aba committee news - fall 2016
TRANSCRIPT
Fall 2016
Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to Advance the Civil Justice System
Carbon nanotubes (CNTs) holdpromise for many beneficialapplications. However, there havebeen concerns and calls for amoratorium raised over “mountingevidence” that CNT may be the“new asbestos,”1 or at leastdeserving of “special toxicologicalattention” due to prior experienceswith asbestos.2 The shape and sizeof some agglomerated CNTs aresimilar to asbestos—the most“desirable.” And because CNTs forstructural utility are long andthin—characteristics thought toimpart increased potency to
asbestos fibers—discussions ofparallels between these twosubstances are natural. Thus, giventhe legacy of asbestos-relatedinjury and the thousands of caseslitigated each year, consideration ofpossible implications of the use ofCNTs in research and in consumerproducts is prudent.
First reported in 19913, CNTsepitomize the emerging field ofnanotechnology, defined by someas the “ability to measure, see,manipulate, and manufacturethings usually between 1 and100 nanometers.”4 CNTs are a typeof carbon-based engineerednanoparticle generally formed by
Uniting Plaintiff, Defense, Insurance, and Corporate Counsel toAdvance the Civil Justice System
Fall 2009
Toxic Torts and EnvironmentalLaw Committee
IN THIS ISSUECarbon 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 ExposuresAnd Injury From Benzene . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Burlington Northern: The Requisite Intent For Arranger LiabilityUnder Cercla . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2009-2010 TIPS Calendar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Continued on page 18
CommitteeNewsCommitteeNews
CARBON NANOTUBES: THE NEXT ASBESTOS?Fionna Mowat, Exponent, [email protected] Tsuji, Exponent, [email protected]
1 Miller, G. 2008. Mounting evidence that carbonnanotubes may be the new asbestos. Friends of theEarth Australia. Available at http://nano.foe.org.au.2 The Royal Society and Royal Academy ofEngineering (RS/RAE). 2004. Nanoscience andnanotechnologies. Royal Society and Royal Associationof Engineers. London: The Royal Society. Available athttp://www.royalsoc.ac.uk/.3 Iijima, S. 1991. Helical microtubules of graphiticcarbon. Nature (London) 354:56–58.4 National Science and Technology Council (NSTC).2007. The National Nanotechnology Initiative. StrategicPlan. Washington DC: NSTC, Committee onTechnology, Subcommittee on Nanoscale Science,Engineering, and Technology. December. Available athttp://www.nano.gov/ NNI_Strategic_Plan_2004.pdf.
LIFECYCLES OF LARGE AEC COMPANIESBy: 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 . . . . . . . . . . . . . . . . . . 1Letter From The Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Social Engineering Fraud in the Context of Computer and Funds Transfer Fraud Coverages . . . . . . . . . . . . . . . . . . . . . . 7Defending 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 . . . . . . . . . . . . . . . . 8The Supreme Court Upholds Implied Certification Under The False Claims Act But Imposes “Rigorous Materiality” Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102016-2017 TIPS Calendar . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Continued on page 11
1 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html2 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,
Fidelity & Surety Law Committee Newsletter Fall 2016
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ChairAdam FriedmanChiesa Shahinian &
Giantomasi PCOne Boland Drive
