How to Protect Yourself as a Construction Lender

Mechanic liens can usurp a constructions lender’s place on title in many cases. A lender can insure against such a loss of priority by negotiating with the title insurer to (i) include mechanic’s lien coverage in the title policy or (ii) obtain certain endorsements to the title policy for such coverage. Title insurers exercise a great deal of caution when providing insurance coverage for mechanic’s liens vis-à-vis construction loans; this caution is principally due to the increased risk that a mechanic’s lien could be filed during the construction project. The title insurance policy for a construction loan will almost certainly include a Pending Disbursement Clause as an exception, limiting the scope of coverage offered by Covered Risk 11(a). Specifically, these clauses limit the insurance covered by the policy for loan proceeds disbursed. Alternatively, a lender may negotiate with the title insurer to include certain endorsements, particular to construction loans, to the title policy. Specifically, these endorsements may be ALTA Endorsements 32-06, 32.1-06, 32.2-06 and/or 33-06. These endorsements are offered in lieu of Covered Risk 11(a) to the title policy, and each provides a certain type of mechanic’s lien coverage to the lender for any construction loan advance.