ICSC Legal Database - Cases Monday, February 22, 1999 05:01 PM Case Index: 00126 Citation: American Savings & Loan Association v. Lawyers Title Insurance Corporation, 793 F.2d 780 (6th Cir. 1986). Issue: Whether a title insurance policy that insured the lender against the risk that subsequent liens for services, labor and materials would gain priority to its lien securing the construction loan, notwithstanding a claim that losses incurred by lender in paying off mechanic's liens were excluded as a risk "created, suffered, assumed or agreed to" by the lender. Facts: This is a case in which a construction lender brought an action for breach of a title insurance policy, seeking to recover losses incurred in paying off mechanics' liens. In 1982 American Savings & Loan Association (lender) loaned $1,000,000 to a group engaged in the construction of a housing complex whose previous arrangements for financial backing had failed midway through the construction project. To secure the loan, American received a deed of trust executed by the borrowers. At the recording of this deed it was superior to any other recorded lien. At the same time, lender acquired a title insurance policy from Lawyers Title Insurance Corp. (Title Co.). Both lender and insurer were aware at the time the policy was issued that lender's lien, under Tennessee law could become subordinate to liens subsequently recorded by subcontractors, materialmen furnishers and laborers. The onstruction project subsequently encountered further difficulties with the result that it could not pay in full its debts, resulting in the filing of notices of mechanics liens. Lender settled these lien claims. Lender then sought recovery from Title Co. which claimed that mechanics lien coverage was exluded under the title policy; lender brought suit for breach of the title insurance policy. The District Court ruled in favor of Title Co., and lender appealed. Holding: Reversed and remanded. The Court held that under Tennessee law, the title insurance policy insured the construction lender against the risk that subsequent mechanics' liens would gain priority over its lien securing the construction loan, notwithstanding the claim that losses suffered by the lender in paying off the mechanics' liens were excluded as a risk "created, suffered, assumed or agreed to" by lender. The court believed that the parties intended the contract to cover the risk of subsequent superior mechanics' liens, and the insurer received specific consideration for insuring such risk. In addition, the court concluded that the lender could not have assumed the risk of future mechanics' liens by financing only a portion of the construction project rather than funding the full actual completion costs. Publication: Legal Update Date: Winter 1986 Classification 1: Insurance Classification 2: Classification 3: 00126 - Legal Update - Winter 1986