ABA Published 'Lifecycles of Large AEC Companies' in the Fall 2016 publication of Committee News

1. Fall 2016
Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to
Advance the Civil Justice System
Carbon nanotubes (CNTs) hold
promise for many beneficial
applications. However, there have
been concerns and calls for a
moratorium raised over “mounting
evidence” that CNT may be the
“new asbestos,”1
or at least
deserving of “special toxicological
attention” due to prior experiences
with asbestos.2
The shape and size
of some agglomerated CNTs are
similar to asbestos—the most
“desirable.” And because CNTs for
structural utility are long and
thin—characteristics thought to
impart increased potency to
asbestos fibers—discussions of
parallels between these two
substances are natural. Thus, given
the legacy of asbestos-related
injury and the thousands of cases
litigated each year, consideration of
possible implications of the use of
CNTs in research and in consumer
products is prudent.
First reported in 19913
, CNTs
epitomize the emerging field of
nanotechnology, defined by some
as the “ability to measure, see,
manipulate, and manufacture
things usually between 1 and
100 nanometers.”4
CNTs are a type
of carbon-based engineered
nanoparticle generally formed by
Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to
Advance the Civil Justice System
Fall 2009
Toxic Torts and Environmental
Law Committee
IN THIS ISSUE
Carbon Nanotubes: The Next Asbestos . . . . . . . . . . . . . . . . . . . . . . . 1
Editor’s Message. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Tatera v. FMC Corporation: When Is A Product No A Product?. . . 3
Mexico’s National Wastes Management Program. . . . . . . . . . . . . . . 4
Environmental Risk During Restructuring And Bankruptcy . . . . . 5
Upcoming TTEL Programs And Meetings . . . . . . . . . . . . . . . . . . . . 6
Limitations Of Toxicogenomic Studies To Assess Toxic Exposures
And Injury From Benzene. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Burlington Northern: The Requisite Intent For Arranger Liability
Under Cercla . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2009-2010 TIPS Calendar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Continued on page 18
Committee
News
Committee
News
CARBON NANOTUBES: THE NEXT ASBESTOS?
Fionna Mowat, Exponent, fmowat@exponent.com
Joyce Tsuji, Exponent, tsujij@exponent.com
1 Miller, G. 2008. Mounting evidence that carbon
nanotubes may be the new asbestos. Friends of the
Earth Australia. Available at http://nano.foe.org.au.
2 The Royal Society and Royal Academy of
Engineering (RS/RAE). 2004. Nanoscience and
nanotechnologies. Royal Society and Royal Association
of Engineers. London: The Royal Society. Available at
http://www.royalsoc.ac.uk/.
3 Iijima, S. 1991. Helical microtubules of graphitic
carbon. Nature (London) 354:56–58.
4 National Science and Technology Council (NSTC).
2007. The National Nanotechnology Initiative. Strategic
Plan. Washington DC: NSTC, Committee on
Technology, Subcommittee on Nanoscale Science,
Engineering, and Technology. December. Available at
http://www.nano.gov/ NNI_Strategic_Plan_2004.pdf.
LIFECYCLES OF LARGE AEC COMPANIES
By: Ibrahim S. Odeh, PhD., MBA and
William J. McConnell, J.D., P.E.
Fidelity & Surety Law Committee
IN THIS ISSUE:
Lifecycles Of Large AEC Companies . . . . . . . . . . . . . . . . . . 1
Letter From The Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Social Engineering Fraud in the Context of Computer and
Funds Transfer Fraud Coverages . . . . . . . . . . . . . . . . . . . . . . 7
Defending The Surety Using FAR 28.106-5 And The Consent
of Surety Requirement For Federal Contract Modifications
Over $50,000 or 25% of Contract Value . . . . . . . . . . . . . . . . 8
The Supreme Court Upholds Implied Certification Under
The False Claims Act But Imposes “Rigorous Materiality”
Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2016-2017 TIPS Calendar . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Continued on page 11
1 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html
2 Id.
I. Executive
Summary
The practice
of architecture,
engineering and/or construction (collectively, “AEC”) is
a high risk and low margin endeavor. A January-2016
study by New York University Stern School of Business
evaluated the net profit margins of over one hundred
industries. Of all industries, “Construction/Engineering”
ranked ninth to last in terms of net profit margin (0.49%).1
The only industries with lower net margins were related
to mining, energy, and telecom.2
The NYU study
took place during a historic construction boom when
one would expect AEC margins to be at high levels.
Record reserves of petroleum and strict environmental
regulations certainly explain the low margins of the
energy and mining industries.
One explanation for the low margins of AEC
companies is the low bid or “race to the bottom” pricing
model that dominates these industries. Because of the
risky nature of design and construction, one would
suspect that the lifecycle of companies in these industries
is relatively short. To empirically evaluate this issue,

2. Fidelity & Surety Law Committee Newsletter Fall 2016
2 2
Chair
Adam Friedman
Chiesa Shahinian &
Giantomasi PC
One Boland Drive
West Orange, NJ 07052
(973) 530-2029
Fax: (973) 530-2229
afriedman@csglaw.com
Chair-Elect
Toni Reed
Strasburger & Price LLP
901 Main St, Ste 4400
Dallas, TX 75202-3729
(214) 651-4345
Fax: (214) 659-4091
toni.reed@strasburger.com
Council Representative
Sam Poteet
Manier & Herod
150 4th Ave N, Ste 2200
Nashville, TN 37219
(615) 742-9321
Fax: (615) 242-4203
spoteet@manierherod.com
Diversity Vice-Chair
Ivette Gualdron
Zurich
236 Rue Landry Rd
Saint Rose, LA 70087-3666
(504) 471-2676
Fax: (504) 712-3507
