In my February 16, 2011 blog post, I addressed the decision that major underwriters made to end the practice of removing the creditor’s rights exception from their policies. This changed the practice of negotiating the removal based on significant financial analysis. It was with great intrigue that I followed that development within the real estate industry.
Now, a little over a year later, we are seeing yet another significant change to real estate title by one title insurance underwriter. After many years of significant loses on Mechanic’s Lien claims in North Carolina, the Fidelity Title Insurance Group, parent company of Fidelity National Title, Chicago Title and Commonwealth Land Title, announced on May 10th that they would no longer issue Mechanic’s Lien coverage for title commitments issued after June 15, 2012. (See their letter below.) Fidelity is also placing restrictions on the effective date of endorsements for previously issued policies. Why this change and why now?
In part, it is connected to North Carolina’s own unique approach to Mechanic’s Liens. What makes North Carolina particularly difficult is that Mechanic’s Liens are ‘hidden liens’ since a contractor can file a claim at anytime up to 120 days FOLLOWING the time of last service. Also, the Lien relates back in time to the date of first service. To make things even more challenging, neither the date of first or last service require any physical presence at the site.
The Future of Mechanic’s Lien Claims Nationwide?
While this is now limited to one state and one underwriter — Fidelity’s companies in North Carolina — the greater question is if and/or when other underwriters might make this same decision for North Carolina and, more importantly, how long before this decision might be made for other states as well?
Most affected by this ruling will be the lending community. Lenders will no longer be able to rely on their title insurer to bear the risk of unrecorded liens priming their loans. The unavailability of Mechanics’ Lien coverage from title insurance companies in North Carolina is sure to have a major impact on lending activities there. It will be interesting to see how this will change lenders’ expenses and underwriting.
An Open Letter to Approved Attorneys of Chicago Title, Commonwealth Land Title, and Fidelity National Title
May 10, 2012
Dear Approved Attorney:
Chicago Title, Commonwealth Land Title, and Fidelity National Title announce that we will be curtailing mechanics’ and materialmen’s lien coverage in situations posing a significant risk of broken priority under applicable NC law at the time of their closing, effective for commitments issued after Friday, June 15, 2012.
Historically, North Carolinians could be assured they had some of the lowest rates, the lowest closing costs and the lowest claims losses in the Country, — but no longer.
Unfortunately, in recent years, we have paid increasing and significant losses from mechanics’ lien coverage in North Carolina, creating a significantly higher claims ratio than the national average. The claims submissions continue unabated in the current market.
To address this problem, for the past several years, our companies and others have made extensive efforts, negotiating in good faith on a multitude of proposals and investing substantial amounts of time in attempts to create a legislative framework whereby innocent purchasers and lenders could be protected by law. Our goal was to provide protection for buyers purchasing and lenders extending loans on properties with recent or contemplated construction.
Unfortunately, thus far, our attempts have been thwarted or ignored. Unless and until this priority protection for these innocent parties under the law is provided, the risk is uncontrollable and unacceptable.
Situations affected will include commercial and residential properties with recent construction or construction loans or both, i.e. those for which potential lien claimants may have the ability to file timely lien claims under N.C.G.S. Chapter 44A, Article 2, and for which the proposed purchaser and/or lender cannot obtain legal priority of record over those potential liens not yet filed at time of closing. These are typically referred to as “broken priority” situations because priority cannot be assured at law and of record.
We recognize that, due to current law, this will have a significant impact on:
• Owners who are not protected by the current law and who may be unable to obtain this protection on new construction, residential or commercial.
• Lenders who are similarly unprotected by the current law and may be unwilling to provide loans for construction on or purchase of these properties without this coverage.
• Owner-builders who may be unable to provide assurance of the coverage to construction lenders, purchasers or their lenders.
• Contractors and suppliers who may no longer be able to assume title insurance policy coverage is available if they are not paid by the appropriate party with whom they contracted.
Attorneys representing all of the above, whether in closing transactions or mechanics’ lien litigation:
We have negotiated in good faith for a reasonable solution to this “broken priority” or “hidden lien” problem in North Carolina in the hopes of avoiding this eventuality. We continue to stand ready to participate in any constructive meaningful negotiations to that end. However, because no such solution has been reached and there appears to be no prospect of a solution in the near future, we are no longer in a position to provide this coverage with no means of effectively and reliably assessing and managing the risk, for ourselves or our insureds. We would be remiss in our fiscal responsibilities to all of our insureds to continue to provide this coverage in these high risk situations.
Please feel free to contact your local Chicago Title, Commonwealth Land Title, or Fidelity National Title counsel to discuss any questions.