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RERA and insurance go hand in hand

Friday, December 01, 2017

Considering the risks involved and the welfare and protection of various stakeholders of real estate business, RERA has now mandated the title and structure insurance of every project. Advocate Tanmay Ketkar explains the development in detail

Risk is an integral part of every business, and real estate business is no exception. In real estate business, in every project, apart from developer there are other stakeholders as well. Customers, allottees and financial institutions financing the project are all important stakeholders. Possible risk or loss in development project adversely affects all these stakeholders at par with the developer. For example, if a structure of building or project collapses due to natural calamity or due to human error it results in loss to developer and all other stakeholders.

The best way to handle these possible risks and losses is to have adequate insurance cover. If insured project suffers loss, some of the loss can be easily recovered through insurance claims, which makes it comparatively easier to take project back on track. Such an insurance cover would protect developer from loss which is directly or indirectly protecting other stakeholders.

Not the norm
In the Indian real estate business, even though high profit and elevated risk is involved, insurance cover is not taken up by every developer for every project. It is not a common practise to have adequate insurance cover for real estate project. Very few selective developers take adequate insurance cover.

Considering the risk involved and the welfare and protection of various stakeholders of real estate business Real Estate (Regulation and Development) Act, 2016 (RERA) has now mandated the insurance covers for every project. RERA section 15 and rule 9(5) has mandated the two insurances for every real estate project first the title insurance and second the structure insurance. It is now compulsory for every developer or promoter to have these two insurance covers for every project. After forming of association of allottees, the insurance cover shall be transferred in favour of such association formed.

Title and structure
Title and structure are two most important aspects of every real estate project. Any defect in title or structure of a real estate project would have devastating effect on developer and other stakeholders. In our current system, title investigation is the most difficult and uncertain issue. There is constant risk of title being or becoming defective. There could be various defects in title, some are mere technical which can be ruled out easily, whereas some serious defects in title could be incurable. Defect in title, its type and seriousness would lead to delaying, changing scope or size or in worst case scenario stalling of real estate project. If a project is delayed, changed or stalled it adversely affects the developer, customers and financers of the project. In such scenarios, the title insurance would be helpful to reduce the quantum of loss that would be suffered due to defect in title.

Structure of the real estate project is also equally important. There are two possible risks for structure, first the natural calamity and second the human error. As far as natural calamity is concerned it cannot be for seen or cannot be prevented or controlled by any human effort. An earthquake or flood in vicinity of real estate project could seriously damage the structure of the project. Secondly, the human error or mistake in execution or actual construction could also adversely affect the structure. Any mistake in building material, its quality, its proportion, actual construction activity would lead to structural defects. The seriousness of the error and time of identifying such an error would be decisive in the possible corrective action.

Rectifying errors
A minor error or an error identified earlier could be easily rectified, whereas major error or an error identified at later stage would sometimes make correction difficult or in worst case impossible. The additional costs, time and loss suffered due to such error would depend upon scope and quantum of corrective action. However, in any case an error in execution is going to cause a loss. In such cases a part of loss can be claimed through insurance cover.

The title and structure insurance are important not only for developer or promoter but also for all customers and financers as well. As far as customers or allottees are concerned, clear title and strong structure are of paramount importance. A defect in title or structure would compel allottees or customers to face loss. The structural defects arising after the completion of project or after defect liability period (5 years from possession) would pose a serious threat to residents. Considering the financers of a project, completion of a project is vitally important. Unless and until the project is successfully completed, the financers will not gain anything. If the project is insured, it is easier for developer to mitigate risk which in turn protects customer and financer.

Considering all these issues the RERA has now mandated the title and structure insurance. Now, we as a customers and financers, two important stakeholders of the project, before investing in projects, must make sure that the project is insured. If project is insured, we and our stakes are insured.

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