Coverage Construction: Arizona Supreme Court’s Osborn III Opinion

Creighton Dixon, Jeffrey Porter and Lynsie Zona | Snell & Wilmer

In Fidelity National v. Osborn III Partners LLC, the Arizona Supreme Court recently decided the question of whether mechanics’ liens filed by a general contractor are a construction lender’s “own darn fault” if the liens result in part from the lender discontinuing advances of loan proceeds to be used to pay the mechanics’ lien claimant. We’ve gathered members of our commercial finance and construction teams to help explain what the decision means for lenders, borrowers, owners, developers, and contractors.

Summary of the Opinion

The standard ALTA form of title insurance policy excludes from its coverage any defects, liens or encumbrances that were created, assumed or agreed by the insured. As the Arizona Supreme Court notes, this exclusion – “Exclusion 3(a)” – is meant to exclude coverage for matters that are the insured’s “own darn fault.”

In Osborn III, the construction lender, Mortgages Limited (“ML”), entered into a loan agreement with a developer to provide a loan for the construction of a condominium project, secured by a first deed of trust on the project. Two years later, in mid-2008, the developer defaulted by failing to make an interest payment, and ML ceased funding the loan. As a result, the general contractor for the project – Summit Builders (“Summit”) – was not paid in full and recorded a mechanics’ lien against the project. That same summer, ML went into bankruptcy, and the bankruptcy court created several LLCs – including Osborn III Loan LLC (“Osborn”) – to hold ML’s existing loans. As successor-in-interest to the lender, Osborn became the insured party on the title policy. Summit sued to enforce its mechanics’ lien at the end of December 2008. 

The title policy expressly provided for coverage if the lender’s deed of trust did not have priority over mechanics’ liens arising from work related to the project that was commenced before the policy date, even though work had indeed already begun prior to the loan closing. Although the Court did not specify the source of this coverage, filings with the Arizona Court of Appeals cite Covered Risk 11 (a) of the title policy, which protects against loss caused by lack of priority of the deed of trust caused by a mechanics’ lien for work that commenced on or before the date the deed of trust is recorded. Perhaps with that understanding, the lender settled Summit’s claims and sought coverage under its title policy.  

Fidelity denied the lender’s claim, however, arguing that the lender triggered Exclusion 3(a) because the lender’s decision to withhold project funding “created” the mechanics’ liens. 

Rejecting two frameworks established by federal courts, Arizona’s Supreme Court held that its prior opinion in a homeowner’s title insurance claim matter provided appropriate guidance in disputes as to the application of title policy Exclusion 3(a) in the context of construction lending in its recent Osborn III opinion. Accordingly, Arizona courts will rely on a causation framework to determine if the insured “created” or “suffered” a defect, encumbrance, or adverse claim – such as a mechanics’ lien – excluded from insurance coverage by Exclusion 3(a).

The Osborn III Court relied on its prior opinion in First American Title Insurance Co. v. Action Acquisitions, LLC, in which the Court held the created-risk exclusion in the purchaser’s homeowner’s title policy applied to its loss of title when the purchaser paid a grossly inadequate price for the home at a sheriff’s sale, which led to the sale being set aside. As in Action Acquisitions, the Fidelity National Court found the language of the title policy exclusion to be unambiguous, meaning that Exclusion 3(a) is applicable if the insured’s actions caused or allowed the defect. Significantly, this analysis does not consider the insured’s intent in creating the defect or whether the insured engaged in misconduct – such as a contractual breach – related to the defect.

The rejected federal frameworks would have imposed other factors into the analysis into application of Exclusion 3(a). However, the Osborn III Court opted instead for a causation framework, similar to a proximate cause analysis in tort law, which relies on examining the sequence of events: The insurer has the burden of proving that the insured’s actions actually caused a defect, encumbrance, or adverse claim so as to trigger Exclusion 3(a).

What does Osborn III mean for Lenders and Borrowers?

This decision will have ongoing relevance for construction lenders. Although the title policy in Osborn III was issued nearly 17 years ago, Exclusion 3(a) and Covered Risk 11(a) remain essentially the same despite ALTA’s recent revisions to its form policies.

