June 1st, 2013

Title Insurance Revisions Reduce Construction Loan Coverage

By John D. Bartley, O'Reilly Rancilio P.C.

Recent endorsement changes by the national title insurance industry have dramatically reduced insurance coverage for construction lien risks. Lenders are now forced to find other avenues of risk avoidance regarding liens filed under the Michigan Construction Lien Act (MCL 570.1101 et seq.). Construction lending risks arise from liens recorded by Contractors §103(5), Subcontractors §106(4), Suppliers §106(5) or Laborers §104(6) who for whatever reason were not identified in the sworn statement provided by the General Contractor under a draw request.

Previously, the title industry issued Pending Disbursement endorsements to insure that the mortgage lien under a construction draw disbursement will remain superior to any construction liens arising from labor or materials provided prior to the date of a certain sworn statement. There was no limitation that only certain named Contractors, Subcontractors, Suppliers or Laborers were included in the scope of coverage offered under the loan policy.

The Pending Disbursement endorsement is now replaced by ALTA Endorsement Forms 32-06, 32.1-06 and 32.2-06. These new endorsements (or their Michigan filed counterparts) provide coverage over construction liens filed by claimants who provided labor and/or materials to the property, who were specifically identified on the sworn statement, and who signed a waiver of lien in exchange for receipt of payment. Lenders will find no coverage available to protect against lien claims from Contractors, Subcontractors, Suppliers or Laborers not named on the sworn statement for whatever reason. The net result is that (absent fraud) the real risks associated with construction liens have shifted to the lender without any available title insurance protection. Lender's counsel might now be forced to advise lenders to be the named "Designee" under the Notice of Commencement §108a, to enforce Notice posting requirements §108a(8), and consider posting the Notice on residential structures

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