ivette.gualdron@zurichna.com
Immediate Past Chair
Gary Valeriano
Anderson McPharlin
& Conners LLP
707 Wilshire Boulevard, Ste 4000
Los Angeles, CA 90017-3623
(213) 688-0080
Fax: (213) 622-7594
gjv@amclaw.com
Membership Vice-Chair
Scott Olson
SureTec Insurance Co
9737 Great Hills Trl, Ste 320
Austin, TX 78759-6418
(512) 732-0099
Fax: (512) 732-8398
solson@suretec.com
Scope Liaison
David Olson
Frost Brown Todd LLC
301 E 4th St, Ste 3300
Cincinnati, OH 45202-4257
(513) 651-6905
Fax: (513) 651-6981
dolson@fbtlaw.com
Technology Vice-Chair
Mark Krone
Anderson McPharlin &
Conners LLP
707 Wilshire Blvd, Ste 4000
Los Angeles, CA 90017-3623
(213) 688-0080
Fax: (213) 622-7594
mk@amclaw.com
Vice-Chairs
Theodore Baum
McElroy Deutsch et al
920 Bausch & Lomb Place
Rochester, NY 14604
(585) 623-4286
Fax: (585) 295-8300
tbaum@mdmc-law.com
Ashley Belleau
Lugenbuhl, Wheaton, Peck,
Rankin & Hubbard
601 Poydras St, Ste 2775
New Orleans, LA 70130
(504) 568-1990
Fax: (504) 200-8932
abelleau@lawla.com
Robert Berens
Salamirad Morrow
Timpane & Dunn
2001 E Campbell Ave, Ste 203
Phoenix, AZ 85016-5574
(602) 258-6219
rberens@smtdlaw.com
Amy Bernadas
Krebs Farley, PLLC
400 Poydras St, Ste 2500
New Orleans, LA 70130-3224
(504) 299-3570
Fax: (504) 299-3582
abernadas@kfplaw.com
Lisa Block
Axis Insurance
1211 Avenue of The Americas
24th Fl
New York, NY 10036
(212) 500-7689
lisa.block@axiscapital.com
JoAnne Bonacci
Dreifuss Bonacci & Parker PC
26 Columbia Tpke, Ste 101
Florham Park, NJ 07932
(973) 514-1414
Fax: (973) 514-5959
jbonacci@dbplawfirm.com
Virginia Boyle
1425 Kershaw Dr
Raleigh, NC 27609
(610) 832-8246
Fax: (610) 828-4684
virginia.boyle@libertymutual.com
Todd Braggins
Ernstrom & Dreste LLP
180 Canal View Blvd, Ste 600
Rochester, NY 14623-2849
(585) 473-3100
Fax: (585) 473-3113
tbraggins@ed-llp.com
Lee Brewer
Bryan & Brewer LLC
355 E Campus View Blvd, Ste 100
Columbus, OH 43235-5616
(614) 228-6131 EXT 203
Fax: (614) 890-5638
lbrewer@bryanandbrewer.com
Shannon Briglia
BrigliaMcLaughlin PLLC
1950 Old Gallows Rd, Ste 750
Vienna, VA 22182-4014
(703) 506-1990
Fax: (703) 506-1140
sbriglia@briglialaw.com
Elizabeth Carley
Cincinnati Insurance Company
PO Box 145496
Cincinnati, OH 45250-5496
(513) 870-2173
Fax: (513) 371-7252
liz_carley@cinfin.com
Gerald Carozza
Selective Ins Co of Amer
40 Wantage Ave
Branchville, NJ 07890
(973) 948-1823
Fax: (866) 324-3786
gerald.carozza@selective.com
Paula-Lee Chambers
Hinshaw & Culbertson LLP
28 State St, Fl 24
Boston, MA 02109-5709
(617) 213-7000
Fax: (617) 213-7001
pchambers@hinshawlaw.com
Andy Chambers
Jennings Strouss & Salmon PLC
1 E Washington St, Ste 1900
Phoenix, AZ 85004-2554
(602) 262-5846
Fax: (602) 495-2728
achambers@jsslaw.com
Bogda Clarke
The Hanover Insurance Group
400 Atrium Dr, Suite 500
Somerset, NJ 08873-4170
(732) 805-2378
Fax: (732) 805-2395
boclarke@hanover.com
Bruce Corriveau
Travelers
111 Schilling Rd,
Hunt Valley, MD 21031-1110
(443) 353-2076
Fax: (410) 205-0608
bcorrive@travelers.com
James Diwik
Sedgwick LLP
333 Bush St, Fl 30
San Francisco, CA 94104-2834
(415) 781-7900
Fax: (415) 781-2635
james.diwik@sedgwicklaw.com
Jennifer Fiore
Dunlap Fiore LLC
301 Main St, Ste 1100
Baton Rouge, LA 70801-1916
(225) 282-0652
Fax: (225) 282-0680
jfiore@dunlapfiore.com
Robert Flowers
Travelers
1 Tower Sq, Ste S202A
Hartford, CT 06183-0001
(860) 277-7150
Fax: (860) 277-5722
rflowers@travelers.com
Jeffrey Frank
Alber Crafton PSC
2301 W Big Beaver Rd, Ste 300
Troy, MI 48084-3326
(248) 822-6190
Fax: (248) 822-6191
jfrank@albercrafton.com
Melissa Gardner
Weinstein Radcliff Pipkin LLP
8350 N Central Expy, #1550
Dallas, TX 75206-1600
(214) 865-7020
Fax: (469) 227-8004
mgardner@weinrad.com
Jeffrey Goldberg
SWISSRE
475 N Martingale Rd, Ste 850
Schaumburg, IL 60173-2276
(847) 273-1268
Fax: (847) 273-1260
jeff_goldberg@swissre.com
Manju Gupta
McDonald Hopkins LLC
600 Superior Ave E, Ste 2100
Cleveland, OH 44114-2690
(216) 973-4453
Fax: (216) 348-5474
mgupta@mcdonaldhopkins.com

3. Fidelity & Surety Law Committee Newsletter Fall 2016
3 3
Leigh Henican
Gray Casualty & Surety Company
3625 N I-10 Service Rd
Metairie, LA 70002
(504) 301-8418
lhenican@graysurety.com
Mike Hennigan
Cincinnati Insurance Company
6200 S Gilmore Rd
Fairfield, OH 45014-5100
(513) 870-2736
Fax: (513) 881-8913
mike_hennigan@cinfin.com
Hilary Hoffman
Chubb
15 Mountain View Rd
Warren, NJ 07059-6795
(908) 903-4706
hhoffman@chubb.com
Marchelle Houston
Travelers Bond & Specialty
Insurance
1 Tower Sq, Ste 2S2
Hartford, CT 06183-0002
(860) 277-2408
Fax: (860) 277-5722
mhouston@travelers.com
Michael Hurley
Berkley Surety Group LLC
412 Mount Kemble Ave, Ste 310N
Morristown, NJ 07960-6669
(973) 775-5040
Fax: (973) 775-5204
mhurley@berkleysurety.com
Susan Karlan
ICW Group - OPRS
15025 Innovation Dr
San Diego, CA 92128
(858) 350-7213
Fax: (858) 350-2640
skarlan@icwgroup.com
Peter Karney
SWISSRE
475 N Martingale Rd, Ste 850
Schaumburg, IL 60173-2276
(847) 273-1259
Fax: (847) 273-1260
peter_karney@swissre.com
Todd Kazlow
Kazlow & Fields LLC
8100 Sandpiper Cir, Ste 204
Baltimore, MD 21236-4999
(410) 825-9644
Fax: (410) 825-6466
todd@kazlowfields.com
James Keating
Allied World Insurance Company
30 South 17th Street, 16th Fl
Philadelphia, PA 19103
(267) 800-1819
james.keating@awac.com
Christina Kocke
Merchants Bonding Company
215 Savanna Dr
Luling, LA 70070
(504) 417-5164
tkocke@merchantsbonding.com
Frank Lanak
HCC Surety Group
601 S Figueroa St, Ste 1600
Los Angeles, CA 90017-5721
(310) 242-4403
Fax: (310) 649-0891
flanak@hccsurety.com
Darrell Leonard
Zurich
11074 Inspiration Cir
Dublin, CA 94568-5530
(800) 654-5155
Fax: (800) 329-6105
darrell.leonard@zurichna.com
Lawrence Lerner
Levy Craig Law Firm
1301 Oak St, Ste 500
Kansas City, MO 64106-2865
(816) 460-1807
Fax: (816) 382-6606
llerner@levycraig.com
William Lutz
Starr Companies
