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Dismissal of Bond Suit Against Travelers Unit Upheld

A federal appeals court affirmed dismissal of litigation filed against a Travelers Corp. unit in connection with a performance and maintenance bond it had issued to a sanitary district’s contractor.

In 2007, Milford, Iowa-based Iowa Great Lakes Sanitary District contracted with Sioux City, Iowa-based McHan Construction Inc. to complete a $14.6 million dollar addition to a wastewater treatment facility, including installation of an ultraviolet wastewater disinfectant system, according to Friday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in Iowa Great Lakes Sanitary District v. Travelers Casualty and Surety Co. of America; Evoqua Water Technologies.

McHan purchased an ultraviolet system from Pittsburgh-based Evoqua. It also obtained a performance and maintenance bond from Travelers Corp. unit Travelers Casualty and Surety that fully guaranteed McHan’s “faithful performance of the contract” with the district, according to the ruling.

McHan defaulted in late 2009, and Travelers and the sanitary district entered in an agreement under which the insurer agreed to complete the project with its bond “in full force and effect.”

There were startup problems involving installation of the ultraviolet system, but in November 2011, the district’s project engineer reported the project was “substantially completed,” according to the ruling.

However, there were subsequent problems with the system, including an electrical fire, according to the ruling. Travelers was asked to develop a plan to repair or replace the equipment by the end of the two-year warranty period for the equipment, which started in November 2011.

 In a May 2014 letter, the district’s engineer said the district did not wish to pursue repairing the failed equipment and asked that the system be removed and the cost of the initial purchase refunded.

The district then filed suit in U.S. District Court in Sioux City against Travelers, asserting a claim against the bond, and breach of warranty claims against Evoqua. The District Court ruled in favor of the insurer and Evoqua, which a three-judge appeals court panel upheld.

“The summary judgment record established that (the district) considered rejecting the UV system in 2010, well before the engineer certified Substantial Completion, but chose not to do so,” said the ruling, in discussing the Travelers bond.

Instead, in November 2011 the district’s engineer certified the equipment as substantially completed, said the ruling. Under Iowa law, it is a “general rule that as to known defects, acceptance of the work in the absence of fraud or mistake is a complete bar to recovery on the construction bond,” said the ruling, in quoting an earlier decision.

“In these circumstances, we agree with the district court that that “(the district) is unable to contort the contract/bond language to such an extent that it could unilaterally reject the UV unit in 2014, without showing (through expert testimony) some type of defect,” said the decision, in affirming the lower court ruling.

In December, a Safeco Corp. unit prevailed in long-running litigation with a construction company over dismissal of the policyholder’s bad faith claims in connection with the insurer’s issuance of three surety bonds. 

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