The Osborn III Court was clear: Timing is key when it comes to Exclusion 3(a). The current economic climate is prompting construction lenders to look closer at the default provisions in their loan documents, and although construction lenders are always concerned with ensuring loan advances are used to pay contractors, Exclusion 3(a) provides one further reason.

What does Osborn III mean for the Construction Industry?

Osborn III is a 2023 opinion about a 2008 dispute. And even more dramatically – the matter is still not resolved! The Supreme Court remanded to the trial court to evaluate three factual issues. This opinion is a timely reminder that in order to avoid decades (plural) of litigation, keep good records. For example, the Court could not determine on the record before it the key timeline of events (e.g., did Developer fail to pay Contractor because Lender withheld funding, or did Developer fail to pay Contractor before Lender withheld funds). A clear record will help facilitate resolution of disputes. This is important as nearly everyone is better off promptly resolving a dispute and getting back to their respective core businesses (e.g., construction or lending, not litigating). 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email

Filing Motion to Increase Lien Transfer Bond (Before Trial Court Loses Jurisdiction Over Final Judgment)

David Adelstein | Florida Construction Legal Updates

If a construction lien is recorded against real property, the lien can be transferred to a lien transfer bond.  This transfers the security or collateral of the construction lien from the real property to the lien transfer bond. The lien transfer bond can be a bond posted by a surety company or it can be cash.  This is governed by Florida Statute s. 713.24.  The amount of the lien does not dictate the amount of the lien transfer bond.  Rather, the lien transfer bond needs to be in the amount of the lien, plus interest on that amount for three years, plus $1,000 or 25% of the amount of the lien (whichever is greater so factor in the 25%) to cover attorney’s fees. Fla. Stat. 713.24(1).

If you are looking to transfer a construction lien to a lien transfer bond, make sure to consult with counsel.

Keep in mind there is a statutory mechanism for a lienor to increase the lien transfer bond to cover attorney’s fees and costs and notice the word “must” in the statute below. Pursuant to Florida Statute s. 713.24(3):

Any party having an interest in such security or the property from which the lien was transferred may at any time, and any number of times, file a complaint in chancery in the circuit court of the county where such security is deposited, or file a motion in a pending action to enforce a lien, for an order to require additional security, reduction of security, change or substitution of sureties, payment of discharge thereof, or any other matter affecting said security. If the court finds that the amount of the deposit or bond in excess of the amount claimed in the claim of lien is insufficient to pay the lienor’s attorney’s fees and court costs incurred in the action to enforce the lien, the court must increase the amount of the cash deposit or lien transfer bond. Nothing in this section shall be construed to vest exclusive jurisdiction in the circuit courts over transfer bond claims for nonpayment of an amount within the monetary jurisdiction of the county courts.

In a recent case, Edmondson v. Tri-County Electrical Services, Inc., 2023 WL 2995420 (Fla. 4th DCA 2023), a lien was transferred to a cash bond by the real property owner.  The contractor-lienor moved to have the court increase the amount of the cash security to better cover attorney’s fees and costs accrued in the litigation. The court deferred ruling on the motion. Subsequently, the court had a bench trial and the contractor prevailed. The court entered final judgment in favor of the contractor and reserved ruling on attorney’s fees, interest, and court costs. The court thereafter entered an amended final judgment that included attorney’s fees, interest, and court costs.  The court then conducted a hearing to increase the cash bond and granted the contractor’s motion for the cash bond to be increased.  The issue was that the court no longer had jurisdiction to require the owner to increase the cash bond:

The action here was not ‘pending’ under section 713.24(3). The general rule is that an action remains pending in the trial court until after a final judgment and such time as an appeal is taken or time for an appeal expires. By the time the trial court had ruled on the motion to increase the bond, the time for an appeal had passed. Therefore, because the matter was no longer pending, the trial court lacked authority to consider the motion.

The trial court was without jurisdiction to grant Contractor’s motion to increase the bond.

Edmondson, supra, at *2 (internal citations omitted).