1000 Wilshire Boulevard, 22nd Fl
Los Angeles, CA 90017
(213) 330-8434
william.lutz@starrcompanies.com
John McDevitt
Liberty Mutual Group
20 Riverside Rd
Weston, MA 02493-2206
(617) 243-7918
Fax: (866) 547-4882
john.mcdevitt@libertymutual.com
Mary Alice McNamara
Travelers
111 Schilling Rd
Hunt Valley, MD 21031-1110
(443) 353-2130
Fax: (443) 353-1137
mmcnamar@travelers.com
Henry Minissale
ACE USA
436 Walnut St, WA10
Philadelphia, PA 19106
(215) 640-2641
Fax: (215) 640-5474
Vincent Miseo
Vincent C Miseo
211 Washington Corner Rd
Bernardsville, NJ 07924
(201) 267-7536
vcmiseolaw@gmail.com
Caryn Mohan-Maxfield
The Walsh Group
929 W Adams St
Chicago, IL 60607-3037
(312) 563-5936
cmaxfield@walshgroup.com
Shannah Morris
Frost Brown Todd LLC
9277 Centre Pointe Dr, Ste 300
West Chester, OH 45069-4866
(513) 870-8220
Fax: (513) 870-0999
smorris@fbtlaw.com
Vice-Chair
Robert O’Brien
Liberty Mutual Group
9450 Seward Rd
Fairfield, OH 45014-5412
(513) 867-3718
Fax: (866) 442-4060
robert.obrien@libertymutual.com
Derek Popeil
Chubb
15 Mountain View Rd
Warren, NJ 07059
(908) 903-3182
Fax: (908) 903-5537
dpopeil@chubb.com
Stephen Rae
Liberty Mutual Group
450 Plymouth Rd, Ste 400
Plymouth Meeting, PA
19462-1644
(610) 832-8254
Fax: (610) 940-9112
stephen.rae@libertymutual.com
Frederick Rettig
State Farm Insurance
One State Farm, Plaza A-3
Bloomington, IL 61710-0001
(309) 766-5051
fred.rettig.c8f1@statefarm.com
John Riddle
Strasburger & Price LLP
901 Main St, Ste 4400
Dallas, TX 75202-3729
(214) 651-4672
Fax: (214) 659-4038
john.riddle@strasburger.com
Kenneth Rockenbach
Liberty Mutual Gr
1001 4th Ave, 17th Fl
Seattle, WA 98154
(206) 473-3350
Fax: (855) 318-4099
kenneth.rockenbach@
libertymutual.com
Edward Rubacha
Jennings Haug
& Cunningham LLP
2800 N Central Ave, Ste 1800
Phoenix, AZ 85004-1049
(602) 234-7800
Fax: (602) 277-5595
er@jhc-law.com
John Sebastian
Watt Tieder Hoffar
& Fitzgerald LLP
10 S Wacker Dr, Ste 2935
Chicago, IL 60606-7411
(312) 219-6900
Fax: (312) 559-2758
jsebastian@watttieder.com
Jan Sokol
Stewart Sokol & Larkin LLC
2300 SW 1st Ave, Ste 200
Portland, OR 97201-5047
(503) 221-0699
Fax: (503) 227-5028
jdsokol@lawssl.com
Scott Spearing
Hermes Netburn O’Connor
& Spearing PC
265 Franklin St, Fl 7
Boston, MA 02110-3113
(617) 728-0050
Fax: (617) 728-0052
sspearing@hermesnetburn.com
W Speicher
Zurich
3787 Sells Mill Rd
Taneytown, MD 21787
(410) 840-9144
Fax: (800) 329-6106
w.glenn.speicher@zurichna.com
Michael Spinelli
Cashin Spinelli & Ferretti LLC
22 Tanwood Dr
Massapequa, NY 11758
Fax: (631) 737-9171
mwspinelli@csfllc.com
Michael Stover
Wright Constable & Skeen LLP
100 N Charles St, Fl 16
Baltimore, MD 21201-3805
(410) 659-1321
Fax: (410) 659-1350
mstover@wcslaw.com

4. Fidelity & Surety Law Committee Newsletter Fall 2016
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Dee Studler
SDC CPAs LLC
1444 N Farnsworth Ave, Ste 500
Aurora, IL 60505-1644
(630) 820-5770
Fax: (630) 820-5765
dstudler@sdccpa.com
Frank Tanzola
International Fidelity Insurance
Company
1 Newark Ctr, Fl 20
Newark, NJ 07102-5219
(973) 776-8770
Fax: (973) 623-8006
ftanzola@ific.com
Ty Thompson
Mills Paskert Divers
100 N Tampa St, Ste 3700
Tampa, FL 33602-5835
(813) 229-3500
Fax: (813) 229-3502
tthompson@mpdlegal.com
Richard Towle
Chubb Limited
15 Mountainview Rd
Warren, NJ 07059-6795
(908) 903-3423
Fax: (908) 903-3030
rtowle@chubb.com
Thomas Vollbrecht
Fabyanske Westra Hart &
Thomson P.A.
333 S 7th St, Ste 2600
Minneapolis, MN 55402-2437
(612) 359-7659
tvollbrecht@fwhtlaw.com
Patricia Wager
Torre Lentz Gamell Gary &
Rittmaster LLP
100 Jericho Quadrangle, Ste 309
Jericho, NY 11753-2702
(516) 240-8969
Fax: (516) 240-8950
pwager@tlggr.com
Courtney Walker
Berkshire Hathaway Specialty
Insurance
4539 Laurelwood Dr,
Memphis, TN 38117-3507
(617) 834-8652
courtney.walker@bhspecialty.
com
Justin Wear
Manier & Herod
150 4th Ave N, Ste 2200
Nashville, TN 37219-2494
(615) 244-0030
Fax: (615) 242-4203
jwear@manierherod.com
Michael Weber
Dinsmore & Shohl LLP
227 W Monroe St, Ste 3850
Chicago, IL 60606
(312) 775-1742
Fax: (312) 372-6085
michael.weber@dinsmore.com
Blake Wilcox
Liberty Mutual Group
1001 Fourth Avenue, Fl 47
Seattle, WA 98154
(206) 473-3264
Fax: (425) 376-6533
blake.wilcox@libertymutual.com
Douglas Wills
Chubb
15 Mountainview Rd
Warren, NJ 07059-6795
(908) 903-5339
Fax: (908) 903-5537
dwills@chubb.com
©2016 American Bar Association, Tort Trial & Insurance Practice Section, 321 North Clark Street, Chicago, Illinois 60654; (312)
988-5607. All rights reserved.
The opinions herein are the authors’ and do not necessarily represent the views or policies of the ABA, TIPS or the Fidelity and Surety
Law Committee. Articles should not be reproduced without written permission from the Copyrights & Contracts office (copyright@
americanbar.org).
Editorial Policy: This Newsletter publishes information of interest to members of the Fidelity and Surety Law Committee of the Tort Trial
& Insurance Practice Section of the American Bar Association — including reports, personal opinions, practice news, developing law
and practice tips by the membership, as well as contributions of interest by nonmembers. Neither the ABA, the Section, the Committee,
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5. Fidelity & Surety Law Committee Newsletter Fall 2016
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It is an honor for me to write my first “From the Chair” greeting to all of you. As
many of you probably know, at the ABA annual meeting in August, I succeeded Gary
Valeriano as Chair of the FSLC. On both my own behalf and on behalf of the FSLC
at large, thank you Gary for all of your hard work over the past couple of years. And a
similar thanks to everyone else who participates in FSLC Leadership. I look forward to
working with all of you.
