title insurance companies cover construction claims

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Did you know title insurance companies assume huge financial risk for almost all of the new construction projects in our community?|ret||ret||tab|

Title insurance companies pay out thousands of dollars every year in claims dealing with new construction. It is the No. 1 cost in claims. |ret||ret||tab|

When people think of title companies, they typically think of title searches and escrow closings. But title companies also play a huge role in the construction industry. |ret||ret||tab|

Title insurance companies basically insure against unpaid bills on construction projects, unpaid bills that can turn into mechanic's liens.|ret||ret||tab|

A person or company that provides labor or materials for a construction project has lien rights against the property where the project is located. For instance, say some work has been done on a construction project, and for one reason or another the bill submitted for the work is not paid. The unpaid party has lien rights. |ret||ret||tab|

The unpaid party has six months from the date the work is completed to file a mechanic's lien. |ret||ret||tab|

Then, the unpaid party has six months from the mechanic's lien filing date to perfect the lien, i.e. file a lawsuit against all parties involved. |ret||ret||tab|

These parties include the property owner, the general contractor and the lending institution making the construction loan for the project. |ret||ret||tab|

Once these parties are served with the suit, each has to file an answer and defend itself in court. If the unpaid party who filed the suit wins in court, he will then have a judgment against the property. Ultimately he could foreclose, taking the property and wiping out any existing construction loans.|ret||ret||tab|

So, how would a title company help? |ret||ret||tab|

Very simply, title insurance companies insure the lending institution and sometimes the owner against these unpaid bills. |ret||ret||tab|

In all title insurance policies there is a standard exception in the coverage for, "Any lien, or right to a lien, for service, labor or materials heretofore or hereafter furnished, imposed by law and not shown by the public records." |ret||ret||tab|

The construction lender or the new lender after the project is complete will always request the insuring title company take this phrase out of the policy as an exception. Which brings us to the title company's role in the construction project. |ret||ret||tab|

In order for a title company to take this exception out, it usually needs to be involved in the project, specifically as the construction disbursing agent. |ret||ret||tab|

This position will write all checks for the construction project and collect all lien waivers for the project. Also, on residential projects, the title company will send a qualified inspector out to inspect the progress. |ret||ret||tab|

These procedures, along with certain signed affidavits, gives the title company some control over any potential liens.|ret||ret||tab|

Occasionally, a buyer of a construction project will request this same type of protection from the title company. This coverage can be offered if the buyer was not part of the project. |ret||ret||tab|

If the purchase is done after the project is complete or almost complete, the coverage can be given. |ret||ret||tab|

If the buyer was involved with the project, for example, if he hired the contractor or had the work done himself, then he could not get this coverage. |ret||ret||tab|

This is true of all insurance products, in that "you can't insure a person against their own act." |ret||ret||tab|

This type of coverage is contrary to typical insurance coverages. |ret||ret||tab|

Title companies insure against claims or problems which happen before the policy date. They don't insure against future problems, as is the case with all other insurance products, except when it comes to mechanic's liens, which could come up to six months after the date of the title policy.|ret||ret||tab|

This is a very complicated part of the title business. |ret||ret||tab|

It is suggested that, whether you're going to build something yourself or you're buying something recently completed, you should visit with your local title insurance agent. |ret||ret||tab|

Ask what type of disbursing procedures were followed, find out if all lien waivers were collected, and see if inspections of the project were done. The agent's advice on what type of coverage is out there, and what needs to be done to get it, could be most helpful.|ret||ret||tab|

|bold_on|(M. Keith Chaffin is vice president of Hogan Land Title Co.)|ret||ret||tab|

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