The issue of ownership/title is a large-scale problem in the real estate market. Somewhere in the chain of transfers and transmissions of the property, certain lacuna prevails and some defect in the title is observed. This is where having title insurance will help. Title insurance is a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property.
It 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, and investors, including but not limited to lenders against any shortcomings in the title to a property. The IRDAI has asked all the general insurance companies, except standalone health insurance companies, to launch new Title Insurance products with added benefits for developers and individual buyers, keeping in view the minimum coverage specified in the latest circular.
Why is Title Insurance introduced?
The Real Estate (Regulation and Development) Act of 2016 makes Title Insurance mandatory for every developer for all projects in order to protect retail buyers. This insurance will facilitate a well-planned residential housing project, as it will help the homebuyers mitigate the issues related to title defects, lopsided sales agreements, and any other issues present in a construction project. This insurance policy is not only beneficial for the homeowners but also benefits the developers by offering them a strong reputation and track records. Therefore, it should not be considered a cost addition but a valuable addition to the real estate business. It helps to protect property owners and buyers against past ownership claims and fraudulent transactions and also helps to protect the property buyers against past claims and potential future losses.
Who Can Buy Title Insurance?
It is meant for real estate developers, housing finance companies, land owners, and property investors. It is a long-term policy ranging from 5-15 years. According to the new circular, the individual owners of the property can also have this insurance product. There are mainly two types of Title Insurance. Those are as per the following.
- Lender’s Title Insurance – It is required to get a mortgage loan. This insurance protects the lenders against problems with the title properly. Therefore, if anyone files a claim against the home, this insurance policy will take care of the claims that will affect the lender’s loan.
- Owner’s Title Insurance – It will offer protection to the owner of the house if someone files a claim against the home before the homeowner has purchased it.
What Are The Inclusions of Title Insurance?
This type of insurance product is very useful for people in the real estate business industry as this has come up with a sack full of benefits. The mentions are as follows.
- If a third party claims a legal right that prohibits the construction or development of the property, this policy will jump in to take care of the necessary things. The insurance company will help to defend the legal right in court or compensate for the loss of value in the property. It will also help to compensate for the breach of the restriction of the property.
- If a third party makes a claim related to the adjoining area of the concerned property that prohibits the development, this insurance policy will kick in. in this case, the insurers can help to challenge the third party’s claim and to get rid of the hindrance.
- Lesser risks – It crystalizes the due diligence process as it relatively reduces the risk factor involved in real estate transactions. This policy accelerates real estate investment
- The insurance offers protection against the following points:
- Frauds like forgery or impersonation
- Litigation costs
- If a title dispute arises during a sale, the insurance company will cover the cost incurred for legal damage.
- Expenses are covered if there is a need to settle the matter out of court by giving compensation to the associated parties.
- Covers fraud, issues not discovered prior to the commencement of the policy
Challenges with Title Insurance
Not many Indian insurers offer title insurance. Indian insurance companies lack the underwriting expertise to offer title insurance products. There are several other challenges for which Title Insurance is not very popular among customers. Some of them are discussed below.
- 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 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, the title insurance market appears to be a non-starter.
- Problem with land records – The endemic problem of credible data regarding ownership and valuation of the property tells at every step of the way. The menace of defective land records resulting in title complications is relatively high in India.
- Long process – A lengthy and time-consuming process of conducting searches at the appropriate land registries, an inspection of land records maintained in government offices, and making such other inquiries as may be necessary to ascertain if there is any encumbrance on the property make the process extensively time-consuming.
- Delay in court – Although the Limitation Act of 1963 lays down the period of limitation within which a suit is to be filed, in several instances, the courts condone the delay, resulting in great uncertainty with respect to litigations that may arise on a property.
- Approval-related problem – There is often a discrepancy in the government approvals, leading to the work’s stoppage. This leads to the failure of big projects.
- Others – a) The volume of title-related swindles is numerous; b) The legal redressal for the title disputes is sluggish; c) The costs involved in conducting due diligence of the property before issuing the policy are substantial;
Exclusions of Title Insurance
A Title Insurance policy offers benefits and facilities to the insured person. However, it also comes with certain exclusions for which it does not provide any coverage. To understand a policy comprehensively and avoid future complications, it is important to go through the policy’s exclusions thoroughly. Therefore, the general exclusions of the Title Insurance Policy are as follows.