I am excited about the year of programs we have ahead of us. In just a couple
of weeks, we’ll be together for the FSLC Fall Meeting. This year’s meeting is at a
new location for the fall – the Fairmont Millennium hotel in Chicago – and focuses
on the fourth edition of one of the most important fidelity books we publish: Financial
Institution Bonds. I am very happy that, once again, the fall meeting is being held in conjunction with the
Fidelity Law Association’s annual meeting on November 9, with the FSLC Fall Meeting on November 10-11.
Thanks (in advance) to Mike Keeley for his efforts with the book, and to Megan Manogue and Joel Wiegert,
our program co-chairs, for putting together an outstanding agenda. The FLA always puts on an outstanding
program, so if your work or practice has anything to do with fidelity law, and you have not already registered
for these programs, you should! You can register on-line for the FSLC Fall Meeting at americanbar.org, and
for the FLA at fidelitylaw.org.
We’re doing everything we can to avoid snow at the 2017 Mid-Winter Meeting. This year’s MWM will
be at the Roosevelt Hotel in New Orleans on January 19-20. If it snows there, I give up. The Thursday
construction program will focus on federal contracting, chaired by Stacy Hipsak-Goetz, John Gillum, and Matt
Bouchard. The Friday surety program will be something we haven’t done before, discussing suretyship in a
global economy: from bonding projects overseas, to international indemnity and indemnitors, and everything
in between. And the fidelity program follows in the footsteps of last year’s remarkably well-received (and
well-acted) program, taking the facts from last year’s mediation program and, using similar video vignettes,
running through the life of the claim, from inception through summary judgment. The brochure for the MWM
should be available at the Fall Meeting. Don’t forget the leadership meetings on January 18 as well.
The 2016-17 FSLC program year will conclude in Naples, Florida, at the Ritz-Carlton Golf Resort, with
the FSLC Spring surety meeting on May 4-5. Patrick Laverty and Cindy Rodgers-Waire will be co-chairing
the program, which will center upon a new publication, The Annotated Performance Bond. In addition to
these “live” programs, we will have a surety webinar this winter on collateral deposit, and we’re also working
on a webinar on a fidelity topic.
Finally, I mentioned FSLC Leadership above. As we begin a new FSLC year, I want to stress that none of
these programs happen, and none of the FSLC’s remarkable success occurs, without the work of our Divisions
and Subdivisions. That’s where you can get involved. If you have any interest whatsoever in joining any of
our Divisions or Subdivisions or in otherwise becoming part of FSLC Leadership, please send me an e-mail
at afriedman@csglaw.com and we’ll make it happen.
I look forward to seeing you in Chicago, New Orleans, and Naples, and to hearing from you during the course
of the year. Be on the lookout for more information about all of our upcoming programs and activities.
Adam P. Friedman
Chiesa Shahinian & Giantomasi PC
Chair, ABA TIPS Fidelity and Surety Law Committee
LETTER FROM THE CHAIR

6. Fidelity & Surety Law Committee Newsletter Fall 2016
6 6
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7. Fidelity & Surety Law Committee Newsletter Fall 2016
7 7
SOCIAL ENGINEERING FRAUD IN THE
CONTEXT OF COMPUTER AND FUNDS
TRANSFER FRAUD COVERAGES
By: David S. Wilson, Chris McKibbin and Stuart Woody
Blaney McMurtry LLP, Toronto
Introduction
Historically, computer fraud
and funds transfer fraud coverages
in commercial crime policies have
been fairly circumscribed in both
intent and effect. Computer fraud
coverages have typically been
interpreted as being limited to
hacking incidents, i.e., where the
fraudster gains unauthorized access
or entry to a computer in order to
makeanunauthorizedtransferoffunds. Recentdecisions
such as that of the U.S. District Court for the Central
District of California in Pestmaster Services, Inc. v.
Travelers Casualty and Surety Company of America1
and
that of the Court of Appeals of New York in Universal
American Corp. v. National Union Fire Insurance
Company of Pittsburgh, PA2
have confirmed that this
is the general intent of the coverage; in Pestmaster, the
Court observed that indemnity will generally not be
found “where an authorized user utilized the system
as intended.” Funds transfer fraud coverages typically
require that fraudulent instructions be transmitted to
the insured’s financial institution, resulting in a loss of
Money or Securities, as defined.
With enhancements in cybersecurity, many fraudsters
havefoundthatitiseasierto“hack”humansthancomputers,
and have turned to various forms of social engineering
fraud. Very often, the weakest point in an organization’s
security system is the employees themselves, and
fraudsters have obtained hundreds of millions of dollars by
using fraudulent pretexts to induce insureds’ employees to
voluntarily part with insureds’ funds.
Common Social Engineering Fraud Scenarios
Generally, social engineering frauds fall within
one of the following four categories: (i) the fake client
scam; (ii) the executive impersonation scam; (iii) the
vendor impersonation scam; and, (iv) the law firm
collection scam.
● Fake Client Scams: These target financial
institutions or other entities that handle client funds.
The financial institution’s employee is induced by email,
phone or fax to wire client funds to a “new” account.
Verification procedures are either absent or not followed,
and the funds are typically unrecoverable. The victim
must reimburse its client for the lost funds, and then
looks to its crime insurer for indemnity.
● Executive Impersonation Scams: These target
a wide range of organizations. Typically, the “CEO”
or other high-ranking executive contacts the finance
department by spoof email or similar-domain email. The
pretext is often an emergency payment relating to a “top
secret” acquisition, merger or emergency situation. The
fraudster will direct the finance department employee to
wire funds to a “special” account. The lost funds are
typically unrecoverable, and the victim turns to its crime
insurer for indemnity.
● Vendor Impersonation Scams: The fraudster
purports to be an employee of a legitimate vendor of the
victim, and contacts the victim’s employee to request that
the vendor’s banking information be changed. The victim
wires funds to the “new” account. By the time that the
legitimate vendor follows up with the victim as to why it
has not been paid, the funds are typically unrecoverable.
● Law Firm Collection Scams: The fraudster
poses as a foreign “client” in a collection matter. The
“debtor” is in collusion with the “client”. As soon as the
lawyer demands payment, the “debtor” promptly issues a
(counterfeit) cheque payable to the lawyer’s trust account.
The lawyer is instructed to wire the funds (less his or
her fees) to the “client” - invariably on an urgent basis
- before the cheque clears. Once the cheque is returned
as counterfeit, the lawyer’s trust account is in deficit and
the funds are typically unrecoverable. Given the limited
scope of trust account overdraft coverage under most
lawyers’ professional liability policies, the lawyer often
looks to his or her crime insurer for indemnity.
1 2014 WL 3844627 (C.D. Cal.).
2 38 Misc.3d 859, 959 N.Y.S.2d 849 (N.Y. Sup. 2013), aff’d as modified 110 A.D.3d 434 (N.Y.A.D. 1st. Dept.), aff’d., 25 N.Y.3d 675, 37 N.E.3d 78 (N.Y. App. 2015).
Continued on page 14

8. Fidelity & Surety Law Committee Newsletter Fall 2016
8 8
DEFENDING THE SURETY USING FAR 28.106-5 AND
THE CONSENT OF SURETY REQUIREMENT FOR
FEDERAL CONTRACT MODIFICATIONS OVER $50,000
OR 25% OF CONTRACT VALUE
By: Rebecca Glos, Watt, Tieder, Hoffar &Fitzgerald, L.L.P.
