Indian real estate is growing at a blistering pace. The housing market in India is sized at around USD 250-300 billion and is expected to reach USD 1 trillion by 2040. The market momentum is backed by solid structural foundations such as a middle class that is marching ahead, concentrated policies to push urbanization, and an expansive credit market.
However, the segment still remains largely unorganized which is also reflected in terms of limited covers and insurance. This has undermined growth in the sector.
The pressing need for defect liability cover
Like other types of insurance and hedging & risk mitigating strategies, in Indian real estate, there is a pressing need for defect liability covers. The cover is generally taken by developers, builders, and contractors. Under the insurance, in case of the identification of a flaw in construction or defect in the building within a specific time period (mostly called the maintenance period), the insurance company will be bound to bear all the expenses. This can give great relief for both the developers as well as the buyers.
Home buying is a high-involvement purchase for most buyers and following such a purchase, no one would even wish to get involved in managing defects and errors. In the absence of a framework for a cover, even a simple error can result in a distorted relationship between the developer and the buyer. The fact can’t be denied that both parties will wish the other one to take the onus and not get directly involved. This will further aggravate the overall relationship between developers and homebuyers.
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There is also a possibility that the home buyer might opt for a costly lawsuit, which again will result in a cost overrun, for both the aggrieved parties. Not to mention, this can affect the reputation of the developer and adversely impact future sales and cash flow. In the time of the digital native era, even small issues can get multiplied and generate irreversible damage.
Defect Liability Cover can be a Simple but Prudent Solution
Amidst the possibilities of discovering future flaws, a defect liability cover is a simple but prudent solution as it can harmonize the equation between all the stakeholders involved – developer, contractor, and buyer. The buyer will have a sense of relief that in case of a defect, there is a 3rd party insurer that will take care of the expenses. The developer will also be contended and need not bother much about the tangible and intangible damages that might emerge in case of a defect.
The cover can protect the developers from unnecessary costs and loss of reputation. This is also a very positive step for the overall industry as it will bring in increased transparency, manage customer expectations, and set the path for healthy and organic growth in the foreseeable future.
(By Nakul Mathur, MD, Avanta India)