Mr. Unnikrishnan purchased a luxury apartment in NOIDA(U.P.) in a prestigious complex developed by a renowned builder, for Rs 3 Crores. His family moved in, life went on, until about a year after the sale, some Mr Malhotra knocks on their door demanding to know why they were living in his apartment. It turns out that the Malhotra’s son was supposed to be caring for the apartment while senior Malhotra was working overseas. Instead, the son forged his father’s signature, sold it, and kept the money and thus started the litigation.
There may be several circumstances like this which can threaten the ownership of your property including liability for violations that happened before you purchased the property. Whether through intentional fraud, sheer error, or incompetence, important factors can be missed during a real estate transaction. These situations can be legally complicated and very stressful.
Mr. Unnikrishnan could have protected his investment of Rs 3 Crs. and saved himself from living in a title related nightmare, had he made one small investment and bought a Title Insurance Policy.
So, the question is- what is Title Insurance. Simply stated, the ‘title’ to a piece of property is the evidence that the owner is in lawful possession of that property. Title is a legal term used to recognise the true owner or owners of a property. And the biggest risk a homeowner faces is his/her property being declared illegal by a competent court of the country.
Title insurance protects against claims from defects. Defects are things such as another person claiming an ownership interest, improperly recorded documents, fraud, forgery, liens, encroachments, easements, and other items that are specified in the insurance policy.
Purchasers and lenders need title insurance in order to be insured against various possible title defects. Title insurance protects both lenders and homebuyers against loss or damage occurring from liens, encumbrances, or defects in a property’s title or actual ownership. Common claims filed against a title are back taxes, liens from mortgage loans, and conflicting wills etc.
Traditional insurance, such as car, life, health, etc., protects the insured against potential future events whereas a, title insurance policy is a form of Indemnity Policy which is retrospective in nature meaning thereby that it will protect the insured not only against events/ claims /future litigations but will also cover past occurrences in respect of the real estate property.
A first attempt was made in 2009 to launch the Title Insurance Policy in India and later Real Estate (Regulation and Development) Act, 2016 made it obligatory for the promoter /developers of real estate projects to obtain insurances in respect of at least (i) title of the land and building as a part of the real estate project; and (ii) construction of the real estate project. Further, such title insurance must be transferred to the buyers of property when the developer enters into an agreement for sale. However, the Act does not make title insurance mandatory merely by application of law. State Governments are in charge of implementing the provisions of this Act within their own states.
Currently, there are few Title Insurance products being marketed by some Insurers. However, considering the requirements of legal protection of promoters in the early stages of development of Project and safeguarding the interests of individual buyers it was felt by the IRDAI that there was a need to expand current Title Insurance Products and make it suitable for Promoters/developers and retail property buyers. So, keeping in view the twin objectives the IRDAI has very recently suggested non-Life insurers to develop and launch 2 types of products namely:
(1) Promoter Legal Expenses (Defence Cost Policy)- To cover legal expenses only incurred in connection with suits challenging the title of the Project.
(2) Allottee/ Individual Buyer Retail Policy– To provide compensation to the end users against loss suffered by them due to defect in the title of the property. This policy may be taken by individual buyer and or Bank/Financial institution at the time of possession /handing over of the property for protection against any legal suit in future. The sum insured offered to them may be equal to the purchased value of the unit.
A clear title is necessary for any real estate transaction. Insurers will be required to do a search on every title to check for claims or liens of any kind against them before granting insurance. They will achieve this by searching public records to develop and document the chain of title and to detect known claims against or defects in the title to the subject property.
It is no doubt a good move by IRDAI which should have been taken long back but critics say that it will add other hardships to the prospective house buyers. Already bankers financing the house loans ask for a single premium policy of life insurance to the buyers, for the sum financed and also the property insurance against natural perils. Another insurance by bankers will add to the woes of the buyers.
Having no title insurance exposes transacting parties to significant risk in the event a title defect is present. Consider a homebuyer searching for the house of their dreams only to find, after closing the deal, unpaid property taxes from the prior owner. Without title insurance, the financial burden of this claim for back taxes rests solely with the buyer. They will either pay the outstanding property taxes or risk losing the home to the taxing entity.
Under the same scenario with title insurance, the coverage protects the buyer for as long as they own or have an interest in the property.
The non-life insurance companies will no doubt develop and market the Title Insurance Products as mandated by the IRDAI but there are some challenges before them. The poor quality of title records in India is a significant impediment for growth and urbanization. Bad title records result in excessive litigation, property disputes, and cases of fraud. This in turn affects the cost and certainty of transactions that involve land and real estate. While the Indian government has been operating a land record modernization program for several years but the progress has not been very encouraging.
The accuracy and accessibility of land title records are a critical component of
property-related litigation that makes up a significant majority of ongoing litigation in India.
Therefore, given the poor state of property records and the prevalence of property disputes in India, title insurance has the potential to both reduce losses suffered in property transactions and improve property records.