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

Construction Litigation Roundup: “What Did You Know… and When?”

Daniel Lund III | Phelps Dunbar

What did you know… and when? 

Parties typically get one bite at the apple in court on a particular “transaction” or “occurrence.” Principles of res judicata – the idea that a matter has been adjudicated and cannot be re-litigated – compel parties to bring related claims in a single proceeding or be barred from doing so down the road.

A most peculiar set of circumstances was presented to courts in Louisiana, wherein a plaintiff sought removal of a construction lien from a project. As it turned out, the same plaintiff had earlier filed suit to have the lien canceled but was unsuccessful. The plaintiff’s second bid to have the lien dismissed met with favor by the court despite the lien holder’s res judicata defense. The lien was dismissed, and the lien holder appealed. 

However, before the matter was completely handled on appeal, the lien holder requested that the Court of Appeal dismiss the appeal and remand the matter back to the trial court – on the basis that the lien holder had itself newly discovered that, in fact, the plaintiff was at the time of its first unsuccessful suit aware of “all of the facts alleged in [the present] lawsuit and the claim it has asserted in the Second Lien Removal Suit” – additional grounds supporting res judicata.

The Louisiana Fourth Circuit Court of Appeal agreed, dismissing the appeal, vacating the trial court’s judgment, and remanding the matter back to the trial court: “An appellate court’s authority to remand a case to the trial court for the consideration of additional evidence, when necessary to reach a just decision and to prevent a miscarriage of justice, is conferred by La. C.C.P. art. 2164 [“The appellate court shall render any judgment which is just, legal, and proper upon the record on appeal.”]. …

“Applying these principles here, we find—in light of the purported new evidence—that this matter must be remanded for consideration of whether that evidence is relevant in resolving the res judicata issue. In so doing, we acknowledge that, as a court of record, we cannot consider the purported newly discovered evidence; it is not properly before us. Nonetheless, to prevent a potential miscarriage of justice from the failure to consider such 2 evidence, we find the appropriate remedy is to remand. To do so, we must vacate the trial court’s judgment.”

225 Baronne Complex v. Roy Anderson Corp., 2022-0793 (La. App. 4 Cir. 03/24/23); 2023 La. App. LEXIS 476 

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

One More Mechanic’s Lien Number- the Number 30

Christopher G. Hill | Construction Law Musings

I’ve spoken here often about the numbers 90 and 150 as they relate to Virginia mechanic’s liens.  These numbers are important for all mechanic’s liens in Virginia, whether commercial or residential (meaning liens for 1 and 2-family homes).  There is another number, 30, that is important for those construction contractors that perform work on single and two-family homes.  Where a mechanic’s lien agent is named on the building permit (or possibly just named if not stated on the permit), and among other requirements, Va. Code 43-4.01 requires that, in order to have lien rights at the project, the contractor must provide notice to the mechanic’s lien agent within 30 days of beginning work that it is performing work and shall seek payment for the work.

Further, the mechanic’s lien agent notice must contain the following:

(i) the name, mailing address, and telephone number of the person sending such notice, (ii) the person’s license or certificate number issued by the Board for Contractors pursuant to Chapter 11 (§ 54.1-1100 et seq.) of Title 54.1, if any, and the date such license or certificate was issued and the date such license or certificate expires, (iii) the building permit number on the building permit, (iv) a description of the property as shown on the building permit, and (v) a statement that the person filing such notice seeks payment for labor performed or material furnished.

Failure to provide this notice by certified mail will bar any mechanic’s lien from being perfected on the property.  The only exception found in the statute is that if the contractor provides late notice, then a lien is available for any work performed after the notice is given.

The takeaway from this statute for residential construction contractors is to always provide a notice to the mechanic’s lien agent as a matter of course.  The notice does not require that a lien be recorded, but failure to do so can bar much of the leverage a mechanic’s lien can provide.

For a more detailed evaluation of any potential mechanic’s lien claim in Virginia, whether residential or commercial, be sure to consult with an experienced Virginia construction attorney.

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