Introduction

Title insurance is a form of indemnity insurance that protects a potential property owner against financial loss from defects in title to real property. The policy is a retrospective one where the insured is protected against losses arising from the events that occurred prior to the date of issuing the policy.

In the recent past, the Insurance Regulatory and Development Authority of India (IRDAI) had introduced Title Insurance to protect the owner of a property against the financial losses that occurred due to valid reasons. In its latest circular, they have introduced a beneficial clause for the customers which states that "Considering the requirements of legal protection for promoters in the early stages of development of the project during financial appraisal, registration and approval with RERA authorities and safeguarding the interests of individual buyers after taking over the physical possession of the property, the regulator needs to expand the current title insurance products suitable to promoters/developers and retail property buyers."

Why was it introduced?

Title insurance provides credibility to developers and promoters of the real estate business. As it is made mandatory now, therefore after some time we will not be able to find any developer who is not abiding by the RERA rules and regulations in the market.

This insurance will further facilitates a well planned residential housing projects, as it will help the homebuyers to mitigate the issues related to title defects, lopsided sales agreement and any other issues which are present in a construction project. The people who are engaged in joint ventures with the developers should compulsorily purchase this policy in order to safeguard their investments, landowners and housing finance companies.

This insurance policy is not only beneficial for the homeowners but also benefits the developers by offering them a strong reputation and track records and hence it should not be considered as a cost addition but rather and valuable addition to the real estate business. RERA is taking proactive steps to introduce title insurance in India and to ensure that in the coming future the real estate market is filled with strong and reputed developers.

Changes in the new notification-

Promoter Legal Expenses (Defence Cost) Policy: This cover will indemnify the insured against legal defence costs only against suits challenging the Title of the project". It means that the expense incurred by the potential owner of the property in legal proceedings such as filing a court case, legal documentation and appointed lawyer's fees filed against the developer, promoter or any other allottee party will now be managed by the insurance. This is further designed to strengthen the stand of the potential property owner and support them in every possible manner to obtain possession of their property

Now this, i.e. Title Insurance cover can be individually bought by the customers for their desired duration, which was earlier available for the entire duration.

Reasons for the non-performance of the Title Insurance-

  • Expensive product

Title insurance is an expensive product because the premium of the policy is calculated on the basis of the gross developed value which comprises of the cost of land, construction and the profit margin of the developers that anywhere leads to around 0.5%- 3% and this premium has to be paid for a period of 7- 12 years . Since developers of under construction properties cannot pass on the burden of insurance costs to the customers with whom they have firmed up the prices and executed registered agreements, the title insurance market appears to be a non-starter. To expect a reduction in the premium is unreasonable. The endemic problem of credible data regarding ownership and valuation of the property tells at every step of the way.

  • Notable Exclusions

Apart from the high premium, the title insurance policy does not cover the following concerns

  • Title insurance only covers past defects. A future invasion of the property is one of the most common concerns among landowners and developers. The land mafia is as true and as genuine as day and night. Professional encroachers may be found in both urban and rural areas. This exclusion from the insurance coverage is particularly unappealing in light of the hefty prices paid.
  • There is often a discrepancy in the government approvals which leads to the stoppage of the work. This leads to the failure of big projects.

Status in India

Existing title insurance products in India have been designed for real estate projects registered with RERA. The Maharashtra Real Estate Regulatory Authority could soon mandate title insurance in the western state of Maharashtra. However, existing regulatory and administrative bottlenecks could potentially inhibit the development of title insurance products.

IRDAI is the sole regulatory body in India that facilitates title insurance and without its prior approval, no policy can be introduced in the market. Only a few companies namely HDFC ERGO General Insurance, ICICI Lombard General Insurance Company National Insurance Company, and Tata AIG General Insurance Company have received such approvals from the IRDAI. But the IRDAI has not published any general regulatory framework for Title Insurance.

IRDAI organised a working group in October 2019 to develop a standardised framework for title insurance products. The working group's conclusions will establish the regulatory framework for the title insurance industry, and hence it will help in improving the land records in India.

Conclusion

Title insurance will safeguard the transacting parties from risks that are related to the title of the land. For the buyer, the title insurance will protect them from the burden of the back taxes till they have an interest in the property and for the lender the burden of banks and mortgage lenders and several other defects.

Title Insurance and Challenges in the Indian Market

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.