Title insurance is a specialized form of indemnity insurance designed to protect potential property owners from financial losses stemming from defects in the title of real property. Unlike other insurance policies that cover future risks, title insurance is retrospective. It protects the insured from losses arising from events that occurred before the policy was issued.
The introduction of title insurance in India, particularly under the guidance of the Insurance Regulatory and Development Authority of India (IRDAI), marks a significant step in safeguarding the interests of property owners and real estate developers.
The Introduction and Purpose of Title Insurance in India
In response to the growing need for legal protection in the real estate sector, the IRDAI introduced title insurance to provide property owners and developers with a safeguard against financial losses due to valid title-related issues. This insurance policy is particularly beneficial for developers during the early stages of a project, such as financial appraisal, registration, and approval with Real Estate Regulatory Authority (RERA) authorities. The latest IRDAI circular emphasizes the need to expand title insurance products to suit the needs of both promoters/developers and retail property buyers.
Title insurance serves as a credibility booster for developers and promoters within the real estate market. With the mandatory nature of this insurance, developers will be compelled to adhere strictly to RERA rules and regulations, leading to a more regulated and transparent market over time. The implementation of title insurance will also facilitate well-planned residential projects, helping homebuyers mitigate issues related to title defects, unfair sales agreements, and other challenges common in construction projects.
Benefits of Title Insurance
Title insurance offers a multitude of benefits not only to homeowners but also to developers. For homeowners, it provides protection against unforeseen legal issues related to property titles, which could otherwise result in significant financial loss. Developers, on the other hand, can leverage title insurance to enhance their reputation and establish strong track records.
This insurance should not be viewed as an additional cost but rather as a valuable investment in the real estate business. By proactively introducing title insurance, RERA aims to ensure that the future real estate market in India is dominated by strong and reputable developers.
Key Changes in the Latest IRDAI Notification
One of the significant updates in the IRDAI’s latest notification is the introduction of the Promoter Legal Expenses (Defence Cost) Policy. This policy indemnifies the insured against legal defense costs incurred in lawsuits challenging the title of the project.
This means that expenses related to legal proceedings, including court cases, legal documentation, and lawyer fees, filed against developers, promoters, or other involved parties, will now be covered by the insurance. This new provision is designed to bolster the legal standing of potential property owners, providing them with the necessary support to secure their property rights.
Another notable change is that title insurance coverage can now be purchased individually by customers for a desired duration, as opposed to the previous practice of covering the entire duration of the project. This flexibility allows property owners to choose a coverage period that best suits their needs, making the insurance more accessible and tailored to individual requirements.
Challenges and Reasons for the Non-Performance of Title Insurance
Despite its potential benefits, title insurance has faced challenges in gaining widespread adoption in India. One of the primary reasons for this is the high cost associated with the policy. The premium for title insurance is calculated based on the gross developed value of the property, which includes the cost of land, construction, and the developer’s profit margin.
This can result in premiums ranging from 0.5% to 3% of the property’s value, which must be paid over a period of 7 to 12 years. For developers of under-construction properties, passing on these costs to customers is not feasible, especially after prices have been firmed up and agreements have been registered. This has led to a slow uptake of title insurance in the market.
Another significant challenge is the issue of notable exclusions in title insurance policies. While the policy covers past defects in the title, it does not protect against future invasions of the property—a common concern among landowners and developers. The prevalence of land mafias and professional encroachers, both in urban and rural areas, exacerbates this concern. Additionally, discrepancies in government approvals can lead to the halting of construction projects, further complicating the viability of title insurance.
Current Status of Title Insurance in India
Title insurance products currently available in India are primarily designed for real estate projects registered with RERA. In states like Maharashtra, the Maharashtra Real Estate Regulatory Authority (MahaRERA) is considering making title insurance mandatory. However, existing regulatory and administrative challenges could potentially hinder the development and widespread adoption of title insurance products.
The IRDAI remains the sole regulatory body overseeing title insurance in India. Without its approval, no title insurance policy can be introduced to the market. As of now, only a few companies, including HDFC ERGO General Insurance, ICICI Lombard General Insurance, National Insurance Company, and Tata AIG General Insurance, have received IRDAI approval to offer title insurance products. However, the IRDAI has yet to publish a comprehensive regulatory framework for title insurance, which is essential for the industry’s growth.
In October 2019, the IRDAI established a working group to develop a standardized framework for title insurance products. The findings of this working group are expected to shape the regulatory framework for the title insurance industry in India, potentially leading to improvements in land record management and greater confidence in the real estate sector.
Conclusion
Title insurance plays a crucial role in protecting the interests of transacting parties in real estate deals. For buyers, it offers protection against issues such as unpaid back taxes and other title-related defects for as long as they have an interest in the property. For lenders, it mitigates the risks associated with loans and mortgages. Despite its high cost and certain exclusions, title insurance represents a valuable addition to the Indian real estate market, offering both buyers and developers a layer of security that is increasingly necessary in today’s complex real estate environment.
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