Keep an Eye on Your Place: Property Insurance Protection for Home Loan Disbursement | Pillsbury – Gravel2Gavel Construction and Real Estate Law


Most construction loans provide for multiple advances or disbursements of funds at different stages of the construction project. The home loan agreement sets out the conditions that the borrower must meet in order to receive each advance payment. Since a construction loan is an active construction project, there is a risk that a lender may lose his priority of lien through an advance (secured by the insured mortgage) on a fitter’s lien. This post explains how a title insurance policy and endorsements can insure against such risk.

This problem arises from the nature of mechanic liens. In particular, if a contractor does not properly receive the payment owed for the work, services or materials provided, the contractor can assert a lien on the property in the amount owed (in accordance with state law). In addition, in most states, the priority of the lien typically relates to the date the work, services, or materials were originally provided by the contractor. During the construction phase (and after the title insurance policy has been issued), a lender could lose its lien priority over a mechanic’s lien if the contractor’s work began prior to the payment of the future advance payment.

A lender can insure against such loss of priority by negotiating with the legal protection insurer to (i) include the mechanic’s lien insurance in the title policy sleeve, or (ii) obtain specific endorsements for the title policy for such coverage. Those familiar with the forms of property insurance policies and American Land Title Association (ALTA) endorsements know that the standard risks covered include:

“The lack of precedence of the lien of the insured mortgage on title (a) as security for each and every advance of the proceeds of the loan secured by the insured mortgage over a statutory lien on services, labor or material resulting from the construction of an improvement or work in the The connection with the country if the improvement or work was either (i) contracted or started on or before the date of the policy; or (ii) is completed, started or continued after the conclusion of the contract if the construction is financed in whole or in part from the proceeds of the loan secured by the insured mortgage that the insured has advanced on the contract date or is obliged to make an advance … “(Risk covered 11 (a), ALTA, Loans Policy, adopted 6/7/06)

As shown above, Covered Risk 11 (a) provides coverage for mechanic liens that arise before the insurance date or after the insurance date when the insured is required to advance the proceeds of the loan agreement.

Nonetheless, property insurers exercise great caution when securing mechanics’ liens against construction loans; This caution is mainly due to the increased risk that a mechanic’s lien could be deposited during the construction project. As an exception, the property insurance policy for a home loan will almost certainly contain a pending disbursement clause, which limits the scope of the Covered Risk 11 (a) coverage. Specifically, these clauses limit the insurance covered by the policy for loan proceeds actually paid out. These pending withdrawal clauses come in many forms; However, an example is:

“Until the payment of the full proceeds of the loan secured by the insured mortgage, this policy only insures the amount actually paid out, but increases with every payment made in good faith and without knowledge of defects, liens or encumbrances the title up to Face value of the policy. At the time of any disbursement of the loan proceeds, ownership must be continued up to that point for any defects, liens, or encumbrances on property that are or have been recorded between the date of the policy and the date of disbursement. ”(Stewart Title, PDCX02 ALTA. )

So that a building lender receives additional cover for each advance payment and can insure himself against a possible loss of his lien, the lender must request a date confirmation for each payment of funds. Other forms of pending disbursement clauses often have additional requirements, such as the provision of deposit waivers by contractors and proof of invoices paid by the owner before a date is issued. Nonetheless, Covered Risk 11 (a) and Datedown Notes (issued under the Pending Payments clause) provide an approach to protecting lenders from a potential loss of their lien priority as an advance on a mechanic’s lien incurred after the original insurance date.

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Alternatively, a lender can negotiate with the title insurer to include certain endorsements on the title policy, particularly for home loans. In particular, these endorsements can be ALTA Endorsements 32-06, 32.1-06, 32.2-06 and / or 33-06. These endorsements are offered in lieu of the 11 (a) Covered Risk Property Policy, and each provides the lender with a particular type of lien on the lender for each home loan advance. Although each confirmation contains additional conditions, these can be distinguished as follows:

  • 32-06 (Home Loan – Loss of Priority): This Addendum provides the Mechanic with a lien on any material or service that is “earmarked for payment on the receipts of a Home Loan Advance Disbursed by or on behalf of the Insured on or before” [the] Date of reporting. ”(ALTA Endorsement 32-06, accepted on 03/02/11.) In particular, the insurance date is extended after each payout in accordance with ALTA Endorsement 33-06, as described below.
  • 32.1-06 (Home Loan – Loss of Priority Direct Payment): This addendum provides the Mechanic with a lien on materials or services that are “paid for directly by the Company or by the insured with Company written authorization” up to the date of coverage. (ALTA confirmation 32.1-06, accepted on 04.02.13.)
  • 32.2-06 (Home Loan – Loss of Priority – Insured Direct Payment): This memo covers the mechanic’s lien on materials or services “paid directly by or on behalf of the insured” up to the insurance date. (ALTA Endorsement 32.2-06, accepted on 04.02.13.)
  • 33-06 (Home Loan Disbursement): This endorsement serves as an endorsement for the date down by changing the date of coverage. In addition, it increases the coverage of the property insurance for each additional construction loan advance. It is issued exclusively in the above-mentioned endorsements of the ALTA 32 series. Similar to pending disbursement clauses, the lender must submit additional documents (e.g. waiver of pledge) before issuing them. (ALTA confirmation 33-06, accepted on 03/02/11.)

If a lender ultimately applies for mechanic liens legal protection insurance, they should allow additional time to negotiate the legal protection insurance policy, as the insurer will review each such application on a case-by-case basis and will need additional documentation to familiarize itself with the coverage extension.

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