Title Insurance, Part 1: what is a “covered loss”?

So, you’ve agreed to finance a construction or land development project.  You secure your loan with a deed of trust on the property.  Down the road, the project exceeds budget and the general contractor and subcontractors assert mechanic’s liens against the property to get paid. Construction on the property slows to a halt and the project is doomed.  The general contractor and subcontractors’ liens exceed the value of the property, title is clouded, and you ultimately realize there’s no chance your loan will be repaid.  Fortunately, you purchased title insurance.  Do you have a claim under your policy?

The answer lies in the definition of “covered risks” under your policy terms.  Title insurers generally insure against “loss or damage” sustained by a previously unknown yet successfully asserted statutory lien.  And, properly perfected mechanic’s liens generally receive favorable priority in Nevada for purposes of payment.  Therefore, if the general contractor’s lien and the subcontractor’s liens did not appear on any title searches and were asserted after you purchased title insurance, then a court would likely interpret your claim as a covered loss under your policy. 

However, if the general contractor had the foresight to assert a statutory lien at the outset of the project the moment construction commenced and before you obtained title insurance, then a fight over coverage may ensue.

A loss typically occurs under a policy of title insurance where there is a lack of priority.  If the general contractor forecloses on its properly perfected superior lien, then your junior lien will likely be extinguished.  See, e.g., Restatement (Third) of Prop.: Mortgages § 7.1 (1997) (“A valid foreclosure of a mortgage terminates all interests in the foreclosed real estate that are junior to the mortgage being foreclosed and whose holders are properly joined or notified under applicable law.”).  Therefore, the title insurance company will likely maintain that foreclosure of the general contractor’s lien is not a covered loss under your title insurance policy because it was not a risk insured against by your title insurer.

More questions on title insurance? Contact an attorney at Lemons, Grundy & Eisenberg to determine how we can help you.