Bulletin: IL2023002

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 section 2 below.

(C) Mechanic’s liens coverage may be available on a Loan Policy during construction by issuance of one of the ALTA 32 Series (Construction Loan) Endorsements (ALTA 32, ALTA 32.1, or ALTA 32.2), as further described in section 3 below.

(D) The ALTA 33 Disbursement Endorsement may be issued to amend the Date of Coverage and increase the amount covered for the Construction Loan Advance, as described in section 4 below.

(E) Other forms of coverage are described in section 5 below.

(F) Any Future Advance Endorsement must contain a mechanic's liens exception, as described in section 6 below.

1. The General Mechanic's Liens Exception

All commitments and policies (Owner’s and Loan) should contain a general mechanic's liens exception for "Any lien, or right to a lien, for services, labor, material, or equipment, 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 or Owner’s Policy without underwriter approval.

Mechanic’s liens rights in Illinois begin at the time any contracts, express or implied, have been entered into for improvements to the land. Lien priority is not established by commencement of work. A construction mortgage does not have priority over mechanic’s liens resulting from contracts let prior to recording of the mortgage.

When issuing a Loan Policy with one of the ALTA 32 Series (Construction Loan) Endorsements (ALTA 32, ALTA 32.1, or ALTA 32.2) described in section 3 below, the general mechanic’s liens exception may be deleted, if approved by an Underwriter.

Approval: An Underwriter must approve issuance of the Loan Policy containing any form of mechanic’s liens coverage during construction, including by deletion of the general mechanic’s liens exception.

2. Mechanic's Liens Documentation

The Mechanic's Liens Documentation (Exhibit 1 below), 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. You also should determine that the mortgage complies with state law for future advances and for a construction loan.

The customary Mechanic’s Liens Documentation generally will include, but not be limited to, the following, unless otherwise approved by an Underwriter:

• STG Indemnity Agreement: Construction, signed by the borrower/owner and other creditworthy party, if applicable;
• Owner’s and General Contractor’s sworn statements; and
• Lien waivers (partial or final) in the standard format, from the General Contractor and Subcontractors.

You must retain these documents and approval in your file.

The Company reserves the right to request additional documents.

3. ALTA 32 Series Endorsement (Construction Loan): ALTA 32, 32.1, or 32.2

Mechanic’s liens coverage on a Loan Policy during construction where funds are being used for improvements to the land may be available through issuance of one of the ALTA 32 Series (Construction Loan) Endorsements (ALTA 32, 32.1, or 32.2).

An Underwriter must approve issuance of the endorsement.

You may not modify the endorsement without Underwriter approval.

If mechanic’s liens coverage is being requested without issuance of one of the ALTA 32 Series Construction Laon Endorsements (ALTA 32, ALTA 32.1, or ALTA 32.2), consult with an Underwriter. Additional requirements and/or exceptions, such as a mechanic’s liens exception and pending disbursements clause, may be required.

4. ALTA 33 (Disbursement) Endorsement

The ALTA 33 (Disbursement) Endorsement is issued in conjunction with one of the ALTA 32 Series (Construction Loan) Endorsements (ALTA 32, 32.1, or 32.2). The ALTA 33 may be issued at closing if funds are advanced for improvements and, upon compliance with applicable requirements, during construction. The ALTA 33 amends the Date of Coverage as defined in the ALTA 32, 32.1 and 32.2 Construction Loan Endorsements and increases the amount covered for the applicable Construction Loan Advance.

Upon satisfaction of the applicable requirements, you may issue the ALTA 33 Disbursement Endorsement during construction. Any other form of Down Date endorsement during construction must be approved by an Underwriter.

In Illinois, in partial satisfaction of the requirements of the ALTA 33, it is customary to accept an Owner’s Sworn Statement, a General Contractor’s Sworn Statement, and standard lien waivers (partial or final) to confirm what work has been completed for each draw request.

The ALTA 33 Disbursement Endorsement should not be issued if the Loan Policy does not contain one of the ALTA 32 Series (Construction Loan) Endorsements (ALTA 32, ALTA 32.1, or ALTA 32.2). If the Loan policy was issued subject to mechanic’s liens, the ALTA 33 may not be used, and you should consult with an Underwriter.

5. Pending Disbursement Clauses/Endorsements

In some circumstances, with Underwriter approval, a pending disbursement clause (PDC), either inserted as an exception or added as an endorsement, may be used to provide mechanic’s liens coverage during construction, instead of an ALTA 32 Series (Construction Loan) Endorsement. These include PDCX11 IL or PDCX06 or PDCX07, if approved by an Underwriter. Other forms of pending disbursement clause may be used, if approved by an Underwriter. Additional requirements and/or exceptions may be required. You may not modify the PDC language and an Underwriter must approve the clause. A different form of disbursement endorsement during construction may apply.

6. Other Forms

Use of any other form of endorsement or pending disbursement clause providing mechanic's liens coverage during construction, or issuance of a "clean" policy (i.e., where the general mechanic's liens exception is deleted but no ALTA 32 Series Construction Loan Endorsement or pending disbursement clause has been inserted, although the Exclusions apply) requires approval of the Senior Underwriting Committee.

7. 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.

You may not issue a Future Advance/Revolving Credit Endorsement (such as ALTA Endorsement 14, 14.1, or 14.2, etc., or other state-specific endorsement) 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.

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

For online viewing of this and other bulletins, please log onto www.vuwriter.com.

EXHIBIT 1 - STG Mechanic's Liens Documentation