Title insurance: Much-needed relief for home buyers
Title refers to the legal right to a property which is obtained by a requisite registered document. Every time a property changes hands there is a change in the title as well. Somewhere in the chain of transfers and transmissions of the property, certain lacuna prevails and some defect in the title is observed.
The issue of ownership/title is a large-scale problem in the real estate market. The maxim of law "no one can give better title than what he has" (nemo dat quod non habet) is the basis on which most of the title disputes are formed. In other words, a defective title holder cannot pass on a valid title to his buyer.
This is where having title insurance will help. Title insurance is fundamentally encompassed under the recent contemporary legislation, the Real Estate (Regulation and Development) Act 2016 (RERA), which is premeditated to shield the interest of the owners, investors including but not limited to lenders against any shortcoming in the title to a property.
Title insurance is something that is much-needed in the real estate industry and it will unquestionably comfort the sentiments of buyers on one hand, and developers, lenders, and institutional investors on the other.
What is title insurance? Title insurance is an insurance of indemnity and unlike other insurances, it has a retrospective effect. This means, the title insurance indemnifies the insured against all the loses and claims that are suffered by the insured as a result of defect in the title of a property (of which the insured was not aware on the date of the policy) even before the date of the policy. So, in simple words, title insurance means an insurance against any loss caused ..
In every real estate transaction, a buyer desires to obtain a clear title and marketable title to the property and intends to know the restrictions or encumbrances on the property before purchasing it. State laws and local restrictions on a property can sometimes hinder the ownership. In every real estate transaction, therefore, emphasis is laid on a marketable title. Even after thorough due diligence, at times there are anomalies in the title of the property that can crop up.
Title insurance is available in many countries such as Canada, Australia, the United Kingdom, Europe etc. In India, title insurance has not been a common practice.
Not many Indian insurers offer title insurance Indian insurance companies lack the underwriting expertise to offer title insurance products. Indian insurers require reinsurance support to be able to offer the product as the cost involved is high. The menace of defective land records resulting in title complications is relatively high in India.
Challenges with title insurance The major reasons why insurance companies have resisted developing the title insurance policy product are: -
1. The volume of title related swindles are numerous;
2. The legal redressal for the title disputes is sluggish;
3. The costs involved in conducting due diligence of the property before issuing the policy are substantial;
4. A lengthy and a time-consuming process of conducting searches at the appropriate land registries, inspection of land records maintained in government offices and making such other enquiries as may be necessary to ascertain if there is any encumbrance on the property; and
5. Although the Limitation Act of 1963 lays down period of limitation within which a suit is to be filed, in several instances, the courts condone the delay and this results in great uncertainty with respect to litigations that may arise on a property.
RERA, now, by virtue of section 16, rests the terror of title disputes by employing an obligation on the promoter to obtain such insurances as may be notified by the appropriate Government including but not limited to two kinds of insurances being, insurance in respect of: -
(i) Title of the land and building; and
(ii) Construction of the real estate project.
The promoter will also be liable to pay the premium and charges in respect of these insurances and shall pay the same before transferring the insurance to the association of the allottees, once the project has been completed. State governments are yet to notify the enforcement of this section. The mandatory title insurance will condense the title disputes and metamorphose the real estate industry into a resolutely, controlled, and regulated segment.
The principal distress for most of the developers, private equity investors, institutional investors and even purchasers is the risk of objections being raised on the title of the property which consequently makes the ownership debatable rendering its marketability to be truncated and in case of construction projects it even impedes and suspends the construction progress.
Title issues often result in interminable litigations thereby cumulatively increasing the total cost involved in the transaction. The developers in any project are susceptible to plentiful litigations with respect to title of the Land and this inversely affects the consumers as well. It becomes prudent in such cases to have a title insurance.
Obligations of the insured When purchasing a title insurance, it is vital to read the policy and be aware of the coverage that is provided. As soon as an individual signs the policy, he/she becomes accountable for all the information provided which includes not only the benefits of the policy but also the restrictions contained therein.
Insurances of every kind are subject to several disclaimers. Likewise, a title insurance is also subject to disclaimers. The insurance policy contains exclusions which, if not carefully observed, could lead to failure in claiming the policy money. In addition to the losses covered under the insurance policy, it is equally important to understand facets such as:
a. How the policy can be claimed;
b. The evidence acceptable for proving the loss;
c. The period within which the loss should be intimated to the insurance company;
d. Renewal of the policy;
e. Limit of indemnity etc.
Why you should have title insurance Title insurance protects investment in real estate and provides coverage against financial loss arising from title defects and other irregularities relating to property acquisition.
Now that RERA has made having a title insurance compulsory, it is going to be of utmost advantage to the consumers as well as the insurance companies. It safeguards all the possible disputes that may arise in respect of the title of the property. The noteworthy advantages of having a title insurance are: -
a. It crystalises the due diligence process;
b. It relatively reduces the risk factor involved in real estate transactions;
c. It accelerates real estate investment;
d. It supplements the representations and indemnities given by the seller in the documents;
e. It covers any defect in title arising as a result of a defective title document; and
f. It covers litigation costs.
Although RERA mandates that the developer shall obtain title insurance in respect of new projects and ongoing projects, obtaining title insurance is a practice that must be followed in the real estate sector as it is a contemporary form of indemnity and need of the hour owing to the fact that property disputes are very persistent.
'Caveat Emptor' or let the buyer beware is the defense taken in most real estate transactions by the developers and the vendors this results in the nightmare of real estate litigation which often petrifies the homebuyers. Having a title insurance will reduce the burden of the prospective buyer, developer/ institutional investor with respect to title of the property as there is thorough check on the title which reduces subsequent risks.
The insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), in process of formulating rules and regulations to promote and initiate the implementation of title insurance in India. In the light of the efforts put in by IRDAI and the provisions of RERA, it is expected that there will be some progress for the establishment of the concept of title insurance in India. Although most of the insurance companies are still in the process of building the title insurance product as it will be project specific, once the product floats in the market the demand would be high as it is a superlative form of indemnity and protection which the consumers can have.
