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Economic Loss Doctrine Keeps Surety From Shirking Bond Liability

Monday, August 04, 2008 03:24 pm

Economic Loss Doctrine Keeps Surety From Shirking Bond Liability

An insurance company sought remedy for overpayment to a delinquent contractor -- but an owner's by-thebook actions saved it from liability.

McDaniel Plumbing and Heating, Inc. (McDaniel) contracted with Indian River School District (Indian River) in Delaware to construct mechanical, plumbing and temperature control systems in a high school. RLI Insurance Company (RLI) issued a performance bond on McDaniel's behalf, as required by Delaware's State Procurement Act.

When Indian River terminated McDaniel for non-performance and failure to pay its subcontractors/suppliers, the school district submitted a claim under the bond for completion of the project. RLI denied the bond, contending that Indian River had violated its contractual obligations by paying McDaniel in excess of the work actually performed. RLI filed negligent misrepresentation claims against Indian River's project architect and construction manager, Becker Morgan Group, Inc. (BMGI) and EDis Company (EDis), respectively. Indian River filed a counterclaim against RLI for costs to correct and complete McDaniel's work.

Non-injured surety can't discharge liability

RLI claimed that Indian River improperly continued to pay McDaniel after the surety, having learned of the contractor's faulty performance, instructed EDiS to cease [...]

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