Here, the contractor should have requested the trial court rule on the deferred motion to increase the cash bond BEFORE the amended final judgment was entered. Or, at a minimum, the contractor should have timely filed a motion for rehearing as to the amended final judgment to address this deferred motion to increase the cash bond. Once the rehearing period expired, “the trial court no longer has jurisdiction over a final judgment.” Edmondson, supra, at *1 (“Contractor did not file a timely motion for rehearing, which would have been the time to raise the bond increase issue.”). Id.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email

Failing to Release A Mechanics Lien Can Destroy Your Construction Business

William L. Porter | Porter Law Group

Is the title to this article possibly true? Yes, absolutely! I have seen it happen. Let me tell you how it happens so you can avoid such a result.

When contractors, subcontractors or suppliers in California construction projects are not paid they often record a mechanics lien on the property on which they worked. This is a customary accepted legal process for the claimant to secure its right to payment. The mechanics lien enables the claimant to eventually sell the property and obtain payment from the proceeds to the extent they remain unpaid. California Civil Code Section 8460 generally requires that a lawsuit to foreclose on a mechanics’ lien must be filed in court within ninety (90) days after the mechanics’ lien is recorded. If no lawsuit has been filed in court within this 90-day period, then the lien generally becomes unenforceable. Because the mechanics lien remains a cloud on the title to the property if not released, the lien claimant usually releases the mechanics lien if they have failed to meet the lawsuit deadline. Lien claimants will also release a lien and/or dismiss the foreclosure lawsuit in exchange for payment. It is rare that the property is actually sold to obtain payment. This is a brief description of the pathway to payment through the use of a mechanics lien.

Sometimes however, even though a mechanics lien becomes unenforceable due to missing the lawsuit filing deadline, the claimant refuses to release the mechanics lien. This results in the mechanics lien remaining as a cloud on title to the property. As a consequence, it becomes difficult to sell the property or use it as security for credit or a loan. The ill-willed claimant instead prefers to leave the mechanics lien in place to serve as a thorn in the side of the property owner or prime contractor who has failed to pay them. Some hope that the owner will still pay them for releasing the mechanics lien even though it is no longer valid. The claimant who takes this path has effectively started down the path to their own demise as a California contractor. Here is what can happen next:

The claimant will receive a letter from the owner, contractor or their legal counsel asking that the claimant release the expired mechanics lien. The claimant often responds to say: “Pay me and I will release it.” When this happens, the Owner will file a petition before the court to release the lien under California Civil Code section 8482. The court will release the lien and impose a monetary judgment against the mechanics lien claimant for all the attorney fees and costs incurred in petitioning the court to release the lien. When faced with the court judgment, some claimants further their error by responding with silence or the equivalent of: “Ok, just try to get the money from me.”

The next step in the process is that the property owner will send the judgment to the California Contractors State License Board (“CSLB”). The CSLB, following the requirements of California Business and Professions Code 7071.17 will give the claimant 90 days to either pay the judgment, file bankruptcy or appeal the judgment. If they do not do so, then the claimant’s contractor’s license, required for a contractor to do business in California, is suspended by the CSLB. But there is more:

If the contractor whose license is suspended actually performs any work at all on any project while the contractor’s license is suspended, then the contractor is subject to “disgorgement” under Business and Professions Code section 7031. Section 7031 provides that any contractor or subcontractor who performs work on a construction project in California without a valid contractor’s license in place during the entire time they work on the project may be compelled by Court Order to refund every penny the contractor received for working on the entire project. For contractors working on multiple projects, this results in financial ruin as they are compelled to return every dollar they were paid on each of those projects from the beginning of the project until the end. Bankruptcy is the inevitable result. The contractor is thus completely destroyed. All this as the result of spitefully refusing to release a valueless mechanics lien that could not be enforced in the first place due to its expiration.

