INSURANCE

IN order to provide relief to buyers of real estate, the insurance regulator has set up a sevenmember working group to study the scope of title insurance in the Indian market. The move by the Insurance Regulatory and Development Authority of India (Irdai) comes after the Real Estate (Regulation and Development) Act came into force on May 1, which mandates that a promoter of a housing society will have to insure title of the land and building as a part of the real estate project they construct.

Title insurance is a cover that protects the owner of a property from disputes or frauds in land titles

For real estate developers, title insurance makes a project more saleable to customers as most land titles in India are riddled by disputes

Title insurance will boost private equity investment in real estate as most of them insist on clear titles given the fact that over 30% cases have title defects in them

An Irdai working group will examine existing practices in the global market to identify the insurable risk and define the compensation structure Title insurance will ensure that buyers of real estate will have an insurance cover to fall back in case something goes wrong in the deal. It is a cover that protects the owner of a property from disputes or frauds in land titles. In India, no property title is insured as the insurance companies do not have the underwriting expertise to offer title insurance products. Such products also require robust reinsurance which is not there in the country.

For real estate developers, title insurance makes a project more saleable to customers as most land titles in India are riddled by disputes. The level of land title-related frauds is very significant and the legal redressal is very slow. Land records in the country are not easily accessible as they are not digitised. Moreover, the risk of faulty land records has grown quite high as the land cost across the country has grown exponentially in the last one decade. Title insurance will boost private equity investment in real estate as most of them insist on clear titles given the fact that over 30% cases have title defects in them. A title insurance will give a lot of comfort to global investors to invest in the Indian real estate sector. Globally, the value of the title insurance cover is on a par with the price of the land and the premium depends on the value of the property, nature of transaction and the cost related to title search and legal issues involved in the title search. Basically, there are two types of title insurance policies – owners' and lenders' policy. The owners' title insurance is bought by buyers of the property and protects them from any disputes in the land title. The lenders' title is taken by the banks and financial institutions to protect the lenders' interest in the collateral of the loan given to the buyers. The Irdai working group will examine existing practices in the global market to identify the insurable risk and define the compensation structure. It will suggest the design of the product and suggest the framework for assessment of risk, pricing, reserving and accounting with actuarial inputs after factoring the long-term sustainability of the product. The group will suggest policy wordings in line with local conditions – both from content and legal perspective. The group will assess the availability and accessibility of local revenue records, status of digitisation of land records in various states and availability of legal expertise to support the underwriting and claims management efforts of the insurer. The group will be led by Suresh Mathur, senior joint director at Irdai, and the working group will submit its report in two months.

The Real Estate (Regulation and Development) Act underlines that the title insurance taken by the promoters at the time of construction of the real estate project must be transferred to the allottee or the association of allottees at the time of the promoter entering an agreement for sale with the allottee. Also, after formation of the association of the allottees, all documents relating to the title insurance will have to be handed over to the association of the allottees. The Act also mentions that promoter will have to compensate the allottees in case of any loss caused to him due to defective title of the land on which the project is developed. Real estate experts feel that the title insurance will push up the cost of the project, which will have to be ultimately paid by the buyer.

At present, a buyer engages a lawyer to verify the land title and if the property is bank financed, then the bank does the verification of the title by charging a fee to the buyer. If the insurers start insuring land titles, then they will have to verify records of the property from the state registrar's offices. Insurance experts feel the terms and conditions of title insurance must be reasonable, both in terms of risk coverage and premium.

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ILLUSTRATION: SHYAM