This article explores Federal
Acquisition Regulation (“FAR”)
28.106-5 and its effect on limiting the ability of the
U.S. Government to increase a Miller Act surety’s bond
coverage without the surety’s consent. FAR 28.106-5
provides a clear requirement that Consent of Surety is
required for contract modifications over $50,000 or 25%
of contract value. This Consent of Surety requirement
is a powerful sword for the Miller Act surety when
negotiating with the Government, both before and after
a default termination of its principal. FAR 28.106-5
provides as follows:
28.106-5 Consent of surety.
When any contract is modified, the contracting
officer shall obtain the consent of surety if –
An additional bond is obtained from other than the
original surety:
No additional bond is required and –
The modification is for new work beyond the scope
of the original contract; or
The modification does not change the contract scope
but changes the contract price (upward or downward)
by more than 25 percent or $50,000; or
Consent of surety is required for a novation agreement
(see Subpart 42.12).
When a contract for which performance or payment
is secured by any of the types of security listed in
28.204 is modified as described in paragraph (a) of
this subsection, no consent of surety is required.
Agencies shall use Standard Form 1414, Consent of
Surety, for all types of contracts.
(Emphasis added)
FAR 28.106-5 provides the Miller Act surety
with protection from excessive Government-initiated
contract modifications by assuring that the original
underwriting expectations are not changed without
the surety’s consent. Consider the following example:
Principal A has a contract with the Government to build
a project for $50 million. The Government issues a
unilateral contract modification adding $20 million of
work to the principal’s scope which the principal does
not dispute. In the event the principal defaults, does
the surety’s Miller Act bond cover the additional work?
FAR 28.106-5 says no – not without the surety’s consent.
The significance of such a safeguard offered by FAR
28.106-5 is that, often times, circumstances can change.
A bond principal’s financial capability may change over
the course of the project. A surety may lose confidence
in the principal’s ability to do the work. Regardless of
the circumstances leading to the surety’s reluctance to
expand its coverage, the good news that it may not have
to if the additional work increases the original contract
price by more than 25 percent or $50,000.
Consider this second example: Principal B has a
contract with the Government to build a project starting
onJanuary1,2015. Duetoissuessolelywithinthecontrol
of the Government, notice to proceed on the project
is suspended indefinitely. During the suspension, the
principal suffers delay damages, which the Government
acknowledges and agrees to compensate by contract
modification thereby increasing the contract price by
$51,000. Does the surety’s Miller Act bond cover the
additional work? FAR 28.106-5 says no – not without
the consent of the surety. Furthermore, if the financial
circumstances of the principal have changed during
the delay period, such that the principal can no longer
perform the work, the surety has an argument that the
unauthorized delay exonerates the surety’s bonds. In our
example, the principal may have been financially capable
to perform the bonded work in 2015. Nevertheless, the
delay not only cost $51,000 to remedy, but it pushed the
principal (and surety) into a period when the principal
could no longer perform the work.
Case authority interpreting FAR 28.106-5 is sparse,
thereby leaving the clear and obvious wording of the
regulation as the only guidance. See Am. Contractors
Indem. Co. v. United States, 111 Fed. Cl. 240, 249
(2013) aff’d sub nom. Am. Contractors Indem. Co. v.
United States, 557 F. App’x 979 (Fed. Cir. 2014) (“As
Continued on page 16

9. Fidelity & Surety Law Committee Newsletter Fall 2016
9 9
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10. Fidelity & Surety Law Committee Newsletter Fall 2016
10 10
In the Watt Tieder Winter 2015-
2016 Newsletter, we previewed the
Supreme Court’s much-anticipated
decision regarding the viability of
the “implied certification” theory under the federal False
Claims Act (“FCA”). On June 16, 2016, the Supreme
Court in Universal Health Services, Inc. v. United States
et al. ex rel. Escobar et al., 136 S.Ct. 1989 (2016) issued
its decision clarifying the scope of implied certification.
Under the implied certification theory, contractors who
have submitted otherwise valid claims for payment may
nevertheless be subject to FCA liability if they are in
violationofamaterialstatutory,regulatory,orcontractual
requirement. Although the Supreme Court’s recent
decision in Escobar upholds the doctrine of implied
certification, there is a silver lining for those contractors
who have unwittingly violated a statutory, regulatory or
contractual requirement. Specifically, the court actually
restricted the FCA’s potential scope through a rigorous
and demanding standard of “materiality.”
In Escobar, parents brought a FCA claim against
a clinic after their daughter died while under the care
of unlicensed clinic staff. The parents claimed that the
clinic failed to comply with state regulations governing
qualifications and supervision of staff members. The
First Circuit found FCA liability on the basis of implied
certification. On appeal, the Supreme Court’s decision
addressed two separate issues: (1) whether the implied
certification theory is valid, and, if it is, (2) whether
a contractor’s claim is false if the particular statute,
regulation, or contract provision does not expressly state
that compliance is a condition of payment.
In response to the first question, the Court held that
the implied certification theory may provide a basis for
FCA liability when a defendant who submits a claim for
payment makes certain representations about the goods
or services provided but omits violations of material
statutory, regulatory, or contractual requirements.
However, two conditions must be present before
liability attaches. First, the claim must make specific
representations about the goods or services. In other
words, the claim must not merely request payment.
Second, the failure to disclose noncompliance with
material requirements must make the defendant’s
representations “misleading half-truths.” Because
the clinic submitted payment codes representing
certain treatments had been provided and identifiers
corresponding to specific job titles requiring a license, the
Court found that the clinic’s failure to disclose its staff’s
licensing violations constituted a misrepresentation.
The Court next considered whether liability under the
implied certification theory requires compliance with a
statutory, regulatory, or contractual requirement to be an
express condition of payment. The Court answered this
question in the negative, holding that such requirements
do not have to be expressly designated as conditions of
payment to be considered material to the government’s
payment decision. However, the Court also noted that the
government’s designation of a particular requirement as
a condition of payment is not automatically dispositive
of materiality. Rather, the relevant inquiry is whether
the defendant knowingly violated a requirement it knew
was material to the government’s payment decision.
The Court’s decision is notable due to its adoption
of an exacting “materiality” standard. The Court
explained that materiality looks to “the effect on the
likely or actual behavior of the recipient of the alleged
misrepresentation.” Thus, materiality is not found
when noncompliance is minor or insubstantial. Nor can
materiality be found simply because the government
has the option to decline payment if it knew about the
violation. The Court also stated that if the government
pays a claim despite knowledge that requirements were
violated, that constitutes “very strong evidence” that
the requirement is not material. Conversely, evidence
that the defendant knows the government consistently
refuses to pay claims based on noncompliance with a
particular requirement is evidence of materiality.
In sum, the Supreme Court’s decision represents a
very measured approach towards implied certification.
The Court has provided both a means to prevent fraud
and abuse without targeting unwary contractors for
simple regulatory violations. While contractors must
still remain mindful of compliance with important
statutory, regulatory, and contractual requirements, the
Court’s decision provides protection against an overly
zealous interpretation of the FCA.
THE SUPREME COURT UPHOLDS IMPLIED
CERTIFICATION UNDER THE FALSE CLAIMS ACT BUT
IMPOSES “RIGOROUS MATERIALITY” STANDARD
By: Robyn N. Burrows, Watt, Tieder, Hoffar & Fitzgerald, L.L.P.