This is the very unfortunate but true story of a number of contractors and subcontractors in California, motivated by ill will, who refused to release an expired mechanics lien. In the end, ill will and spite was their undoing. They destroyed themselves. Sic semper tyrannis.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email

Huh? Action on Construction Lien “Relates Back” Despite Notice of Contest of Lien

David Adelstein | Florida Construction Legal Updates

Not every case law you read makes sense. This sentiment goes to the uncertainty and grey area of certain legal issues.  It is, what you call, “the nature of the beast.”  You will read cases that make you say “HUH?!?” This is why you want to work with construction counsel to discuss procedures and pros / cons relative to construction liens.

An example of a case that makes you say “HUH” can be found in Woolems, Inc. v. Catalina Capstone Creations, Inc., 2023 WL 2777506 (Fla. 3d DCA 2023) dealing with a construction lien foreclosure dispute.

Here, a contractor filed a lawsuit against a subcontractor with a summons to show cause why the subcontractor’s construction lien should not be discharged.  This is a specific complaint filed under Florida Statute s. 713.21(4). This statute requires the lienor to essentially foreclose on its construction lien within 20 days after it was served with a “show cause” summons.  The subcontractor filed its answer and counterclaim but did NOT assert a claim to foreclose its construction lien.

Around the time of subcontractor’s answer and counterclaim, the contractor transferred the subcontractor’s lien to an all-cash lien transfer bond in accordance with Florida Statute s. 713.24. Once the lien transfer bond was recorded, the owner recorded a notice of contest of lien under Florida Statute s. 713.22. The notice of contest of lien shortens the limitations period to foreclose on a lien to 60 days.

The subcontractor did NOT timely foreclose its lien against the lien transfer bond and the general contractor moved to have its all-cash lien transfer bond returned, as it should do. The subcontractor filed its lien foreclosure against the lien transfer bond AFTER the 60-day window expired. The trial court, and affirmed by the appellate court, denied the general contractor’s request to have the lien transfer bond returned and allowed the subcontractor to assert its (dilatory) claim against the lien transfer bond claiming it related back in time to the subcontractor’s initial counterclaim.  HUH?!?


Here are the issues with this ruling:

  1. The subcontractor should have foreclosed its construction lien with the 20-day time period from receiving the summons to show cause. The case reflected the subcontractor asserted claims, but not the lien foreclosure claim subject to the summons to show cause. (The appeal did not discuss this point for reasons currently unknown.)
  2. Regardless of (1), the lien was transferred to a bond and a notice of contest of lien was recorded shortening the time period to foreclose the lien (as to the bond) to 60 days. There is case law referencing this procedure. Yet, the subcontractor still did not timely assert its claim against the lien transfer bond.
  3. The trial court applied the relation back doctrine which does nothing but completely water down the statutory purpose of a notice of contest of lien (not to mention the summons to show cause complaint).

In light of this ruling, here are my recommendations:

  1. If you are going to transfer a lien to a lien transfer bond, do it from the get-go. Then, record the notice of contest or pursue the summons to show cause complaint.
  2. If filing the summons to show cause complaint, wait for the 20-day time period to expire. If the time period expires, move to have the lien discharged before making the decision to transfer the lien to a lien transfer bond.
  3. If recording a notice of contest of lien, wait for the 60-day time period to expire before taking action.

The reality is that the procedure implemented in this case should have been fine but for the application of the relation back doctrine that makes you say HUH?!?

As mentioned, if dealing with a lien, please make sure to discuss strategic considerations with a construction counsel that can help navigate the process and advise on the pros and cons.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email

Lien Waivers and Releases of Claims: Be Careful Not to Sign Away Your Rights!

Jackson S. Nichols and Jake B. Mitchell | Construction Law Now Blog

Most commercial contractors are familiar with construction lien waivers (also called lien releases). Typically, there are two types: partial and final lien waivers. Standard industry practice requires contractors to submit executed partial lien waivers on a regular (usually monthly) basis with their payment applications to show the progress of the work performed to date, while final waivers are required at the end of the project. Such waivers usually contain a representation that the contractor or subcontractor who performed the work was paid in full for the work performed and materials supplied and also release any claims or liens associated with that work. Waivers are also dated and signed by the contractor before a notary.