West Orange, NJ 07052(973) 530-2029
Fax: (973) [email protected]
Chair-ElectToni Reed
Strasburger & Price LLP901 Main St, Ste 4400Dallas, TX 75202-3729
(214) 651-4345Fax: (214) 659-4091
Council RepresentativeSam Poteet
Manier & Herod150 4th Ave N, Ste 2200
Nashville, TN 37219(615) 742-9321
Fax: (615) [email protected]
Diversity Vice-ChairIvette Gualdron
Zurich236 Rue Landry Rd
Saint Rose, LA 70087-3666(504) 471-2676
Fax: (504) [email protected]
Immediate Past ChairGary Valeriano
Anderson McPharlin & Conners LLP
707 Wilshire Boulevard, Ste 4000Los Angeles, CA 90017-3623
(213) 688-0080Fax: (213) 622-7594
Membership Vice-ChairScott Olson
SureTec Insurance Co9737 Great Hills Trl, Ste 320
Austin, TX 78759-6418(512) 732-0099
Fax: (512) [email protected]
Scope LiaisonDavid Olson
Frost Brown Todd LLC301 E 4th St, Ste 3300
Cincinnati, OH 45202-4257(513) 651-6905
Fax: (513) [email protected]
Technology Vice-ChairMark Krone
Anderson McPharlin & Conners LLP
707 Wilshire Blvd, Ste 4000Los Angeles, CA 90017-3623
(213) 688-0080Fax: (213) 622-7594
Vice-ChairsTheodore Baum
McElroy Deutsch et al920 Bausch & Lomb Place
Rochester, NY 14604(585) 623-4286
Fax: (585) [email protected]
Ashley BelleauLugenbuhl, Wheaton, Peck,
Rankin & Hubbard601 Poydras St, Ste 2775New Orleans, LA 70130
(504) 568-1990Fax: (504) [email protected]
Robert BerensSalamirad Morrow Timpane & Dunn
2001 E Campbell Ave, Ste 203Phoenix, AZ 85016-5574
(602) [email protected]
Amy BernadasKrebs Farley, PLLC
400 Poydras St, Ste 2500New Orleans, LA 70130-3224
(504) 299-3570Fax: (504) 299-3582
Lisa BlockAxis Insurance
1211 Avenue of The Americas 24th Fl
New York, NY 10036(212) 500-7689
JoAnne BonacciDreifuss Bonacci & Parker PC
26 Columbia Tpke, Ste 101Florham Park, NJ 07932
(973) 514-1414Fax: (973) 514-5959
Virginia Boyle1425 Kershaw Dr
Raleigh, NC 27609(610) 832-8246
Fax: (610) [email protected]
Todd BragginsErnstrom & Dreste LLP
180 Canal View Blvd, Ste 600Rochester, NY 14623-2849
(585) 473-3100Fax: (585) 473-3113
Lee BrewerBryan & Brewer LLC
355 E Campus View Blvd, Ste 100Columbus, OH 43235-5616(614) 228-6131 EXT 203
Fax: (614) [email protected]
Shannon BrigliaBrigliaMcLaughlin PLLC
1950 Old Gallows Rd, Ste 750Vienna, VA 22182-4014
(703) 506-1990Fax: (703) 506-1140
Elizabeth CarleyCincinnati Insurance Company
PO Box 145496Cincinnati, OH 45250-5496
(513) 870-2173Fax: (513) 371-7252
Gerald CarozzaSelective Ins Co of Amer
40 Wantage AveBranchville, NJ 07890
(973) 948-1823Fax: (866) 324-3786
Paula-Lee ChambersHinshaw & Culbertson LLP
28 State St, Fl 24Boston, MA 02109-5709
(617) 213-7000Fax: (617) 213-7001
Andy ChambersJennings Strouss & Salmon PLC
1 E Washington St, Ste 1900Phoenix, AZ 85004-2554
(602) 262-5846Fax: (602) 495-2728
Bogda ClarkeThe Hanover Insurance Group
400 Atrium Dr, Suite 500Somerset, NJ 08873-4170
(732) 805-2378Fax: (732) 805-2395
Bruce CorriveauTravelers
111 Schilling Rd, Hunt Valley, MD 21031-1110
(443) 353-2076Fax: (410) 205-0608
James DiwikSedgwick LLP
333 Bush St, Fl 30San Francisco, CA 94104-2834
(415) 781-7900Fax: (415) 781-2635
Jennifer FioreDunlap Fiore LLC
301 Main St, Ste 1100Baton Rouge, LA 70801-1916
(225) 282-0652Fax: (225) 282-0680
Robert FlowersTravelers
1 Tower Sq, Ste S202AHartford, CT 06183-0001
(860) 277-7150Fax: (860) 277-5722
Jeffrey FrankAlber Crafton PSC
2301 W Big Beaver Rd, Ste 300Troy, MI 48084-3326
(248) 822-6190Fax: (248) 822-6191
Melissa GardnerWeinstein Radcliff Pipkin LLP8350 N Central Expy, #1550
Dallas, TX 75206-1600(214) 865-7020
Fax: (469) [email protected]
Jeffrey GoldbergSWISSRE
475 N Martingale Rd, Ste 850Schaumburg, IL 60173-2276
