What is a Subdivision Bond?
Subdivision, Developer’s, and Site-Improvement bonds are a subset of the broader category of Contract bonds that must be filed with the government agency responsible for regulating subdivision and development activity in the land developer’s jurisdiction. Subdivision bonds must be written to match the name on the platte agreement of the land that is being subdivided or improved.
Subdivision bonds must be issued by insurance carriers admitted in the state where the project is to be completed. The insurance carrier issuing any surety bond, such as a subdivision bond, will also be referred to as the “surety company” or the “bond company”.
Why is a Subdivision Bond Required?
Subdivision bonds protect municipality requiring the bond by transferring to a surety bond company the cost of ensuring the municipality is compensated for damages resulting from the developer’s failure to complete improvements required by the platte agreement and any municipal codes, ordinances, or statutes as specified or referenced in the agreement. The surety company provides the municipality a guarantee (the surety bond) that they will receive payment for financial damages due to a violation of the subdivision agreement up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, the landowner/developer are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond. Subdivision bonds refer to the Land owner or Developer as the Principal, the surety bond company as the Obligor and the municipality requiring the bond as the Obligee.
How much does a Subdivision Bond Cost?
Subdivision bonds typically cost between 1-5% of the total value of the project.
Is a credit check required for subdivision bonds?
Credit checks are required for subdivision bonds. Credit analysis is an important component of subdivision bond underwriting and is reviewed in addition to business financial statements, personal financial statements, engineer’s estimates, and site plans.
Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How does the wording in the bond form and site/subdivision agreement impact the cost of a subdivision bond?
The bond form is a tri-party agreement which defines the rights and obligations of the municipality (obligee), surety company (obligor) and landowner/developer (principal). While many bond forms use similar language, each bond form and contract can be customized by the project owner requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the landowner/developer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a subdivision bond surrounds cancellation provisions and forfeiture clauses.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the contractor and municipality 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 contractor failing to pay premiums due, claim payouts, or material changes in the contractor’s credit score. Subdivision bonds are non-cancellable and the work has to be signed off by the municipality requiring the bond before it can be released by the surety company.
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”). Subdivision bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.