Introduction
In the realm of property transactions, securing clear and marketable title is paramount. In Sri Lanka, the complexity of land ownership and the diversity of legal systems governing property rights often lead to title defects that can hinder the ability of landowners to secure loans. Defective title insurance, a relatively lesser known but vital tool, has emerged as a solution to these challenges, ensuring that even lands with imperfect titles can be used as collateral for loans. This blog explores the origins, development, and impact of defective title insurance in Sri Lanka.
Understanding Title Insurance: Origins and Types
Title insurance, which originated in the United States, was developed to address the uncertainties faced by landowners and banks due to defects in property titles. There are two main types of title insurance policies:
- Mortgagee’s Policy: This policy protects lenders against loss or damage arising from existing title defects on mortgaged land.
- Owner’s Policy: This policy guarantees the title of the property owner, indemnifying them against losses due to title defects that existed before the acquisition of the land.
In Sri Lanka, a unique model of title insurance, known as Defective Title Insurance, was introduced to address the specific challenges faced by landowners who lacked marketable titles—essentially titles that were not accepted by banks as security for loans.
The Problem of Defective Titles in Sri Lanka
Property rights in Sri Lanka are embedded within a complex web of legal systems, including Roman-Dutch law, customary laws (such as Kandyan, Thesawalamai, and Muslim law), and statutes introduced during colonial rule. This diversity, coupled with informal systems of land ownership, often results in titles that lack the formal documentation required by banks to extend credit.
For instance, many landowners in rural areas possess only a single deed without proof of prior ownership, or they hold land through informal inheritance systems without proper testamentary documentation. Such titles, often described in non-standard measurement systems and lacking formal registration, were historically rejected by banks, making it difficult for landowners to use their property as collateral.
The Introduction of Defective Title Insurance to Sri Lanka
In the 1960s, the Sri Lankan government, recognizing the need to expand access to credit as a means of promoting social and economic development, sought solutions to the problem of defective titles. The conventional approach of implementing a Torrens title registration system and conducting cadastral surveys was deemed too costly and time-consuming. Instead, the government, through the Insurance Corporation of Ceylon (now Sri Lanka), introduced a defective title insurance scheme.
This innovative insurance model was designed to cover known defects in property titles that banks identified as reasons for rejecting land as loan collateral. The first defective title insurance policies were issued in 1970, and to date, around 200,000 policies have been issued, allowing previously unmarketable lands to be used as security for loans.
How Defective Title Insurance Works
Defective title insurance in Sri Lanka does not aim to grant full legal title to landowners. Instead, it guarantees the marketability of the land by covering the specific defects that make the title unmarketable. The process typically involves the following steps:
- Title Examination: A thorough examination of the land title is conducted, often involving a review of old deeds, private archives, and survey plans. Local knowledge and evidence from village elders and officials are also used to establish ownership.
- Issuance of Policies: Based on the examination, an insurance policy is issued either in the name of the bank (for mortgagee’s policies) or the landowner (for owner’s policies). The policy guarantees the land’s marketability, allowing it to be used as collateral.
- Premium Payment: Unlike other forms of insurance, title insurance requires a one-time premium payment. The amount is based on the value of the land and is typically determined after the insurance company confirms the land is insurable.
The Impact of Defective Title Insurance
The introduction of defective title insurance had a significant impact on the Sri Lankan property market. By making previously unmarketable lands creditworthy, it enabled a broader section of society, particularly those in rural areas, to access loans for development and entrepreneurship. Banks, initially skeptical, became advocates of the scheme as it provided a reliable way to secure loans without the need for costly and time-consuming legal procedures.
Moreover, the scheme allowed property developers to obtain insurance for large parcels of land with defective titles, making it easier to develop and sell subdivided plots. This, in turn, contributed to the growth of the real estate market in Sri Lanka.
Conclusion
Defective title insurance is a critical tool in Sri Lanka’s property market, particularly for landowners with imperfect titles. By providing a guarantee of marketability, it has enabled greater access to credit and facilitated the development of lands that were previously considered unmarketable. While the concept of title insurance is still evolving in Sri Lanka, its impact on the real estate sector and the broader economy cannot be understated. As the country continues to modernize its property laws and systems, title insurance will likely play an increasingly important role in securing property rights and promoting economic growth.