11. Fidelity & Surety Law Committee Newsletter Fall 2016
11 11
LIFECYCLES OF LARGE...
Continued from page 1
this paper profiles the top 100 construction and design
firms in the United States from just over 50 years ago
to identify how many firms survived, how many firms
were acquired, and how many firms failed. This paper
also explains the common reasons for success or failure
of these AEC firms.
II. Survival Rate of Large Contractors
Engineering New Record (“ENR”) first published
its first “Top 400 Contractors” list in 1964, just over 50
years ago. This article compares the top 100 contractors
noted on this 1964 list with ENR’s top 100 contractors
of 2014, to determine if each individual contractor: (1)
survived; (2) survived but dropped their construction
program; (3) were acquired; or (4) failed. The results of
this analysis are as follows:
Contractors that Survived: 26
Contractors that were Acquired: 41
Contractors that Failed: 22
Contractors that Survived
but Dropped Construction: 11
Total Contractors: 100
As noted above, the most common exit strategy for
contractors is through acquisition, which occurred to 41
of the 100 contractors. The success of the acquisitions
was mixed at best. Of the 41 acquisitions, 22 failed and
19 survived. Thus, large acquisitions have less than a 50
percent survival rate.
The ownership makeup of the survivors is a blend of
public companies, family-owned private businesses, and
employee-owned firms; thus, there is no one ownership
model that best fits large contractors. Also, of the 26
surviving companies, exactly half either moved up
ENR’s top contractor list between 1964 and 2014 or
maintained the same rank, and the other half moved
down the list or are no longer ranked. For the most
part, the firms that moved down the list failed to enter
international markets to bolster overall work programs.
In terms of the 22 contractors that failed over this
timeframe, failure was often a result of poor leadership
transitions, shifts in market conditions, improper
investmentsinnon-coresectors,orfinancialissuesrelated
to overly-large construction contracts. One notable
market shift that affected many contractors in the 1970s
was the compression of the nuclear sector. Companies
that repositioned in the 1970s to take advantage of the
environmental cleanup boom of the 1980s and 1990s,
or the chemical/petroleum expansion after the Gulf War,
often achieved noteworthy success. However, several of
these same firms that rode the environmental wave then
failed in the late 1990s or early 2000s after this federal
work dried up.
In sum, if you add the 26 companies that survived
to the 13 successful acquisitions, this equates to a
“large contractor success ratio” of 39% over a fifty-
year time span. While a 61% failure rate might sound
high, I contend that it is quite low when you consider
the constant market shifts, the high-risk and low-
margin nature of construction, and the five-decade
sample period.
III. Survival Rates of Large Design Firms
Overall, the results of the top 100 design firms are
similar to the results of top 100 contractors between
1964 and 2014, as noted below:
Contractors that Survived: 24
Contractors that were Acquired: 35
Contractors that Failed: 41
Total Contractors: 100
One notable difference exists between the design
firm data and the contractor data—the majority of the
35 design firm acquisitions proved to be successful,
while over half of the 41 contractor acquisitions failed
This suggests that entering new regions and markets
via acquisition makes more sense in the design industry
than in the construction industry.
Many of the top design firms are either publicly
traded (12 of the top 20) or employee-owned (7 out of
20). Publicly traded companies trade at much higher
multiples that privately held companies, which gives
public firms more capital to make strategic acquisitions.
This difference in valuation between public and private
markets drives deal flow (public companies buying
private companies). Regardless of ownership structure,
many design firms that did not maintain a formal M&A
strategy fell out of the top 100 listing over time. Thus,
design firms that lack the personnel, capital, and/or an
appetite for risk (vis-a-vis M&A transactions) have a
difficult time keeping pace with the overall industry.
One recent trend is for large design firms, such as
AECOM, to acquire pure contractors. The converse is

12. Fidelity & Surety Law Committee Newsletter Fall 2016
12 12
not true—only one pure contractor triggered a merger
with a large architectural firm (The Beck Group’s merger
with Urban Architecture in 1999). Because this trend
just developed over the past five years, time will tell if
this strategy proves to be successful.
Likecontractors,designfirmsaregeneratingmoreand
more revenue from international work. In fact, domestic
design revenue over the past 50 years has increased at an
annual rate of 5.3%, while international design revenue
during this time has increased at an annual rate of 9.8%.
In addition, design firms must also keep a close eye on
market shifts. For instance, the largest design sector in
the 1980s and to the mid-1990s was hazardous waste,
primarily due to Congress’ passage of Comprehensive
Environmental Response, Compensation, and Liability
Act legislation (“CERCLA”) in 1980 and Superfund
Amendments and Reauthorization Act (“SARA”) in
1986. Federal and state funding for this work created
a massive industry for engineers and contractors alike.
However, in the early to mid-1990s funding for this
work dried up, which caused poor performance or worse,
failure, of many design firms.
In 1990, 15 of the top 100 design firms in the United
States derived most of its revenue from hazardous
waste related projects. Nearly all of these firms lacked
the proper diversification necessary to allow for proper
repositioning once an inevitable market shift occurred,
which started to take place in the early to mid-1990s.
Consequently, 11 of the 15 firms either sold out or went
bankrupt (Dames & Moore; ICF Kaiser; IT Corporation,
etc.). Furthermore, the remaining firms have struggled
to keep pace with average design company performance
over the past three decades.
In conclusion, if you add the 24 design firms that
survived to the 27 successful acquisitions, this equates
to a “large design firm success ratio” of 51% over the
50-year time frame, which exceeds the success ratio for
contractors of 39%. It should be interesting to see how
the design firm’s success ratio is affected by the recent
trend of contractor acquisitions.
IV. Conclusions
Managing a large design and/or construction
company in the United States is no easy task and the
odds are against long term success. Nearly all motivated
employees desire to work for companies that offer
continued growth potential. Moreover, boards and
shareholders typically push construction executives
to continue growth patterns to maximize shareholder
value. Year over year growth, however, is difficult in
light of the ever swings in economic conditions, not to
mention technological advances or safety incidents that
can displace industries overnight (i.e. Three Mile Island
nearly shut down the nuclear power industry).
39 of the top 100 contractors and 51 of the top 100
design firms survived over the 50-year profile period.
The primary difference between the two industries is the
success of acquisitions. A large number of contractors
were acquired by large companies such as Raytheon,
Northrup Grumon, and Air Products Inc., that sought
to diversify into the construction industry. In every
instance, the larger companies later shed the construction
programs. When companies add construction as a non-
core offering, the results were dreadful. To the contrary,
diversification for design firms is necessary to maintain
or grow market share. The majority of design firm
acquisitions were made by large publicly traded design
companies that have capital and market valuations that
promote frequent M&A activity (AECOM, Jacobs, Tetra
Tech, Parsons, etc.). In fact, the design firms that do
not focus on M&A activity often fall off the ENR top
designer listing over time.