Many contractors believe these waivers contain standard language that does not deviate significantly from one to the next, but that is not necessarily true. More dangerously, contractors also often think partial waivers only release claims to the extent of work performed, but they can release additional rights outside of the work already performed, such as mechanic’s lien rights and other claims (e.g., as delay claims). Accordingly, partial lien waivers should be scrutinized closely.

Most contractors are familiar with mechanics’ liens, but their importance bears repeating. Mechanics’ liens are a valuable tool for contractors to leverage higher-tier contractors or owners to pay for work performed on a project. In essence, mechanics’ liens impose blemishes on titles to properties. After a blemish on a property’s title is established and if the lien amount is not paid, the lien claimant can force the sale of the subject property. Accordingly, project owners are incentivized to only withhold payment to their prime contractors for a good reason to avoid a lien on the property.

Because mechanics’ liens are such powerful mechanisms, project owners and higher-tier contractors frequently seek to limit or eliminate those rights. One way is by having contractors execute partial lien waivers. By executing partial lien waivers, contractors give up their right to file a lien (and oftentimes any other claim that would otherwise be litigated). The waivers are executed in exchange for payment for work performed. Consequently, contractors waive their right to file a lien or other claim for all work that has been paid for to date. However, it is not uncommon to see language in lien waivers that waive and release all mechanics’ liens rights going forward. Thus, if a contractor is not careful, they can release all lien rights at the very beginning of a project and destroy their ability to file a lien claim for future work.

Lien waivers can also waive and release a contractor’s ability to assert other claims. For instance, many waivers are drafted to release all claims for delays up to the date of the waiver or claims for work that has not yet been performed. Courts in some jurisdictions have enforced such waivers of future claims.

Due to the implications of executing a lien waiver, contractors should take a three-step approach to ensure their rights are protected to the fullest extent possible:

  • Analyze and fully understand the scope of the lien waiver;
  • Analyze the timing and conditions of the release;
  • If feasible, negotiate the language of the waiver to avoid releasing lien rights or other claims pertaining to the project.

Before executing a lien waiver, contractors should address a few scope-related questions (i.e., what exact rights are forfeited in the release). For example, contractors should determine whether the lien waiver is limited to only mechanics’ liens rights or whether other potential claims are included too (delay, impact, etc.). Additionally, contractors should consider whether the lien waiver applies only to lien rights and/or claims accrued as of the payment date or whether it includes future lien rights and claims. Notably, certain jurisdictions provide some protection regarding these waivers. For instance, Maryland does not allow a subcontractor to prospectively waive lien rights at the onset of a project, but it does let general contractors do so, and it does not protect subcontractors from waiving lien rights after work has commenced. Additionally, Virginia law does not allow any contractor to waive their mechanics’ liens rights for work not yet performed. Understanding the relevant rules limiting the scope of lien waivers in your jurisdiction is critical.

Next, contractors should assess the timing and conditions governing a lien waiver. For example, a contractor’s lien waiver can be deemed valid and enforceable either upon execution and delivery of the form or only upon the contractor’s receipt of payment for the work performed. Ultimately, the language of a particular lien waiver will dictate both the timing and conditions governing it. That being the case, contractors must scrutinize the terms and conditions of a particular lien waiver.

To ensure maximum protection and clarity before waiving mechanics’ liens rights and other remedies, contractors should identify the priorities of a project and negotiate based on those priorities. Contractors should consider, for example, whether a project has suffered delays or other impacts have been incurred due to events outside of its control. To the extent that is the case, one particular negotiating point might be to include language in the Release to state that the contractor only waives its mechanic’s lien rights and other claims for direct damages and not for indirect or consequential damages resulting from impacts to the project. Some lien waivers even explicitly provide an area where the contractor can list such exceptions. Alternatively, contractors should determine whether change orders remain outstanding. If that is the case, one negotiating point might be to include language in the lien waiver that the rights released are narrowly limited to the work paid for     and do not include outstanding or unapproved change orders.

Negotiating the terms of a lien waiver with an upstream contractor or project owner can be challenging. If you are unsure how to prioritize your negotiations or want to ensure that you fully understand what legal rights and remedies are being waived and released, consider engaging with legal counsel.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email