A Complete Viability and Need Analysis
Title risk in immovable property can bring in heavy economic losses to owners and lenders including defects in title, marketability of title, liens on property, encumbrances….
Imagine a situation where one owns a piece of land or a building, or in the process of constructing a house and someone else comes and claims the property as his or her own, producing the documents in support of his claim. It will culminate into an endless and costly litigation for deciding the true owner of that property. This is not an incomprehensible situation. With the poor maintenance of land records by government officials in the past and even today and the resultant increase in property transactions and real estate disputes, it is becoming an uphill task to verify genuineness of the documents.
The records relating to land and buildings are poorly maintained at Registrar offices. In many cases, the property is recorded in the name of a person who died a long time ago but the names of his legal successors are not entered in the record. So, the person buying an immovable property bears the entire burden of finding out the soundness of the title to the property.
In certain cases, the property being transferred without consequential mutation hardly reflects true ownership of the property. Such a transaction will definitely attract dispute. More than the dispute over the property, psychological and legal hassles will dampen a person even as he or she prepares himself or herself to defend his or her case. Mostly the land records are not up-to-date and in many cases they are not available at all. In this kind of environment, title insurance assumes a very important role. It offers guarantees of the title ownership and protects purchasers and lenders against both known and unknown title defects on the title to property. This will also help banks or other mortgagors as instances are available where duplicates of title deeds are prepared and loans or advances are taken from different banks on the same property.
Title insurance involves the issuance of an insurance policy promising that if the state of the title is other than as represented on the face of the policy and the insured suffers losses as a result of the difference, the insurer will reimburse the insured for that loss and any related legal expenses, upto the face amount of the policy.
The current law on registration of documents (deeds) has significant flaws. While accepting a document for registration, the registering authority is concerned only with the registration of document, and not with the authenticity or validity of title. It may not concern itself about the validity of the document as a deed, registered or unregistered, does not in itself prove ownership of title; it is merely a record of a transaction. The Transfer of Property Act, 1882 does not envisage that the document concerning property transfer shall originate from a public authority and a similar omission exists in the Registration Act, 1908. This creates substantial risk to the buyers of immovable property and lenders giving loans against mortgages of immovable property.
Under the Registration Act, 1908, a document registering a property is a registered document of assurances and such assurances of title given by the vendor to the purchaser becomes a subject matter of registration. It is however not registration of the title. Therefore, if the representation as to the title is proved to be wrong, the purchaser loses the property to the rightful owner despite the assurances. The only remedy available to the purchaser is to seek damages for breach of the covenant of the title by resorting to costly litigation. Again, if the seller of that property is not found to be solvent enough to pay the damages or the financial status of the seller may be such as to keep im beyond the reach of law then Title Insurance would act as a saving grace.
“Title insurance is really a safe guard measure for any investor or lender. It would be welcomed by prospective investors, buyers and credit agencies alike as it would enhance the flow of funds in the real estate market and easy transferability.”
insurance is principally a product developed and sold in the United States of America. Title insurance is basically protection against financial loss from real estate transactions arising from defects in the “title” or “ownership” of the property. Title insurance is quite different from most other traditional forms of insurance. Unlike others, it is not concerned with risk assumption but rather, risk elimination. In India akin to Title Insurance there exists a similar product namely Fidelity Insurance which is concerned with the risk assumption. Property transactions in India are inherently risky because the government doesn’t guarantee ownership of land. It merely endorses property transactions and earns revenue from them. Experts say six out of every 10 court cases filed or waiting to be resolved in India relate to property.
The first and possibly the most important step in the process of a title insurance policy is the title search. This title search is referred to as the “Chain of Title”. The “Chain of Title” reveals the following:
The contract seller of the property is, in fact, the legal owner and that all the owners are parties to the contract.
The estate or degree of title which one has agreed to purchase is currently and accurately vested in the seller.