VISIT US
ON THE WEB AT:
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13. Fidelity & Surety Law Committee Newsletter Fall 2016
13 13

14. Fidelity & Surety Law Committee Newsletter Fall 2016
14 14
Coverage for Social Engineering Fraud Losses
Social engineering fraud losses do not fall within
the intended scope of the computer fraud or funds
transfer fraud coverages, primarily because it is the
insured’s duped employee, and not the fraudster, who
transfers the insured’s property. Such losses typically
lack the element of unauthorized access to an insured’s
computer system that is required for coverage under
the computer fraud insuring agreement. They also fall
outside of the funds transfer fraud insuring agreement,
as any instructions to the insured’s financial institution
are made by the insured’s own employee and are, by
definition, not themselves fraudulent (even if they are
based on a fraudulently-induced misapprehension as to
the legitimacy of the transaction).
To address this perceived lacuna in coverage,
underwriters have recently introduced discrete social
engineering fraud coverages, typically added by
endorsement to commercial crime policies. The
first such coverages were introduced in Canada in
September 2014, hot on the heels of their introduction
in the United States.
Unfortunately, the industry’s introduction of social
engineering fraud coverage has not prevented numerous
disputed and litigated claims in which insureds who do
not have the new coverage have contended that their
computer fraud or funds transfer fraud coverages should
respond to social engineering fraud losses.
As of the writing of this article, there do not appear to
be any decisions that interpret social engineering fraud
coverages. However, there have been a few cases in which
courts have dealt with insureds’ contentions that their
social engineering fraud losses are covered by the forms
of computer fraud coverages there in issue. These include:
● Apache: In the August 7, 2015 decision of the
U.S. District Court for the Southern District of Texas
in Apache Corporation v. Great American Insurance
Company,3
the Court found coverage under the
computer fraud coverage for a vendor impersonation
scam, largely on the basis that restricting the
application of the policy solely to frauds perpetrated
by hacking would render the policy almost pointless.
Given the considerable scope of application for
computer fraud coverage to incidents of hacking or
unauthorized access or entry, the reasoning inApache
is debatable. The decision is currently under appeal
to the Fifth Circuit Court of Appeals.4
● Medidata: In Medidata Solutions Inc. v. Federal
Insurance Co.,5
a case currently before the U.S.
District Court for the Southern District of New York,
the insured’s employee fell victim to an executive
impersonation fraud and was induced by a fraudulent
email to wire $4.77 million to the fraudster’s
account. Medidata’s complaint asserts coverage
under each of the computer fraud and funds transfer
fraud coverages. The parties brought cross-motions
for summary judgment. On March 10, 2016, both
motions were denied, without prejudice, due to an
insufficient record. The parties were granted leave to
conduct limited expert discovery.
● Owens, Schine: In the 2011 decision of the
Connecticut Superior Court in Owens, Schine &
Nicola, P.C. v. Travelers Casualty & Surety Co.
of America,6
which predates the introduction of
social engineering fraud coverages, the Court found
coverage for a law firm collection scam loss, holding
that the phony retainer emails exchanged between the
fraudster and the firm were a “cause” of the firm’s
loss. As the emails represented the use of a computer,
the loss fell within the computer fraud coverage.
Owens, Schine has often been criticized, and has been
distinguished in other decisions interpreting computer
fraud coverages.7
The Court’s decision was ultimately
vacated by stipulation of the parties.8
These cases represent attempts by insureds to
transform computer fraud coverages into social
engineering fraud coverage.The uncertainty surrounding
whether computer or funds transfer fraud coverages
might or might not be interpreted to cover social
engineering fraud losses creates a challenge for insurers,
brokers and, ultimately, insureds, in their attempts to
obtain appropriate coverages at a fair cost.
SOCIAL ENGINEERING FRAUD...
Continued from page 7
3 2015 WL 7709584 (S.D. Tex.).
4 2016 WL 6090901 (5th Cir. Oct. 18, 2016) Note: at the time of publication, the Fifth Circuit had just released its decision reversing the grant of summary judgment to Apache and
rendering judgment in favor of Great American instead. See our analysis of the Fifth Circuit’s decision here: https://blaneysfidelityblog.com/2016/10/24/apache-corporation-fifth-
circuit-holds-that-commercial-crime-policys-computer-fraud-coverage-does-not-extend-to-social-engineering-fraud-loss/
5 No. 1:15-cv-00907 (S.D.N.Y. Mar. 10, 2016).
6 52 Conn. L. Rptr. 236 (Conn. Super. Ct. 2011).
7 See, e.g., Universal American Corp. v. National Union Fire Insurance Company of Pittsburgh, PA, 25 N.Y.3d 675 (2015) at 682-683.
8 2012 WL 12246940 (Conn. Super. Ct. Apr. 18, 2012).

15. Fidelity & Surety Law Committee Newsletter Fall 2016
15 15
Underwriting Solutions
There are several approaches insurers may take to
address this challenge.
1. Targeted Exclusions in Base Commercial Crime
Wording: Some insurers include social engineering
fraud-targeted exclusions to their base wordings, and
have drafted their social engineering fraud endorsements
so that these exclusions do not apply to the endorsement.
One such exclusion is the “authorized entry” exclusion
applied in the July 8, 2016 decision of the U.S. District
Court for the Western District of Washington in Aqua Star
(USA) Corp. v. Travelers Casualty and Surety Company
of America.9
In Aqua Star, the insured was the victim of
a vendor impersonation fraud and asserted a claim under
its computer fraud coverage (it does not appear from
the decision that the insured maintained separate social
engineering fraud coverage). Travelers’ Wrap+ Crime
Policy contained an exclusion whereby the policy:10
will not apply to loss resulting directly or
indirectly from the input of Electronic Data by a
natural person having the authority to enter the
Insured’s Computer System.
The exclusion applied to the loss, insofar as the
fraudulent banking details were information, which fell
within the meaning of “Electronic Data”. The employee
in question was a natural person and had the authority to
enter banking details into Aqua Star’s computer system.
Another exclusion is the “voluntary parting”
exclusion, an example of which is as follows:11
Loss resulting from your, or anyone acting on
your express or implied authority, being induced
by any dishonest act to voluntarily part with title
to or possession of any property.
Appropriately-worded exclusions serve to reinforce
the intent of the computer fraud and funds transfer fraud
coverages as most courts have historically interpreted them.
2. The “Non-Optional” Social Engineering Fraud
Endorsement: Some insurers now add social engineering
fraud endorsements to all, or virtually all, commercial
crime policies they underwrite. These endorsements
typically feature a sublimit of liability that is negotiated
with insureds based on their particular needs and risk
assessments. Making social engineering fraud coverage
a quasi-standard coverage supports insurers’ legitimate
interest in maintaining the boundary between computer
fraud and social engineering fraud coverages. Courts
interpreting fidelity policies have generally held that they
must be interpreted as a whole, and that interpretations
that render parts of the policy redundant or superfluous
are disfavoured.12
If a loss clearly falls within the social
engineering fraud coverage, this supports the argument that
it should not be interpreted to also fall into other coverages.
3. Offering Social Engineering Fraud Coverage to
Applicants (and documenting it): One of the fundamental
principles of policy interpretation is the “reasonable
expectations” doctrine, which is generally expressed
as encompassing the reasonable expectations of both
the insured and the insurer.13
It is arguable that, where
an insured has expressly been offered a coverage, and
makes an informed decision to decline it, the insured
then has no reasonable expectation that a loss falling
squarely within that coverage will be covered under
some part of the policy that it did purchase. Appropriate
evidence of such coverage being offered and declined
may assist with a “reasonable expectations” argument in
the event of a disputed claim or litigation.
