The municipality with jurisdiction over the area where a subdivision is to be constructed, not the homeowners or businesses that purchase the buildings, will own the roads, streetlights, and power lines once the subdivision is completed. The developer is responsible for building and installing them according to the terms of the subdivision agreement between the developer and the municipality’s Planning Board. The requirement that the developer must purchase a subdivision bond is included in the subdivision agreement for the financial protection of the city.
Subdivision Bonds for Development Work
Developers need subdivision bonds when local authorities require assurance for public improvements tied to a new development. Surety Bonds Agent works nationwide with practical guidance and fast quote support. Request a subdivision bond quote online.
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What Are Subdivision Bonds?
A subdivision bond is a type of construction performance bond that provides financial protection for the municipality in which a subdivision is being created by a developer. They are sometimes referred to as site improvement bonds, completion bonds, or plat bonds. The name plat bond comes from the illustrations, called plats, submitted by a developer to a municipality when seeking approval to break up a large tract of land into building sites to create a subdivision.
A subdivision bond guarantees that the developer will complete all the work required to turn a subdivision into a functional residential community or commercial area—building roads, bringing in utilities, putting in curbs and sidewalks, and landscaping, for example. Some subdivision bonds combine features of a performance bond with those of a payment bond by guaranteeing that the developer will not only complete the work on time and according to specifications, but will also pay contractors, subcontractors, and suppliers according to contractual terms.
Failure to live up to the terms of the surety bond agreement can result in claims for damages being filed against the subdivision bond.
Who Needs Them?
How Do They Work?
The municipal planning authority requiring a subdivision bond is referred to as the bond’s “obligee.” The obligee establishes the required amount of the subdivision bond and defines what would constitute a violation of the surety bond agreement.
The developer purchasing the bond is the “principal,” and the company guaranteeing the payment of claims is the “surety.” The principal must complete the work covered by the subdivision bond in accordance with the subdivision agreement and the terms of the subdivision bond.
What Happens if a Claim is Filed?
Any violation that causes the obligee or other covered party to incur a financial loss can result in a claim against the bond—a claim that the principal is legally obligated to pay if the surety finds it to be valid and is unable to negotiate a more favorable settlement. When a claim must be paid, the surety typically pays it on behalf of the principal, and is then reimbursed by the principal. If necessary, the surety can sue the principal to recover the claim amount (plus court costs and legal fees).
costs
What Do They Cost?
The annual premium cost of a subdivision bond depends to a large extent on an underwriting assessment of the risk that the principal will delay repaying the surety for claims paid on the principal’s behalf, or not repay the surety at all. The most significant factor in that assessment is the principal’s personal credit score.
It’s safe to say that someone with a history of being financially responsible will most likely continue to pay their debts, which means the risk to the surety is low. A low credit score indicates a higher risk level. A very creditworthy principal is rewarded by a low premium rate (typically in the 1% to 3% range), while someone with a less impressive credit history will pay a higher rate (potentially as high as 10% or more).
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