CONSTRUCTION LIENS and LIABILITY
Problems and Risks
Bulletin No. 2017-106
Construction liens and construction financing historically have created some of the major losses experienced in the title insurance industry.
Prior economic ups and downs have established trends that illuminate when the greatest likelihood of construction liens and liability problems are most likely to occur. The greatest risk occurs when the economy takes a downturn, creating less demand for housing, particularly new single-family housing. Large tract home builders are particularly at risk if they do not respond to the downturn appropriately; they may find themselves with a reduced stream of income from sales, unable to pay subcontractors and suppliers on the unfinished houses.
Because of this risk, every construction policy issued by NITIC, whether an Owner's Policy or a Loan Policy, must contain the exception provided by Procedural Rule P-8, unless the policy is issued after the waiting period described in the Rule. Other procedures are required, too, as described in the NITIC Underwriting Manual's Texas Supplement which also includes and references the following documents:
So "HEADS UP" and BEWARE!
Title insurance claims are most likely to be incurred when:
- Unpaid contractors, subcontractors, or suppliers are not disclosed to the title company by the owner or builder/general contractor before closing and title insurance is issued without P-8 exceptions or specific exceptions to those lien claims, whether of record or not-in other words, when the required "Final Bills-Paid Affidavit" is incorrect or untrue;
- Lien priority is broken because work started before the loan we insured to a lender was perfected (the construction financing);
- The Commencement Affidavit (or "Affidavit of Non-Commencement") was untrue; or
- There is a failure to comply with all requirements to perfect a valid lien for the construction loan on homestead property.
- Is owned by a known builder;
- Has had construction of any kind of improvements on it within the last two years; or
- Has a construction loan being created in current transaction.
Everyone in the title insurance industry should purposefully be aware of what's going on in their local housing and real estate market with regard to:
- The rate of home sales (particularly when the rate slows);
- Overbuilding;
- Rumors or known facts that subcontractors and suppliers are either not being timely paid or not being paid at all;
- Builders, contractors or subcontractors filing bankruptcy; or
- Industrial or other large workforce employers closing or relocating their business, which significantly affects local employment;
And with this evaluation, make a conscious decision as to risk and insurability of each transaction involving construction.
Please contact us with any questions.
