Texas Developer and Subdivider Insurance: Lien Bonds, Plat Security and Improvement Contracts

If the developer does not require a statutory payment bond, Property Code §53.101 makes the owner reserve 10 percent of the contract price, or of the value of the work, during construction and for 30 days after the work under the original contract is completed. Those reserved funds secure payment to the subcontractors and suppliers below the original contractor. Under §53.103, a claimant who has given the required notices and files its lien affidavit by the 30th day after completion, termination or abandonment has a lien on the reserved funds.

This is where many Texas developers carry an unplanned exposure. An owner that pays out the reserve early, or pays the GC in full despite a subcontractor's notice of claim, may end up paying twice. Lenders usually draft their draw procedures around this risk, and title insurers watch it at closing. A developer weighing the cost of a payment bond against the administrative burden of tracking notices and retainage can bring both options to the lender before the loan documents are final.

Local Government Code §212.071 allows a city with 5,000 or more inhabitants to contract with a developer to build public improvements related to the development, other than buildings, without competitive sealed bidding. Under §212.072 the city shares the cost, generally capped at 30 percent of the contract price for cities under 1.8 million people and up to 70 percent for larger cities, with higher shares allowed for city-required oversizing.

In exchange, §212.073 requires the developer to execute a performance bond for the construction of the improvements to ensure completion, executed by a corporate surety in accordance with Government Code chapter 2253. That puts the developer in the position of a principal on a public-style bond, even though it is a private party. The surety typically underwrites the developer's balance sheet, the project budget and the contractor building the improvements, and it expects the developer and often its principals to sign a general agreement of indemnity. The bond protects the city, not the developer.

Outside city limits, Local Government Code §232.004 lets a commissioners court require the owner of a tract to post a bond before subdividing it. The bond is payable to the county judge, sized by the court to ensure proper construction of the roads, streets and drainage but not more than their estimated cost, and conditioned on completing them to county specifications within a reasonable time. The statute allows an alternative form of financial security in place of the bond, so a developer can compare a surety bond with a letter of credit or cash before the plat is filed.

Inside a city or its extraterritorial jurisdiction, plat approval runs through chapter 212, and in counties covered by the water and sewer rules of §212.0105, §212.0106 lets the city require a bond for water and sewer facilities before the tract is subdivided. Beyond those statutes, most improvement security in Texas comes from local subdivision ordinances, so the amount, form and release terms differ by city and county. The plat application is usually the first place a developer sees what the jurisdiction will accept.

A Texas developer holding several income properties may look at a captive to finance retained liability across its portfolio, either through a Texas captive for its affiliates or through a program domiciled elsewhere. A Texas captive pays 0.5 percent premium tax within a $7,500 floor and a $200,000 cap, while coverage from an insurer not authorized in Texas generally carries a 4.85 percent independently procured insurance tax.

Residential property coverage is among the lines a Texas captive may not write, and lender exhibits often call for admitted carriers, so the study usually starts with what the loan documents allow.

Insurance Code §151.105 says the anti-indemnity subchapter does not affect an indemnity provision in a construction contract for a single-family house, townhouse or duplex and for land development directly related to one. For a Texas residential developer, that means a broad-form indemnity clause in a builder or site contractor agreement may remain enforceable where the same clause would be void on a commercial or multifamily project.

The insurance side follows the contract. A residential developer that relies on broad indemnity from its contractors usually wants additional insured status and contractual liability terms that can respond to it, and the contractors' carriers may limit residential or tract work by endorsement. On a mixed-use or multifamily phase, the chapter 151 limits may apply again. A developer running both product types in one master-planned community may need two sets of contract and insurance exhibits rather than one.