that they be used to pay for such labor and material.

The wording of endorsement A contemplates that a separate endorsement will be issued at the time of each disbursement. Issuing offices will be furnished instructions concerning specific requirements to be met before this endorsement is issued. The requirements will include furnishing lien waivers, receipts, affidavits, construction schedules, invoice, etc., as a condition to issuing the endorsement.

Endorsement A provides insurance against filed and unfiled mechanic's liens. A current examination of the public records wherein mechanic's liens are filed should be made prior to each issuance of this endorsement. If a filed lien is discovered, a Senior Underwriter should be contacted for instructions. It should be noted that Endorsement A is not a general date-down endorsement since it relates only to mechanic's liens. The date of policy should not be extended unless an examination has been made of all applicable records.

3.44.6

Endorsement B To Construction Loan Policy

Endorsement B is similar to endorsement A. However, it does not confine its coverage to disbursements prior to the policy date. Endorsement B ties its coverage of disbursements to those which are legally obligatory in accordance with a written agreement in existence on the date of the endorsement to the extent secured by the insured mortgage.

Endorsement B is designed for issuance in those cases in which initial priority of the mortgage over mechanic's liens has been obtained (usually by recording prior to commencement of construction), but may be lost under state law as to disbursements made by the lender which it was not obligated to make.

This endorsement gives the lender protection as to mechanic's liens whenever filed for labor performed or material furnished as to all disbursements made by the lender which it is obligated to make. The lender should comply with the requirements for priority prescribed by state law by entering into an agreement obligating it to make disbursements under conditions which do not make the disbursements optional on its part and then disburse under those conditions to preserve the obligatory.

3.44.7

Endorsement C To Construction Loan Policy

Endorsement C tracks endorsement B; except that in place of the requirement that disbursement is mandatory, it requires that disbursement be made either prior to recording a lien claim or with consent of the Company if a lien claim is made.

Endorsement C is designed for use in those states in which the mortgage will have priority over mechanic's liens as to disbursements of the loan made prior to the filing of a mechanic's lien. The endorsement gives full priority protection as to disbursements made until a mechanic's lien is filed but the priority of subsequent disbursements is insured only if they are made with the consent of the insurer. Knowing that such subsequent disbursements will be subordinate to the filed mechanic's lien, the title insurer and lender should agree on some procedure for dealing with the lien before disbursement continues.

Although the language of the endorsement does not require it, the insured lender will probably ask for a continuation of the title at the time of each disbursement. A "date down" or continuation endorsement may be issued if all intervening matters are shown.

3.44.8

Endorsement D To Construction Loan Policy

Endorsement D is the broadest of the four. Its first paragraph insures against loss of priority to a mechanic's lien except as stated in the two subsequent paragraphs which are common to all of the endorsements.

Endorsement D is designed for use in those states in which the mortgage has priority over mechanic's liens and cannot be lost by subsequent action; except, perhaps, by failure of the lender to comply with the provisions of law or its disbursing agreement. This endorsement should not be issued in other jurisdictions without specific prior authority from a Senior Underwriter.