The Colombian Council of State recently issued a ruling reinforcing contractor liability for structural defects in public works projects, even after contract settlement. The case involved a temporary joint venture that had executed a road rehabilitation contract for a state entity in 2011, backed by a surety bond with work stability coverage.
Background of the Case:
In 2015, an audit by the Office of the Colombian Comptroller General of the Republic identified serious structural failures in the asphalt, retaining walls, and other elements of the road. As a result, in 2016, the contracting entity declared the occurrence of a loss and required the insurer to pay indemnification under the work stability coverage of the bond. The insurer and the contractor challenged this decision, arguing that (i) the damages were not attributable to the contractor, (ii) the insurance exclusion for lack of maintenance applied, and (iii) the indemnification amount was improperly calculated.
Key Findings of the Ruling:
Stability Coverage in Surety Bonds:
The Council of State reaffirmed that the stability coverage in surety bonds extends beyond the completion and final acceptance of the work, ensuring protection during the warranty period. This post-contractual coverage guarantees indemnification for structural defects or hidden flaws that compromise the stability of the construction. Even after the project has been delivered and the contract liquidated, the coverage remains in effect, safeguarding the project owner against defects arising from faulty execution.
Exclusion for Lack of Maintenance Rejected:
The insurer argued that the road’s deterioration was due to poor maintenance and heavy vehicle traffic, invoking an exclusion in the policy. However, the court ruled that the contracting entity had conducted proper maintenance and imposed traffic restrictions on heavy vehicles. Since the insurer failed to prove that these factors directly caused the damage, the insurance exclusion did not apply.
Indemnification Calculation Validated:
The contractor and insurer also challenged the indemnification amount, claiming it lacked technical support. The court rejected this argument, confirming that the contracting entity’s assessment was based on technical reports and official pricing guidelines, ensuring a fair and justified calculation.
Implications for Contractors and Insurers
This ruling highlights the function of the stability coverage in surety bonds and its post-contractual nature, as it remains in effect beyond the completion of the contract, its liquidation and final acceptance of the work. It also underscores that insurers must present clear and compelling evidence when invoking coverage exclusions.
Lucas Fajardo Gutiérrez | Partner of the Insurance and Reinsurance Team
Luis Alejandro Peña | Associate of the Insurance and Reinsurance Team
Brigard Urrutia
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