Supporting Responsible Property Development with Subdivision Bonds

Subdivision bonds play a crucial role in the development of residential and commercial areas. They ensure projects are completed, and serve as a financial safeguard for municipalities and developers.

The Purpose of Subdivision Bonds

Much like a contractor’s performance bond guarantees the successful completion of a single specific project, subdivision bonds act as a guarantee for a variety of projects related to the development of a property or properties. For instance, when a developer plans to divide land into multiple lots for residential or commercial use, they often need to build or improve public infrastructure to support the new development. These projects typically include roads, sidewalks, drainage systems, and utility installations, all of which are essential for the sustainable growth and functionality of residential and commercial areas. To ensure that these projects are completed as promised, local governments often require developers to obtain subdivision bonds. These bonds act as a financial guarantee that the developer will fulfill their obligations according to approved plans and specifications, thereby safeguarding the interests of the public and maintaining the integrity of the community’s infrastructure. If the developer fails to do so, the bond can be used to cover the costs of completing the unfinished work.

Beyond Simply Subdivisions: Other Applications of Subdivision Bonds

A variety of bonds are often referred to as subdivision bonds, because they cover the same obligations. They can include: public improvement, completion, performance, right-of-way, grading, plat, or site improvement bonds and are required for other types of development. For instance, if a developer were to purchase an existing lot and build a restaurant, they may need to add a new turn lane and entry from the existing roadway, run water, sewer, and storm drainage, etc., activities which would require bonding under the umbrella subdivision bond terminology.

What Does a Surety Consider? 

When considering a developer's application for a subdivision bond the surety will take a number of factors into account during the underwriting process: 

1. The Obligation - a surety will consider both the scope and term of the obligation. The scope is determined by the range of the statutes and ordinances that apply to the development site. The term depends on a number of factors including the type of development and its needs. For instance, commercial developments tend to be completed more quickly than residential developments, so the obligation term would be shorter. 

2. The Contractor - the developer's working relationship with their contractor/s performing the work is an important consideration, as is the character and experience of the contractor/s which impacts the actual work being done.  

3. The Funding - the funding for a development project is often structured differently than a typical individual construction project's funding. Confirmation of the development's particular funding structure is critical to a surety's underwriting process. 

4. The Indemnity Package - many developers have complex ownership structures requiring special attention to the indemnification process.

Subdivision Bonds: Promoting Responsible Development and Collaboration

Subdivision bonds are a critical tool in the development process. They provide financial protection and accountability and serve as a cornerstone for collaborative efforts between developers, municipalities, and stakeholders. By ensuring that infrastructure projects are completed as planned, subdivision bonds pave the way for neighborhoods and business districts to flourish.

How do I get a Surety Bond?

Surety bonds are issued by Merchants Bonding Company (Mutual) through insurance agents. Contact your local insurance agent or use our Find an Agent tool. They will guide you through the process, informing you of what documents and information are needed by the surety (Merchants Bonding Company (Mutual)) to underwrite your bond.

What is a Surety Bond?

A surety bond is a three-party agreement that ensures the fulfillment of a commitment or contract. For instance, the surety (Merchants Bonding Company (Mutual)) may provide a surety bond to a construction company (the principal) which is required by the state (the obligee), ensuring the construction company will perform the duties as outlined in the contract. In bonding the construction company, Merchants assumes the risk should the company default or not fulfill their contract. A surety bond is different from traditional insurance in that the principal is obligated to pay back the surety company on any claims paid out.

All information provided is subject to change.