Title Companies Change Game – Mechanics’ and Materialmen’s Lien Claims Coverage

On May 10, 2012, the Fidelity Title Insurance Group which includes Fidelity National Title Insurance Company, Chicago Title Insurance Company and Commonwealth Land Title Insurance Company, announced that they would no longer issue mechanic’s lien coverage for title commitments issued after June 15, 2012.  In addition, these same companies are putting present restrictions on when and how endorsements affecting the effective date of existing title policies are issued.

This action of the Fidelity Title Group follows several tough years in which the title industry has been hit with numerous losses on mechanic’s lien claims in addition to substantial costs of defense even when claims have been defeated.  Fidelity’s experience has been replicated at all other title companies writing title insurance in North Carolina.

The issue for title companies is twofold:  (1) a mechanic’s liens in North Carolina is a hidden lien because a contractor can file a lien claim at anytime up to 120 days after the date of last performance, and (2) a mechanic’s lien relates back in time to the date of first performance.   This is further compounded by the fact that neither the date of first performance nor the date of last performance requires any physical alteration to, or presence on, the land.

The title industry has tried for years to modify the law to overcome the issues of the hidden lien and the relation back.  There most recent efforts at legislative reform were stymied by political interests in favor of the current law.  As a last resort, Fidelity pulled the mechanic’s lien coverage in North Carolina.

We expect all other major title insurance companies writing insurance in North Carolina to follow suit in the near future.

The unavailability of mechanics’ lien coverage from title insurance companies in North Carolina will have a major impact on lending activities.  Banks and other financial institutions must now determine how to manage the risk of unrecorded priming liens resulting from non-payment of  contractors and subcontractors.  How each lender addresses and manages this risk-shifting will depend on a number of factors.

This of course will have a trickledown effect on developers and contractors including the possibility of less affordable financing available for borrower’s and more expenses to be shared between borrower’s and their contractors.

 




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For media inquiries, please contact: Erin Molinaro | ekm@crlaw.com