What is a Highway Permit Bond?
Highway permit bonds are a subset of the broader license and permit bond category that must be filed with the government agency (city, county, or state) requiring the permit. Highway permit bonds consist of two primary categories - (1) Right of Way, Excavation or Encroachment permit bonds required of contractors performing work on or around public highways; and (2) Excess Size and Weight permit bonds required of trucking companies moving large loads over public highways. Government agencies (usually state transportation departments) responsible for regulating highway activity in the permit holder’s jurisdiction require contractors or truckers to procure a permit bond as a condition to perform the permitted activity. Many states issue highway permits directly, while others allow local municipalities to regulate and issue highway permits.
Highway permit bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as highway permit bond, will also be referred to as the “surety company” or the “bond company”. Highway permit bonds refer to the permit holder as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a highway permit bond required?
Individuals performing work about or adjacent to a highway are required to purchase permit bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a contractor or trucking company breaking state or local statutes specified in their permit. The surety company provides the government a guarantee (the surety bond) that the government agency will receive payment for financial damages due to a violation of the conditions of the permit up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, highway permit holders are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond.
Highway permit bond violations triggering a bond payout may include a permit holder failing to pay required permit fees, abandoning an uncompleted job or negligence or violation of laws in relation to the permitted activity.
How much does a highway permit bond cost?
Highway permit bonds generally cost between .5% and 5% of the bond limit with a minimum premium of $100.00 .
Example: $10,000 Highway Permit Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 680 or Above | .5% | $100 |
| 650-679 | 1.0% | $100 |
| 600-649 | 1.25% | $125 |
| 550-599 | 2.5% | $250 |
| 525-549 | 3.0% | $300 |
| 500-524 | 5.0% | $500 |
The actual cost of a specific highway permit bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the permit holder’s experience and creditworthiness. Encroachment permit bonds required by a local government (city or county) tend to have the lowest cost, while state requirements have potentially higher costs and/or more strict underwriting requirements.
Is a Credit Check Required for Highway Permit Bonds?
Credit checks are required for most highway permit bonds required by state agencies. Highway permit bonds required by cities, townships or counties with bond amounts under $25,000 generally do not require a credit check to purchase the bond. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How does the wording in the bond form impact the cost of a highway permit bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and permit holder(principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the highway permit holder via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a right of way bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 highway permit bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Highway encroachment permit bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the permit holder and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the permit holder failing to pay premiums due, claim payouts, or material changes in the permit holder’s credit score. Encroachment bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Right of way bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.