Existing restrictions, easements or rights of way for roads, public utilities, etc., which may limit one’s right to the use of the property or grant rights to others who are not owners.
Land titles are transferred from one buyer to another and over a period of time, there could be a series of owners for the title. Title insurance becomes necessary because it protects one against defects and human error. This kind of insurance relies on title search. A title search results in listing the names of owners of the property over a period and also investigates any liabilities that may exist in the ownership records. Insurance companies dealing with title insurance generally use the services of lawyers with the understanding of local languages and state-wise regulations.
The premium charged by insurance companies would differ on a case to case basis. As the risk assessment process would conclude, higher the risk, higher would be the premium. However, it is likely to be in the range of 0.5% to 2% of the total sum assured. The sum assured would include the value of the property plus additional costs like legal expenses.
In India, none of the property transactions, neither large acquisitions nor a simple sale of a land or a flat, is covered through an insurance policy by an insurer. One of the biggest disadvantages of land titles is that records for purchase or sale of land are often inadequately documented or computerized. Additionally, different property laws are applicable in different states which could lead to dispute over ownership. In recent times there has been an increase in the number of cases of blunders and frauds in recording deed transfers.
Venturing into title insurance is going to be a new experience as the Indian market does not have any similar product that can be compared to this. It will most definitely call for the building of domain expertise within organizations to deal with the complex situations that may arise in this area. It will also require some investments towards building of a title plant. A title plant would encompass the record storage and mining facility for land records, equipment, fixtures as well as human resources with expertise in handling title insurance cases.
What is title insurance? Title insurance is an insured statement of the condition of title or ownership of an immovable property. The insurance can protect owner and lender against defects such as adverse possession, loss of deeds, boundary disputes and other risks as stated above. Title insurance protects a person from losses arising due to problems in the title of the property. It is designed to protect the insured (both the purchaser and lender) from losses arising because of defects in the title or an event occurring prior to the transaction. Title insurance is an indemnification agreement for the title as it exists on the effective date of the policy. Defects in the insured title which arise thereafter are not insured. A title insurance policy is not an agreement to guarantee the state of the title. Title insurance unlike other insurances, is not based on the prediction of the future. It is based to a large extent on the work of an abstractor.
During the final settlement or closing stage of the purchase, the title company works very closely with the lender. “Title insurance is really a safe guard measure for any investor or lender” says Lok Mohapatra, the Managing Partner at an American law firm, Franklin Firm, LLP. India should also develop the system of title insurance. It is an absolute requirement in a transaction of an immovable property as it has been in many developed countries. Apart from removing insecurity and uncertainty regarding the investment in the immovable property, title insurance can substantially reduce litigation and ease the burden of courts. “It would be welcomed by prospective investors, buyers and credit agencies alike as it would enhance the flow of funds in the real estate market and easy transferability”, says Mohapatra.
The insurance companies generally issues two types of policies-one being Owner’s Policy protecting the owner for full value of the property and the other being Lender’s Policy that covers the mortgage amount, thereby protecting the lender. Owners’ title insurance is bought by a buyer of the property. It protects the buyer from all loss or defects in the title. It is issued to the owner, upon the acquisition of the property, for a one-time premium and is effective through the life of the investment. This policy covers losses — including legal expenses — arising out of claims relating to (a) Legal title, (b) Defects, liens,
Apart from removing insecurity and uncertainty regarding the investment in the immovable property, title insurance can substantially reduce litigation and ease the burden of courts.
Since Title Insurance is intended to provide protection to purchaser or mortgagee or owner of an immovable property, it is vital that investigation of title is properly facilitated by proper maintenance of records of transactions by concerned authorities or departments of concerned State Government. Since the present state of affairs of maintenance of aforesaid records is quite pitiable, it is apprehended as to how and to what extent the title insurer would be successful in satisfying itself on the absolute title of the concerned property while carrying out title investigation.
