Understanding Off-Site Surety Bonds

Posted: September 05, 2019

Off-Site surety bonds, also known as off-site improvement bonds or subdivision bonds, are a type of construction performance bond. They provide a guarantee to the municipal planning authority that the developer of the property will pay for certain improvements to be made (such as sidewalks, streetlights, sewers, streets, and so on). The term “off-site” is used because those improvements will be made to the surrounding area, not to the building site itself.

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Who Needs Them?

The developer of the subdivision or commercial project must purchase an off-site surety bond in order to receive the necessary permits to move ahead with that project. As the party required to purchase the bond, the developer is the “principal” in the surety bond agreement.

While the developer handles the construction of the buildings, municipalities prefer to handle the improvements, to ensure that they meet local codes and are consistent with the same features in other parts of the community. But the cost of making those off-site improvements is the responsibility of the developer. The municipal planning authority requiring the bond is the “obligee” in the surety bond agreement.

How Do They Work?

The company that underwrites and issues the off-site bond is the third party in the surety bond agreement, referred to simply as the “surety.” The surety bond agreement spells out what the developer must do as the principal to avoid a claim being filed against the bond—namely to pay for the off-site improvements that the municipality makes.

If the principal violates any of the terms of the surety bond agreement, the obligee can file a claim against the bond to cover the cost of the improvements. Typically, the surety will try to settle the claim amicably, but if that fails, the surety will go ahead and pay the claim.

Surety bond agreements include a clause that indemnifies the surety and makes the principal solely responsible for paying claims. So, any payment the surety makes directly to a claimant is in effect an advance, or a short-term loan to the principal. The surety can take legal action against the principal if that’s what it takes to get reimbursed.

What Do They Cost?

The obligee establishes the required bond amount based on the cost of the off-site improvements to be made. But the principal only pays a small portion of that amount as the premium rate. The surety determines the premium rate that the principal must pay to obtain the bond. That determination is based largely on the principal’s personal credit score. The higher the principal’s credit score, the lower the premium rate—as low as 1% to 3% for those whose credit is good enough to qualify for the standard market rate. Those with poor credit may still be able to get bonded, but they may pay a higher premium rate.

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If you’ve been informed that you need to purchase an off-site bond, request an online quote today, or speak with one of our experienced agents to discuss your needs.

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