Bulletin: IL2010005

Dear Associates:

Mechanic's liens are a significant source of claims. This bulletin advises you of required procedures relating to mechanic's liens and mechanic's liens coverage only on Loan Policies during construction (including rehabilitation, renovation, and the like). It should be read in conjunction with other National and state-specific Bulletins relating to mechanic's liens.

Summary

(A).Do not delete the general mechanic's liens exception from the Loan Policy during construction without underwriter approval.

(B).Require Mechanic's Liens Documentation described in paragraph B below regarding work done.

(C).Include our Pending Disbursement Clause as described in paragraph C below if the Loan Policy is issued during construction.

(D).Other forms of coverage, including an acceptable Interim Certification Endorsement or Down Date Endorsement, are described in paragraph D below.

A. The General Mechanic's Liens Exception

All commitments and policies should contain a general mechanic's liens exception for "Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records."

Before or during construction, or if you are unable to determine that no construction has been or will be performed, you may not delete the general mechanic's liens exception from a Loan Policy without underwriter approval.

B. Mechanic's Liens Documentation

The Mechanic's Liens Documentation, all in a form acceptable to the Company, are required as a condition to providing mechanic's liens coverage, unless otherwise approved by an underwriter (Exhibit 1 below). You also should determine that the mortgage complies with state law for future advances and for a construction loan.

Approval: An underwriter must approve issuance of the Loan Policy.

You must retain these documents and approval in your file.

C. Pending Disbursement Clauses/Endorsements (See Exhibit 2 below).

A pending disbursement clause, either inserted as an exception or added as an endorsement, must appear in all Loan Policies issued prior to and during construction. This requirement applies whether you have been able to document the absence of construction or not. You must use PDCX11 IL or PDCX06 or PDCX07 if approved by an Underwriter. You may not modify the clause and an Underwriter must approve the clause

PDCX11 IL includes a mechanic's lien exception for services, labor or material furnished after the date shown on a Sworn Contractor's Statement and an exception for rights of mechanics and materialmen shown on the Statement and their applicable subcontractors. PDCX06 provides limited coverage for mechanic's liens arising from non-payment of bills for labor performed or material furnished prior to a specific date, which date may be the date of the current disbursement. PDCX07 provides limited coverage for mechanic's liens by those persons or entities receiving payments directly from the Insured pursuant to written disbursement authorization approved by the Insured.

D. Other Forms

(1)Use of any other form of pending disbursement clause, or any other endorsement providing mechanic's liens coverage, or issuance of a "clean" policy (i.e., where the general mechanic's liens exception is deleted but no suitable pending disbursement clause has been inserted, although the Exclusions apply) requires approval of the Senior Underwriting Committee.

(2) Down Date Endorsement. During construction, upon satisfaction of the requirements stated in the pending disbursement clause, you may issue an endorsement dating down the Date of Policy and increasing the Amount of Insurance. You should use STG Interim Certification Endorsement or the STG Construction Loan Endorsement 1 or a substantially similar endorsement. Any other form of Down Date must be approved by an Underwriter. In Illinois, in partial satisfaction of the requirements of a down date endorsement, it is customary to accept the Architect AIA Application and Certificate of Payment to confirm what work has been completed for each draw request.

E. Future and Future Advance/Revolving Credit Endorsements

Some states purport to provide priority to "obligatory" future advances made by the lender as opposed to discretionary (non-obligatory) advances. You may not rely upon obligatory advance protections to provide mechanic's liens coverage.

If you are asked to provide an endorsement relating to obligatory advances, you must delete any coverage relating to mechanic's liens and the form of endorsement must be approved by a Senior Underwriter. For example, if you are requested to provide CLTA 122 or 122.2 Obligatory Advance Endorsement, you must delete Paragraph 6 from the CLTA 122 and 122.2 Endorsements by striking out the text on the endorsement (e.g., "(6) Lack of priority of the lien of the insured mortgage over any statutory lien for services, labor or material arising out of the work or improvement under construction or completed at the date hereof.") or deleting it by numbered exception on Schedule B. You may not issue a Future Advance/Revolving Credit Endorsement (such as ALTA Endorsement 14-06, 14.1-06, or 14.2-06, a Credit Line Endorsement, or CLTA Endorsement 111.10 or 111.11) on a Loan Policy insuring a construction loan mortgage unless the endorsement includes a mechanic's liens exception, such as the general mechanic's liens exception.

You may not issue a Future Advance/Revolving Credit Endorsement (such as ALTA Endorsement 14-06, 14.1-06, or 14.2-06, a Credit Line Endorsement, or CLTA Endorsement 111.10 or 111.11) on a Loan Policy insuring a construction loan mortgage unless the endorsement includes a mechanic's liens exception, such as the general mechanic's lien exception.

If you have questions relating to this bulletin or any of the referenced bulletins, please contact Stewart Legal Services or your local underwriting personnel.

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