Friday

15


November , 2019
Real estate sector and its insurance
15:46 pm

Kasturi Sengupta


The word ‘titleʼ is a legal term that means legal ownership of property. Title to property is obtained, when the owner of the property signs a deed (transfer document) in favour of the buyer. Title is then registered in government’s land registration system and the buyer gets the ownership of the property. Title insurance has become a fundamental part of most real estate transactions, both commercial and residential. In every real estate transaction, a buyer wants to receive a good and marketable title to the land and know the restrictions or encumbrances on the land before purchasing it.

Today, title insurance companies are an integral part of real estate transactions, as they provide insurance policies that protect residential or commercial property owners and their lenders against losses related to property title and ownership related disputes for the land on which the construction is made.

The RERA Act has necessitated the builder or promoter or developer of the residential or commercial property to have title insurance. Under the Act, the promoter or developer is required to compensate the allottee or purchaser for any loss caused to him on account of defective title of the land on which the construction is made. The benefit of insurance will be passed on to allottee or association of allottees at the time of handover or agreement of sale or to second or subsequent allottee at the time of repurchase or resale of property.

About the policy

The insurance companies can cover projects under constructions or new developments, policies can be sold to promoters (developers) or allottees, association of allottees or subsequent allottees and the policy period is seven years (can be extended to 10,12 or 15 years) for this segment.

The Gross Development Value of the property (GDV) is to be taken as the limit of indemnity and GDV is equal to aggregate sale price of all units in the project which includes the cost of land.

For the promoter (developer of property) the value of property is actual amount invested including cost of land + cost of construction + profit of promoter. For the allottee (purchaser), the value is amount paid by him to the developer as per agreement of sale.

Rating methodology

Premium for title insurance policy is a percentage of the GDV. The premium rate reflects the country-level systematic title and conveyance risks and is adjusted on a case to case basis for specific risks of individual transactions. This rate is determined depending on the relative degree of risk of the particular transaction. Title insurance premium rates are largely determined by operating and acquisition cost factors, as compared with property or casualty rates that are based on the actuarial determination of expected losses. The risk of title loss is a function of many factors, which can vary considerably from jurisdiction to jurisdiction and transaction to transaction. Also, the services covered by the title insurance premium vary significantly from state to state. It is difficult to compare a pure title insurance risk premium with an all-inclusive rate that covers not only the risk of loss but also the title search, examination, title opinion and closing.

Title insurance premium can be decided by taking into consideration few criteria or characteristics of the property to be insured like ownership of land (entity), location of the land or properties present, litigation history of the project or land, period of construction.

Regarding the ownership of land (entity), government owned lands which are purchased by developers or allotted for the purpose of development are less risk prone as compared to privately owned lands since the government is the rightful owner of the land. In cities like Mumbai and Bangalore, mill lands have a lower risk of title related disputes and hence can be offered a higher discount. Concerning the ownership of land (duration), if the land has been owned by a single entity for a long duration, for example 10-20 years or so, a discount can be applied to the premium rating since the number of transactions in a span of decades is relatively less.

Concerning the location of the land present, in metros, tier 1 and tier 2 cities are offered a higher discount as compared to that of tier 3 or rural regions.

Concerning the period of construction, based on the number of months or years into construction and the number of months or years left for construction, a discount can be offered. This discount is attributed to the observation that most of the title claims usually come forth in the first two/three years from the start of the project. As months progress, the risk is relatively lower.

Documents to be submitted

The following documents need to be submitted with the proposal form for premium rating. They are namely - original copy of the legal title report of the land (if he is owner) and land purchase agreement or agreement for sale, any land survey report, consent of the land owner, copy of collaboration agreement between promoter and land owner, and the copy of title report reflecting the title of the owner, list of encumbrances if any, with respect to the land, list of ongoing litigation on the land, financer details and lawyer’s details, due diligence report or search report.

— The author is Chief Manager, National Insurance Co Ltd, Misc Tech Department

[The views expressed here are personal and don’t reflect those of the government]

 

Add new comment

Filtered HTML

  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <blockquote> <code> <ul> <ol> <li> <dl> <dt> <dd>
  • Lines and paragraphs break automatically.

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.