The Latin phrase ‘caveat emptor’, which literally means ‘buyer beware’, is applicable in all the deals of purchases made by you, from small value items to big-ticket items like a house. When you buy a house, you invest your lifetime savings, in the form of past savings, as well as future savings (if you are taking a home loan). Hence, it is very important for the buyer to be extra vigilant. In case any defect is found in the rights of the seller in the property acquired by you, you may have to face the legal consequences of such defect, including reduced marketability of your house and expenses incurred to rectify the case. As the old legal maxim says: ‘One cannot give what one does not possess’, similarly, you cannot get better legal rights over the property, than what you seller had. In order to protect against losses, advanced countries have title insurance, which is being introduced in India now.
What is title insurance?
In order to protect the buyer of the property – whether a flat, or land, or even a developer who is buying a land – an insurance company promises to indemnify the buyer against any loss caused, due to any defect in the title of the seller in the property. Under title insurance, the insurance company pays you for any loss in the market value of the property, for expenses which you may incur due to the defect in the title of the property acquired by you. The defect in the title may be present at the time of buying the title insurance and which, neither the insurer nor the insured are aware of.
Why title insurance is gaining importance
Section 16 of the Real Estate (Regulation and Development) Act, 2016 (RERA), requires all developers to buy title insurance, for the project to be undertaken afresh, as well as for projects that are incomplete as on the date of enactment of the law. This requirement will help mitigate the hardship caused to innocent flat buyers, in case any defect is detected in the title of the land on which the building was constructed.
Title insurance for completed buildings
With prices of residential houses skyrocketing, it is important for the buyer to have an assurance about the validity of the title. As per the provisions of the RERA, the developer is required to buy insurance for title of the land and building, before he transfers the project to the housing society or association of allottees. The developer is also required to hand over the documents of such insurance to the society/association. Hence, buyers of flats which are completed after the enactment of RERA will get the insurance for title, while flat owners who have purchased the flats before enactment of this law, do not have any title insurance. As the land is normally owned by the housing society and not by the individual flat owner, the society should buy title insurance immediately, to safeguard the interest of its members. Since the cost of construction of a flat is a smaller portion, as compared to the cost of land, in the total cost of the property, it is more important for housing societies to buy title insurance, with respect to the land owned by the society.
The importance of the title insurance can be understood with an example. For a flat in and around Andheri west, in Mumbai, the prevailing rate is around Rs 20,000 per sq ft. The cost of construction can reasonably be assumed to be around Rs 3,000 per sq ft, leaving the balance Rs 17,000 as cost of the land. When flat owners buy home insurance, it covers the cost of construction only and not the cost of the land on which the building is standing.
Title insurance products in India
In the absence of historical and reliable data on property titles, the level of risk borne by an insurance company in underwriting a title insurance was not known and thus, insurance companies were unwilling to jump into this segment. With the RERA mandating title insurance for all new and incomplete projects, the IRDA must have prevailed upon insurance companies, to provide title insurance products in India.
The first and the only title insurance provider, as of today in India, is HDFC Ergo Limited. The title insurance policy of HDFC Ergo covers the person buying the title insurance, against the loss caused due to any defect in the title, existing on the date on which the policy is purchased. It also covers the expenses, which the insured part may have to incur, in order to defend his title in any legal proceedings. However, any defect in the title, which occurs after the date of purchase of the title insurance policy, is not covered. Likewise, any defect in the title which the person buying was aware of, at the time of purchase of the policy, is also not covered under this policy. The policy covers the amount of loss or damage, which the insured may have to pay in pursuance to a final order of any court of competent jurisdiction, as well as any damage payable to a third party under a written settlement. Besides the owner of the property, even a lender, who lends against the title of the borrower, can cover himself against any defect in the title of the borrower. In due course, other insurance companies are likely to enter this insurance segment, leading to better and more refined products.
(The author is a tax and investment expert, with 35 years’ experience)