Subcontractor Can Recover Damages From Payment Bond Surety As Result Of Delay, But Only Actual Costs Of Labor And Materials

Lexicon, Inc. v. Safeco Insurance Co. of America
No. 04-6086, 2006 U.S. App. LEXIS 3113 (6th Cir. Feb. 9, 2006)

Icon, Inc. served as a subcontractor on a steel plant expansion project in Kentucky. Pursuant to its subcontract, Icon secured a payment bond, with Safeco Insurance Company of America as surety. Lexicon, Inc. performed work on the project as a subcontractor to Icon. Lexicon incurred additional costs on the project as a result of delays for which it was not at fault. Lexicon brought a claim for these “delay and impact” costs against Safeco, as surety for Icon.

The lower court awarded summary judgment to Safeco. That court found that Lexicon may have been entitled to the actual costs it expended for labor and materials as a result of the delays, but held that Lexicon’s failure to segregate these costs from other, non-compensable damages (such as administrative costs and lost profits) precluded Lexicon from maintaining the claim.

On appeal, the Court of Appeals for the Sixth Circuit partially affirmed this holding. Citing authority from other jurisdictions and stating what it concluded was a general rule, the court agreed that Lexicon could recover the actual costs of labor and materials, but not related collateral expenses. The court also faulted Lexicon for failing to identify its damages specifically, and for consistently attempting to include such costs in its claim. Among other things, the court noted that Lexicon was attempting to recover additional profit on hourly wage rates which already encompassed a profit component. The court also criticized Lexicon for attempting to prove its claim on a “total cost” basis.

Nonetheless, the appellate court parted ways with the lower court by holding that Lexicon had produced at least some evidence indicating it could differentiate its actual costs from breach of contract damages such as lost profit and increased overhead. The court pointed to several documents which purported to provide an itemized breakdown of Lexicon’s claim. In remanding the case for trial on these issues, the court emphasized that Lexicon bore the burden of proving which specific costs in its claim were directly attributable to labor and material expenditures.

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