Business Insurance Alberta | Subdivision Bonds

Foundational coverage | What are Alberta “subdivision bonds”?

It’s all in a name. And a definition. Insurance, like any industry, is home to abbreviations, short forms and distinct terminology. So knowing what coverage terms actually mean for your Alberta business is important.

For instance, “umbrella liability” doesn’t cover risks related to using umbrellas indoors. And “all risks” insurance doesn’t literally cover every single risk that your business may ever encounter.

Likewise, subdivision bonds do not exclusively cover subdivision building developments.

Yes, insurance terms can be confusing. And that’s why we’re so committed to providing the insurance insights and info Alberta businesses need to make informed coverage decisions.

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Our unique all-Canadian blog features 1,200+ articles just like this one. And each one is built to shed some light on what you need to know when you are buying business insurance in Alberta, Ontario, BC and across Canada.

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Our team of insurance brokers can help you find the coverage you need to build your business with confidence. In other words, we can align the best products and services – including subdivision bonds – for your Alberta business.

Keep reading to learn more about subdivision bonds and how you can use them to manage the specific risks of property development.

Firstly…defining subdivision bonds

We went to the global source. The International Risk Management Institute (IRMI) is a well-known and highly respected resource for info about coverage definitions. Following is the current IRMI definition for subdivision/improvement bonds.

“Also referred to as site improvement, plat, completion, or simply performance bonds, subdivision/improvement bonds help cover the owner/developer.

The key difference between subdivision bonds from regular contract performance bonds is that the owner/developer (the principal) has to pay the cost of building the bonded improvements rather than the public agency (the obligee).

While not all sureties write subdivision bonds, for those that do, the underwriter will require information such as the scope of the improvements, a cost estimate, and where the money is coming from.”¹

IRMI.com: Expert Commentary – Subdivision/Improvement Bonds

In addition to this definition, IRMI goes on to explain the specific types of guarantees that owner/developers select.

For instance:

1. “Corporate surety bonds
2. Irrevocable letters of credit issued by a financial institution, e.g. bank
3. Certificates of deposit (CDs)
4. Other, such as cash, certified/cashiers check or money order
5. Tripartite agreement”²

These are just some of the choices you face when you are seeking Alberta business insurance. Certainly these options are complex. So when you need to align coverage options for your Alberta business, you need to work with an expert.

ALIGNED insurance brokers are 100% focussed on business insurance solutions only. They will deliver the expertise you need to make the best decisions for your business insurance.

Secondly…understanding the advantages of bonds

With every choice, there’s a pro and a con. Therefore, it’s important to understand the potential drawbacks and benefits of each choice you make for your Alberta business. Here’s what IRMI has to say about the advantages of corporate surety bonds…

• “Surety bonds provide pre-qualification of the owner/developer through the underwriting process.
• Surety credit is unsecured and does not reduce or tie-up the owner/developer’s source of funding.
• Surety’s claim department will work to facilitate a resolution of any problem and not merely to forfeit the owner/developer’s security.
• Corporate surety bonds typically provide the public agency with a 100 percent performance, 100 percent payment, and 1-year maintenance bond.
• Irrespective of how much the owner/developer may have spent to complete the improvements up to the time of default, the full amount of the bonds are available to complete the work.”

If you are weighing the pros and cons of business insurance options for your Alberta business, we can help. We have relationships with more than 65 of Canada’s top insurance companies and can connect you to the best solutions.

Contact us now to learn more about subdivision bond options for your AB firm.

Thirdly…finding a surety that writes subdivision bonds may be difficult

You want to find the right insurance company to build your coverage solution. Unfortunately, it’s not as easy as just Googling “subdivision bonds in Canada”. This is because not all insurance companies write subdivision bonds. IRMI provides the following explanation:

“Subdivision/improvement bonds are a type of bond that not all surety companies want to write. The reasons for avoiding this class vary. Some bonding companies lack the familiarity or underwriting expertise. Some have had poor experience in the past and have found that these bonds can have a very long lifespan.”⁴

If you are looking for a subdivision bond, we can help. Keep reading to learn how…

Run an Alberta municipality? Here’s some good news…

Commonly used by municipalities throughout the U.S., subdivision bonds are gaining traction with municipalities in Ontario and Western Canada as an alternate form of security in real estate development projects.

“A subdivision bond provides effective financial protection to municipalities,” says Larry Ryan, President, Frank Cowan Company.

“I am confident that municipalities will find this product provides more benefits than traditional letters of credit. Moreover, the subdivision bond provides substantial benefits to developers. This product delivers a win-win solution for municipalities and developers.”

This is because of flexibility. A subdivision bond provides responsive, liquid financial security to municipalities while giving developers much more financial flexibility than letters of credit.

Most importantly, while they are a long-standing product in the U.S., subdivision bonds are becoming more prevalent in Canada.

“The Guarantee, Canada’s oldest surety company and a leading provider of subdivision bonds throughout Canada and the United States, has been working successfully with municipalities and developers to make the product available in Canada,” adds Dick Langland, National Vice President of Commercial & Developer Surety at The Guarantee. “We expect more and more Canadian municipalities will adopt subdivision bonds as an alternative to a letter of credit.”

We have strong relationships with top insurance companies in Canada such as Frank Cowan Company, Intact, The Guarantee and many, many more. ALIGNED brokers can connect your business with choice and value.

In conclusion | How Alberta municipalities can benefit from using subdivision bonds

• Liquidity. A subdivision bond is comparable to a letter of credit, representing a very liquid instrument that provides the municipality with the funds required to correct a default by the developer.
• Responsive. Municipalities are not bound to take any action or proceedings, or to exhaust recourse against the developer or any other security, before turning to the subdivision bond.
• Customization. Subdivision bonds can be tailored for each municipality, providing financial protection in line with specific forms of development.
• Pre-qualification. To obtain a subdivision bond, a developer must demonstrate the financial means to complete the development project, and the expertise, resources and operational controls to bring it to a successful conclusion.
• Promotes Growth. Accepting an alternate form of financial security that is of benefit to developers sends a clear message to the development industry that a municipality is innovative, responsive to the needs of developers and growth-oriented. Attracting development opportunities – at no additional risk to the municipality – helps ensure continual growth of communities.
• Performance. If a claim is filed against the bond, the developer is required to repay the surety all amounts paid under a subdivision bond. The bond keeps the developer responsible, accountable and motivated to fully perform all of its obligations to the municipality.

To sum up, if you need options for your Alberta business insurance, we can help. Contact an ALIGNED insurance broker now to get your questions answered and your business insurance…aligned.