Standard v. Enhanced: Mechanic’s liens

Part 4 of a series

As a homebuyer, you have the choice in the type of owner’s title insurance coverage.

Throughout this series of comparing the two types of coverage (Standard Coverage vs. Enhanced Coverage) you have observed that the primary difference relates to matters affecting your title post-policy date and pre-policy date.

That is, the standard owner’s title insurance coverage mostly covers only matters that occur prior to the date the policy was issued, whereas, the enhanced owner’s title insurance coverage protects you against matters arising prior to the date of the policy, as well as, matters arising after the date the policy has been issued.

In the case of mechanic’s liens, the homebuyer is covered only up to the policy date when he or she elects to purchase the standard owner’s title insurance coverage. The homebuyer who purchases the enhanced owner’s title insurance coverage is not only covered for mechanic’s liens arising prior to the policy date but is also covered for mechanic’s liens arising after the policy date so long as the labor and material was furnished before the policy date.

You might be asking, “What is a mechanic’s lien?”

A mechanic’s lien is a claim filed by a contractor or sub-contractor for labor and material performed on the subject property which, by operation of law, constitutes a lien against title.

For example, let’s say a seller was a builder and prior to the sale of the property, the seller failed to pay the contractor’s final bill. In turn, the contractor cannot pay his sub-contractors. As a result, the contractor and/or the sub-contractors file a mechanic’s lien after the seller has already sold and settled the property.

The new homebuyer is now stuck with having to pay the sub-contractors in order to clear his or her title to the property. However, if the homebuyer had elected to purchase the enhanced owner’s title insurance coverage, the homebuyer would simply make a claim with the title insurance company to pay the sub-contractors.

In another example, the sales contract required the seller to perform pest inspection treatment and damage repair. Prior to closing, the seller hired ABC Pest Control to perform the required treatment and repairs and promptly issued a check for the payment of those services.

At closing, the seller provided the homebuyer with evidence of payment and an invoice from ABC Pest Control marked “Paid.” Following closing, ABC Pest Control filed a mechanic’s lien as a result of the seller’s bounced check and the seller’s subsequent refusal to make good on the check. In this case, the homebuyer purchased the enhanced coverage and the title insurance company paid ABC Pest Control on the claim.

Had the homebuyer purchased the standard coverage, the homebuyer would have been required to pay ABC Pest Control in order to establish clear title.