Bulletin: TX000022

Dear Associates:

The Department of Insurance regulations prohibit title companies from giving coverage against mechanic and materialman liens in either owner or mortgagee's policies during the construction period. However, regulations permit, and in some instances require, giving mechanic's lien coverage upon the permanent financing of a commercial project subsequent to the construction period and on sale of commercial and residential properties to various entities. Various provisions of our mechanic's lien statutes give rise to substantial risks and over the last five years Stewart Title Guaranty Company has paid out over one million dollars in claims directly related to such claims. Stewart Title is committed to reducing these risks through the implementation of comprehensive mechanic lien claims avoidance procedures.

It is strongly recommended that each office thoroughly examine its procedures to insure that every source of information available to that office is explored to reduce the exposure to risk and loss.

In view of the fact that each client's particular circumstances makes it difficult to formulate one policy which fits every situation the following recommendations should be considered when determining the advisability of extending mechanic's lien coverage:

1. Permanent Financing Or Sale After Construction
   
   a. Obtain a sworn Final Affidavit and Agreement form (See Final Affidavit and Agreement forms available through reference section at the end of this bulletin), utilizing the format that fits your particular transaction.
   
   b. Obtain a sworn Affidavit of Debts and Liens (See Indemnity and Affidavit form available through reference section) following procedures outlined in prior bulletins.
   
   c. Verify by contacting the lender that all funds have been disbursed and all bills, subcontractors, suppliers, etc. have been paid.
   
   d. Inspect the project for completeness and obtain the final inspection by the lender's independent inspector, if available.
   
   e. Obtain a list of all materialmen, subcontractors and/or contractors who have been on the job. Obtain copies of final lien waivers from all of these persons. Verify, by telephone, that subcontractors and/or contractors have been paid. In the event there are unpaid vendors, payment must be made prior to or at closing. If the payment is made directly by the lender or the Contractor, lien waivers and confirmation of payment must still be obtained from the subcontractors and contractors prior to closing. In the event there is a sale of a recently constructed project, you should obtain indemnities from the developer - entity as well as the principals of the entity holding title indemnifying Stewart Title Guaranty Company against any subsequent mechanic lien claims. In the event that you are dealing with a reputable, financially sound builder, you may consider waiving Paragraph 5 but if these requirements are waived you should attempt to obtain reliable financial statements and the Indemnity Agreement in the form as set forth in the reference section at the end of this bulletin.
   
   
2. Additional Safeguards

In addition to the above, there are other procedures which when implemented can significantly reduce exposure to mechanic lien loss. Every office should ,on a frequent basis, review its procedures and obtain information which is available through many sources as to the financial responsibility of their builder clients. Sample procedures are as follows:

a. Active participation in local credit organizations.

b. Weekly review of all mechanic liens filed in the county.

c. Maintenance of a cross index of individuals, partnerships and corporation affiliated with the builder. This index should be used in connection with the weekly review of the mechanic lien filings.

d. When a builder is building in numerous counties and/or states inquiries should be made on a regular basis with title companies handling the builder's accounts in those counties and/or states to insure that a problem is not developing in one of those counties and/or states which will soon become your problem.

The importance of a constant and vigilant review of your procedures in dealing with coverage of mechanic liens cannot be over emphasized. Any questions concerning the advisability of extending said coverage should be immediately referred to your Stewart Title Guaranty Company Underwriting Counsel.