How and Why Title Companies Changed Their Coverage Requirements
Every construction project requires many different team players, including lenders, borrowers, contractors, subcontractors, buyers and title insurers. Title insurers play a unique role throughout the process, providing protection for lenders and buyers. Recent changes in title insurance coverage have impacted the financial side of projects — for the better.
Why Every Construction Project Needs a Title Insurance Policy
A title insurance policy protects the lender and buyer and helps ensure property ownership is transferred with a clean title. For example, if after a property is sold a contractor or subcontractor opens a claim stating they were not paid for work done by the borrower, the title insurance policy will cover the claim and remove the lien.
How Title Insurance Coverage Works
Traditionally, title insurance coverage for construction loans was provided through blanket coverage. With blanket coverage, the entire project is insured upfront.
The 2008 financial crisis, however, led to the foreclosing of many ongoing projects and forced title insurers to pay contractors’ bills. Since then, title insurers have revised policy coverage to better control risk.
Today, incremental coverage is the standard and requires borrowers to request a title endorsement from the title insurer before the lender can agree to fund a draw request. A title endorsement certifies that a certain percentage of the project has been completed and protects the lender from claims or liens against the property for that percentage of completion.
How the Construction Timeline Has Changed
Every title endorsement adds about 24-72 hours to the construction project timeline. The fund control company oversees every draw request and communicates with the lender and title company to ensure the project draw and funding approval stays on schedule.
Recommendations
We’ve worked with a number of high-profile clients with tight timelines and strict budgets. With that said, we’ve found ways to keep a project’s flow of capital consistent and avoid delays caused by title endorsement requests.
Recommendation for Lenders
Request the Title Endorsement as soon as the draw request is received. Don’t wait until the draw is processed and approved.
Recommendation for Borrowers
Make sure Conditional and Unconditional Releases are filled out completely and signed when making a draw request.
Embrace the change.
Though coverage requirements for title insurance have shifted, lenders and borrowers can make simple adjustments to their own policies and procedures to receive loan proceeds on-time and keep projects moving forward.