Current revenue records as operative in all states in India are at best presumptive in nature and do not assure or convey any title to the concerned immovable property. Further, the registration of deeds and documents in India under the Registration Act 1908 also does not guarantee the title of the property as it operates on the principle of presumptive rights, because the State assumes that the property owner enjoys proper title and proceeds with registration. In other words, the registration of property only amounts to a certification of a transaction and does not in fact ensure the title on the property of the owner.
Thus, taking into consideration, the present state of affairs, I have my own reservations on success of proposed Title Insurance system in India. In my view, the title insurer could be exposed to the risk of substantial losses on account of liabilities arising out of undertaken insurances for the titles which are not effectively verifiable under the prevailing set of systems & procedures. Further, in order to shield losses the Insurer wants to charge higher rate/s of insurance premium because of the inherent risk of defective titles. And this makes me question, whether there would be many takers for the title insurance in India.
The value at risk has grown proportionally as the land cost has increased for the real estate developers. Title insurance makes a project bankable and saleable to customers. Typically, the title Insurance company backs the policy with its cash reserves and solvency.
Property consultants believe that the availability of title insurance products will boost private equity investment in Indian real estate since most of the institutions are very particular about clear titles encumbrances on legal title, (c) Right of access and (d) Additional endorsements.
On the other hand, the lenders’ title insurance is bought by lenders such as banks and financial institutions. Experience in other global markets is that all institutional lenders require title insurance to protect their interests in the collateral of loans secured in real estate. It is issued to the mortgage lender, at loan closing, for a one-time premium and is effective until maturity. This policy covers losses — including legal expenses — arising out of claims relating to: invalidity or unenforceability of the mortgage; prior liens or encumbrances; invalidity or unenforceability of any mortgage assignment; borrower’s legal title; defects, liens, encumbrances on borrower’s title; right of access and additional endorsements. Insurance is provided only against the actual losses. In the context of a mortgagee or lender policy, a statement of coverage agreeing to pay for actual losses sustained through objections in the title to the property of the mortgager operates to cover the validity of the title to the land securing the debt.
This policy has a provision for defense cost if a title to the real property is challenged in a court of law up to the actual amount of indemnity provided under the policy. As per the title insurance policy, a defect in title is said to arise when the aggregate of rights, privileges and powers commonly known as ownership is subjected to the claims of others. However, coverage of title insurance extends to reasonable anticipated implications of ownership, which attach to the insured property by reason of the record, but doesn’t extend beyond that part.
A title insurance policy covers the claims that could NOT have been discovered in the public records as well as the defects that could NOT be discovered in the record. Heirs to the buyer of property are also protected. The insurance company will not only satisfy any valid claim against insured’s title, but will also pay for costs and legal expenses in defending against a claim. Title insurance will also help the seller at the time of sale, by making the title marketable or saleable to prospective buyers. Further, since there is no legal malpractice insurance in India to cover claims arising out of lawyer’s defects in
“Title insurance needs to address some important issues like: (i) Information and documents to be examined by the Insurer at the time of taking the policy, (ii) in case the title finally emerges as defective and the mortgagor does not compensate or clear the dues or pay the land value, whether the insurer will pay the same together with costs. (iii) Settlement of policy amount would be to the same extent or after adjusting erosion in value over a period of time, as is done by the Insurance Companies normally with respect to other assets, (iv) at the time of creation of mortgage, if any lapse has occurred, will it be insurance worthy? (v) Finally, can such policies like ‘Title Insurance’ be taken up for already created mortgaged assets?”
“Financially, the title insurance could be referred to as a self funding mechanism, particularly, in urban areas, where transactions are large in number and the parties entering into property transactions shall be prepared to pay a bit more than the actual price, as premium to the insurance company for benefit of security to the investment and marketable title. No doubt, the system will go well with the computerization of recording system of the documents using advanced technology” says Thea Parent, Attorney, Real Estate & Finance Law, USA.
