October 31, 2012 Articles

Construction Industry Policyholder Coverage in Upheaval After Ruling

Insurance coverage for construction industry policyholders has been thrown into a state of upheaval due to a recent decision by the Fifth Circuit Court of Appeals. It misinterprets and misapplies Texas precedent and standard form general liability insurance policies

by Noel C. Paul and Andrea Yassemedis

Some experts have estimated that the value of commercial real estate has spiraled downward as much as 45 percent since the height of the market in 2007.[1] One consequence: Delinquency rates have risen steadily.[2] If the commercial real estate market does not stabilize, the United States economy could experience a significant uptick in commercial real estate defaults.[3] In this economic environment, it is vital that lenders fueling commercial development take care to obtain a key safety net in the event the project goes bad: a policy of title insurance that covers mechanics liens filed against the property.[4]

Mechanics liens often result when development projects fail, and they can entail years of expensive litigation and potentially several million dollars in settlement payments. Like most policies available to large commercial entities, the scope of coverage provided by title insurance to lenders can vary significantly, and lenders should work to negotiate the most favorable terms and expansive coverage, including coverage for mechanics liens. Should claims arise for mechanics liens, lenders also should be ready for a potential dispute with their title insurer. Court holdings with respect to the key exclusion for coverage for mechanics liens are confusing and contradictory. Moreover, as claims for mechanics lien coverage increase, insurers will almost surely push back by testing the outer limits of the exclusion.

This article provides some guidance to lenders in understanding some of the fundamental issues related to coverage for mechanics liens. It then discusses the basic coverage provided to lenders under a standard title insurance policy and how lenders can obtain coverage specifically protecting against mechanics liens that might arise during the course of a real estate development project. The article also discusses the key exclusion raised by title insurers with respect to mechanics lien coverage and case law analyzing that exclusion. Finally, the article explains the proper rule for analyzing the exclusion and concludes by offering some additional recommendations for policyholders and their counsel.

Premium Content For:
  • Litigation Section
Join - Now