Conclusion
In our view, it is important to maintain the traditional
boundary between computer fraud/funds transfer fraud
coverages and social engineering fraud coverage. The
proliferation of social engineering frauds has exposed
insureds to greater risk; however, insurers have responded
byunderwritingdiscretesocialengineeringfraudcoverages.
There is no need for courts to depart from the traditional
interpretation of computer fraud and funds transfer fraud
coverage and transform them into social engineering fraud
coverage. To do so creates uncertainty on the part of
insureds, insurers and brokers, and makes it more difficult
for all industry participants to ensure that insureds obtain
the coverages they require at a fair price.
David S. Wilson and Chris McKibbin are partners, and Stuart
Woody is an associate, with the Fidelity Practice Group of Blaney
McMurtry LLP in Toronto, Canada. Their blog, Blaneys Fidelity
Blog, may be accessed here: https://blaneysfidelityblog.com/
9 Aqua Star (USA) Corp. v. Travelers Casualty and Surety Company of America, 2016 WL 3655265 (W.D. Wash.).
10 Ibid. at 2.
11 Example from Methodist Health System Foundation, Inc. v. Hartford Fire Ins. Co., 834 F.Supp.2d 493 (E.D. La. 2011).
12 See, e.g., Emcor Group, Inc. v. Great American Ins. Co., 2013 WL 1315029 (D. Md. 2013) at 7, aff’d 636 Fed.Appx. 189 (4th Cir. 2016).
13 In Canada, the reasonable expectations doctrine expressly extends to the expectations of both the insured and the insurer: see Progressive Homes Ltd. v. Lombard General
Insurance Co. of Canada, 2010 SCC 33 at para. 23.

16. Fidelity & Surety Law Committee Newsletter Fall 2016
16 16
stated above, ACIC was a prior approval surety and the
increase in the bond amount [$240,000] is greater than
the $50,000 minimum stated in the regulation. Thus,
there is no dispute that 13 C.F.R. § 115.19(e) applies. The
question, rather, is whether ACIC agreed or acquiesced
to this alteration before it received written approval from
the SBA on June 2, 2004.”) Cf. In Re C.H. Hyperbarics,
Inc., ASBCA No. 49375, 04-1 B.C.A. (CCH) ¶ 32568
(Mar. 23, 2004) (“When the Contract was later amended
and the new contract price exceeded the total contract
award by more than 25 percent, the surety consented to
increase the amount of the bond by 100 percent of the
dollar amount of Modification No. P00003.”)
Notably, FAR 28.106-5 is a defense of the surety, not
the principal. The fact that a particular change increases
the contract price by 25% or $50,000 does not mean
that the principal is relinquished from having to obtain a
bond or that the extra work is not bondable. Rather, the
original surety is not “required” to bond the extra work
without its consent. FAR 28.102-2(d) provides that
when the contract price increases, the Government may
secure additional bonding through one of three methods:
Securing additional payment protection. If the
contract price increases, the Government must secure
any additional protection by directing the contractor to –
Increase the penal sum of the existing bond;
Obtain an additional bond; or
Furnish additional alternative payment protection.
The requirement to provide additional bonding exists
fortheprincipal,whilethereexistsnosimilarrequirement
for the existing surety on the bonded contract.
The FAR provisions requiring the surety’s consent
stem from a well-established understanding that “[t]he
surety bond embodies the principle that any material
change in the bonded contract, that increases the
surety’s risk or obligation without the surety’s consent,
affects the surety relationship.” Nat’l Sur. Corp. v.
United States, 118 F.3d 1542, 1544 (Fed. Cir. 1997).
“Specifically, a surety will be discharged entirely from
its obligations where the change to the underlying
agreement is cardinal, i.e., amounts to a substituted
contract or imposes fundamentally different risks on
the surety than those to which it had agreed. Where the
alteration is less than cardinal, the surety’s obligation ‘is
reduced to the extent of loss due to the modification.’”
Preferred Nat. Ins. Co. v. United States, 54 Fed. Cl. 600,
605 (2002). “For example, one ground for discharge is
when material modifications that increase the surety’s
risk are made to the bonded contract without the surety’s
consent.” Lumbermens Mut. Cas. Co. v. United States,
654 F.3d 1305, 1313 (Fed. Cir. 2011).
In practice, negotiating with the Government over
FAR 28.106-5 issues has been very straightforward.
Lacking significant contradictory case authority to
fight over, the parties are left with the plain wording
of the regulation. In one recent negotiation, a clever
Assistant United States Attorney tried to equate “notice”
to “consent.” The form Miller Act bond contains the
following language: “Notice of those modifications to
the Surety(ies) are waived.” Relying upon this notice
language, the Government relied on a body of case law
wherein the surety was not relieved when it was not
given notice of particular changes. See, e.g., United
States for the use of T.M.S. Mechanical Contractors, Inc.
v. Millers Mutual Fire Ins. Co., 42 F.2d 946, 952 (5th
Cir. 1991); Continental Bank & Trust Co. v. American
Bonding Co., 605 F.2d 1049 (8th Cir. 1979).
When relying upon FAR 28.106-5, the surety is not
suggesting that its express waiver of notice of changes
is meaningless. The Government is entitled to rely upon
the express terms of the Miller Act bond. However,
“notice” and “consent” are different. Regardless of what
notice is or is not given by the Government, the surety
retains the right to “consent” to contract modifications
over the regulatory thresholds. The Government cannot
expand the notice waive provision beyond its intended
scope, and rely upon the same to require unlimited extra
work from the surety.
These issues arise regularly in our construction
practice in all arenas – local, state and federal.
Fortunately, in the federal arena, the FAR provides
a clear rule regarding when consent is and is not
required.
DEFENDING THE SURETY...
Continued from page 8

17. Fidelity & Surety Law Committee Newsletter Fall 2016
17 17
November 2016
9-11 FSLC & FLA Fall Meeting Fairmont Chicago
Contact: Donald Quarles – 312/988-5708 Chicago, IL
December 2016
5 TIPS Free Member Monday CLE Free Teleconference
Contact: Ninah Moore – 312/988-5498
January 2017
12-14 Midwinter Symposium on Insurance &
Employee Benefits Hyatt Regency
Contact: Ninah Moore – 312/988-5498 Coral Gables, FL
19-21 Fidelity & Surety Committee Midwinter Mtg Roosevelt Hotel
Contact: Felisha Stewart – 312/988-5672 New Orleans, LA
February 2017
2-5 ABA Midyear Meeting Miami, FL
Contact: Felisha Stewart – 312/988-5672
23-25 Insurance Coverage Litigation Midyear Mtg Arizona Biltmore Rst
Contact: Felisha Stewart – 312/988-5672 & Spa, Phoenix AZ
March 2017
8-10 Transportation Mega Conference Sheraton New Orleans Hotel
Contact: Donald Quarles – 312/988-5702 New Orleans, LA
25-29 TIPS/ABOTA National Trial Academy TBD
Contact: Donald Quarles – 312/988-570
April 2017
6-7 Motor Vehicle Products Liability Program Arizona Biltmore Resort
Contact: Donald Quarles – 312/988-5708 & Spa, Phoenix AZ
7-8 Toxic Torts & Environmental Law Midyear Mtg Arizona Biltmore
Contact: Felisha Stewart – 312/988-5672 Resort & Spa, Phoenix, AZ
2016-2017 TIPS CALENDAR