The property insurance in India is a must because:
(a) People are not too deligent to find defects in property; (b) Procedure for investigation for property is too lengthy and cumbersome; (c) Most of the people are unaware as to where to find what? (d) The property prices have risen sky high and after spending one’s life savings if one finds the property title as defective the dream of owning a house becomes a nightmare; (e) Most of the builders purchase property from the State Government authorities on deferred payment or installments scheme, they sell the flats constructed to various purchasers and sometimes default in making installments to the land owning agencies resulting in passing over a defective title to the flat owner. In case an independent agency had made title investigation and have recorded the payment of future installments by the builders, the buyer could at least follow and ensure timely payment of installments.
If for a one time price at the time of purchase of property-one gets rid of all such worries and assumes a perfect, marketable, unambiguous and healthy title to the property which he not only purchases for himself but for his children and descendents, he is indeed protected and can sleep happily after purchase.
title examination, the title insurance policies can act as an additional protection against lawyers’ errors or omissions in any title examination or title opinion. Lack of title insurance in the Indian real estate market is preventing many new NRIs and international investors from investing in our Indian real estate market.
“Financially, the title insurance could be referred to as a self funding mechanism, particularly, in urban areas, where transactions are large in number and the parties entering into property transactions shall be prepared to pay a bit more than the actual price, as premium to the insurance company for benefit of security to the investment and marketable title. No doubt, the system will go well with the computerisation of recording system of the documents using advanced technology” says Thea Parent, an attorney specialising in real estate and finance law in the United States of America.
However T K Ray, Chief General Manager (Law), IFCI while welcoming the idea of title insurance states that, “Title insurance needs to address some important issues like:
While the general public perception is that the recording system is becoming computerized, so the defects in the title could be rectified and protected easily, it is hardly true. The computerisation of the records is not intended to correct the title defects though it would facilitate title examination and issuance of title policy. In many developed countries like the United States, the lending agencies for real properties engage lawyers and title insurance companies and agencies to do title search and title insurance underwriting. They require borrowers to provide title reports and arrange title insurance. Here in India, there is no such legal process. Therefore, the chances of ending up in litigation with respect to the title of the mortgaged property are very high.
“The title insurance literally takes the burden of title verification off the chest of a lending agency and proves a boon to the borrower as well.”
(i) Information and documents to be examined by the Insurer at the time of taking the policy, (ii) in case the title finally emerges as defective and the mortgagor does not compensate or clear the dues or pay the land value, whether the insurer will pay the same together with costs, (iii) Settlement of policy amount would be to the same extent or after adjusting erosion in value over a period of time, as is done by the Insurance Companies normally with respect to other assets, (iv) at the time of creation of mortgage, if any lapse has occurred, will it be insurance worthy? (v) Finally, can such policies like ‘Title Insurance’ be taken up for already created mortgaged assets?”
A lot of details about its operational aspects would have to be worked out and considerable legislation is required before the title insurance companies can enter India. To begin with, the Indian Parliament must enact legislation and set up administrative agencies to permit title insurance companies to create procedures and ancillary institutions like title agencies and abstract agencies as well as promulgate regulations mandating fixed rates of premiums.
“The title insurance literally takes the burden of title verification off the chest of a lending agency and proves a boon to the borrower as well,” says Annette Evans, an attorney specializing in commercial real estate and business laws in Philadelphia, United States of America. Title insurance will also help the credit institutions all over country to accept the property as a security as the same enables them to cover the risks towards the perfect title as well. Also, with this the mortgages taken by the lending institutions can be made negotiable securities and traded in the secondary market. All this will unleash flow of finance for land development, agricultural operations and for house constructions. This will strengthen the real estate market significantly and eventually lead to the real estate transactions multiplying substantially.
Title insurance is an effective measure of protection against risks inherent in the property transaction where the uncertainty of title exists by delineating some defects of title and insuring against potential loss that may be caused. This insurance remedy is what is needed immediately in India. Title insurance products give lot of encouragement to the international investors in the real estate market in developing countries like India.
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