- If there are any changes in the Insured Use of the Property, then the insurance company is not liable to pay any compensation.
- The policy will not cover any statutory rights relating to coal, petroleum, and other such substances that may be on or under the Property.
- If there is any claim arising due to misrepresentation by the insured during the investigation, that will be permanently excluded from the policy.
- Claims arising from missing government records will also fall under the exclusions category.
- If there are any claims affecting the title due to political matters, the insurance company will not compensate for that.
- Claims related to tribal rights over agricultural lands will not be covered by the policy.
- Title insurance only covers past defects. A future invasion of the property is one of the most common concerns among landowners and developers, which this policy does not cover.
- Actions of the government, pending litigation, sovereign ownership claims such as expropriation, etc., will not be compensated by the insurance company.
Claim process of Title Insurance
Below are the general steps for the claim process:
- Inform the insurance company within 45 days of the occurrence of the event for which the insured person needs to file the claim.
- Insured must submit the duly signed and filled claim form along with the supporting documents within 90 days of notifying about the claim.
- An expert will be appointed on behalf of the company to review the documents and survey the claim.
- If no discrepancy is found, the claim will be settled within the stipulated time period.
- In case of any claim by a third party, the insurance company will indemnify property buyers to the extent of the loss incurred by them.
Below are some of the documents which the insured person has to submit for timely claim settlement:
- Duly filled in a claim form
- Title document or registration of the title document
- Property documents
- KYC documents
- Details of lawyer’s fees
- Any other, if required.
Frequently Asked Questions
Here are some of the frequently asked questions that you must know.
The expense incurred by the potential property owner in legal proceedings, such as filing a court case, legal documentation, and appointed lawyer’s fees 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 the Title Insurance cover can be individually bought by the customers for their desired duration, which was earlier available for the entire duration.
IRDAI is the sole regulatory body in India that facilitates title insurance; 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.
A basic owner’s title insurance policy typically covers the following hazards:
- Ownership by another party.
- Incorrect signatures on documents, in addition to forgery and fraud.
- Flawed records.
- Restrictive covenants (terms that reduce value or enjoyment), such as unrecorded easements.
- Encumbrances or judgments against property, such as outstanding lawsuits and liens
Title insurance is subject to disclaimers. The insurance policy contains exclusions that, 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:
- How the policy can be claimed;
- The evidence acceptable for proving the loss;
- The period within which the loss should be intimated to the insurance company;
- Renewal of the policy;
- Limit of indemnity, etc.
The premium amount for a Title Insurance policy depends on various factors, such as:
- Limit of indemnity
- Tenure of the policy
- Excess opted by the insured person
- The size of the property
- Property age, etc.
Yes, the insurers do cover an increase in the property’s value during the policy’s tenure. In order to cover the appreciated value of the property, the insured person has to inform the insurer, and the company will then get the increased value covered by charging an additional premium. Premium will be directly paid to the insurer and an endorsement will be passed against the same.
Title insurance can be renewed only by mutual consent and is subject to payment in advance of the total premium. If the property buyer doesn’t renew his policy, it will automatically terminate at the end of the policy period.
Listed below are some of the points that the insured should know about Title Insurance:
- The buyer should get a written affidavit from the developer, which states that the ‘legal title’ to the land contains legitimate documents of ownership.
- Developers can avail of title insurance when they are applying to register their project.
- Property owners and buyers should know the coverage provided by the insurance company as well as the exclusions related to the plan.
- Individual homeowners are not yet included in such insurance policies. However, both the commercial and residential properties are eligible to get the plan
As per the recent changes in RERA Act, it is mandatory for property owners to buy title insurance.
This policy is issued on a multi-year pre-paid basis and cannot be canceled by an insurance company and the insured. However, if the insured tries to conceal or misrepresent a material fact related to this policy, title insurance will be canceled and no premium will be refunded.
There are two types of claims which are generally filed under a claim insurance policy, and those are:
- Breach of covenants – A claim is payable for breach of restriction enforced by a third party that states no new developments are permitted on the property without consent.
- Lack of access – In case of lack of access, the insurer picks up the legal and claims assessment costs if the claimant is unable to prove the title.