When a mechanic's lien waiver goes missing at closing, who carries the exposure until it surfaces

Question

Say a contractor recorded a lien three months before closing and the seller swore it was paid. The title company issues the policy, the lien waiver never makes it into the file, and the contractor comes back six months post-close saying the check bounced. The owner's policy covers the buyer against the recorded lien, but the title company's gap between "we insured it" and "we confirmed the release" is where things get expensive. Does your underwriter require the waiver in hand before you can issue over a recorded mechanic's lien, or do you write an indemnity and move on?

ravi_chandrasek · Answer

Most underwriters require either a recorded release or a signed, notarized waiver in hand before issuing over a recorded mechanic's lien, but some will accept a holdback escrow plus a gap indemnity from the seller when the release is pending.

The checklist a careful operator runs: confirm the lien is still active in the county index the morning of closing, verify the contractor's notarized waiver matches the recorded lien amount and legal description exactly, get the seller's proceeds holdback in an amount covering lien plus accrued interest plus the title company's litigation reserve, require a personal indemnity from the seller rather than just the entity, and set a hard deadline in escrow instructions for delivering the recorded release before funds are disbursed to the seller.

The gap that actually bites is a waiver signed but never delivered to the title file before the policy commits. Your underwriter approved issuance on the assumption the waiver existed; the closer assumed someone else confirmed it. The policy is out, the lien is live, and the indemnity is worth whatever the seller's balance sheet is worth that day.

What does your underwriter's clearance checklist actually require in writing before a closer can mark a mechanic's lien as resolved?

leilaqasim · Answer

Indemnity from the seller is the "move on" option until it blows up.

Mine blew up on a Plano fourplex in 2021, $18k lien the seller swore was clear, check had bounced two weeks before closing, and my title company had taken a personal indemnity and moved on. Claim took eleven months to resolve and the seller was by then judgment-proof in a different state. The underwriter paid but then came after me for escrow funds I had already disbursed because the indemnity named my LLC as a party.

What did your title commitment actually say about that lien in Schedule B?

When a mechanic's lien waiver goes missing at closing, who carries the exposure until it surfaces

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