(847) 273-1268Fax: (847) 273-1260
Manju GuptaMcDonald Hopkins LLC
600 Superior Ave E, Ste 2100Cleveland, OH 44114-2690
(216) 973-4453Fax: (216) 348-5474
Fidelity & Surety Law Committee Newsletter Fall 2016
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Leigh HenicanGray Casualty & Surety Company
3625 N I-10 Service RdMetairie, LA 70002
(504) [email protected]
Mike HenniganCincinnati Insurance Company
6200 S Gilmore RdFairfield, OH 45014-5100
(513) 870-2736Fax: (513) 881-8913
Hilary HoffmanChubb
15 Mountain View RdWarren, NJ 07059-6795
(908) [email protected]
Marchelle HoustonTravelers Bond & Specialty
Insurance1 Tower Sq, Ste 2S2
Hartford, CT 06183-0002(860) 277-2408
Fax: (860) [email protected]
Michael HurleyBerkley Surety Group LLC
412 Mount Kemble Ave, Ste 310NMorristown, NJ 07960-6669
(973) 775-5040Fax: (973) 775-5204
Susan KarlanICW Group - OPRS
15025 Innovation DrSan Diego, CA 92128
(858) 350-7213Fax: (858) 350-2640
Peter KarneySWISSRE
475 N Martingale Rd, Ste 850Schaumburg, IL 60173-2276
(847) 273-1259Fax: (847) 273-1260
Todd KazlowKazlow & Fields LLC
8100 Sandpiper Cir, Ste 204Baltimore, MD 21236-4999
(410) 825-9644Fax: (410) 825-6466
James KeatingAllied World Insurance Company
30 South 17th Street, 16th FlPhiladelphia, PA 19103
(267) [email protected]
Christina KockeMerchants Bonding Company
215 Savanna DrLuling, LA 70070(504) 417-5164
Frank LanakHCC Surety Group
601 S Figueroa St, Ste 1600Los Angeles, CA 90017-5721
(310) 242-4403Fax: (310) 649-0891
Darrell LeonardZurich
11074 Inspiration CirDublin, CA 94568-5530
(800) 654-5155Fax: (800) 329-6105
Lawrence LernerLevy Craig Law Firm1301 Oak St, Ste 500
Kansas City, MO 64106-2865(816) 460-1807
Fax: (816) [email protected]
William LutzStarr Companies
1000 Wilshire Boulevard, 22nd FlLos Angeles, CA 90017
(213) [email protected]
John McDevittLiberty Mutual Group
20 Riverside RdWeston, MA 02493-2206
(617) 243-7918Fax: (866) 547-4882
Mary Alice McNamaraTravelers
111 Schilling RdHunt Valley, MD 21031-1110
(443) 353-2130Fax: (443) 353-1137
Henry MinissaleACE USA
436 Walnut St, WA10Philadelphia, PA 19106
(215) 640-2641Fax: (215) 640-5474
Vincent MiseoVincent C Miseo
211 Washington Corner RdBernardsville, NJ 07924
(201) [email protected]
Caryn Mohan-MaxfieldThe Walsh Group929 W Adams St
Chicago, IL 60607-3037(312) 563-5936
Shannah MorrisFrost Brown Todd LLC
9277 Centre Pointe Dr, Ste 300West Chester, OH 45069-4866
(513) 870-8220Fax: (513) [email protected]
Vice-ChairRobert O’Brien
Liberty Mutual Group9450 Seward Rd
Fairfield, OH 45014-5412(513) 867-3718
Fax: (866) [email protected]
Derek PopeilChubb
15 Mountain View Rd Warren, NJ 07059(908) 903-3182
Fax: (908) [email protected]
Stephen RaeLiberty Mutual Group
450 Plymouth Rd, Ste 400Plymouth Meeting, PA
19462-1644(610) 832-8254
Fax: (610) [email protected]
Frederick RettigState Farm Insurance
One State Farm, Plaza A-3Bloomington, IL 61710-0001
(309) [email protected]
John RiddleStrasburger & Price LLP901 Main St, Ste 4400Dallas, TX 75202-3729
(214) 651-4672Fax: (214) 659-4038
Kenneth RockenbachLiberty Mutual Gr
1001 4th Ave, 17th FlSeattle, WA 98154
(206) 473-3350Fax: (855) 318-4099
Edward RubachaJennings Haug
& Cunningham LLP2800 N Central Ave, Ste 1800
Phoenix, AZ 85004-1049(602) 234-7800
Fax: (602) [email protected]
John SebastianWatt Tieder Hoffar & Fitzgerald LLP
10 S Wacker Dr, Ste 2935Chicago, IL 60606-7411
(312) 219-6900Fax: (312) 559-2758
Jan SokolStewart Sokol & Larkin LLC2300 SW 1st Ave, Ste 200Portland, OR 97201-5047
(503) 221-0699Fax: (503) [email protected]
Scott SpearingHermes Netburn O’Connor
& Spearing PC265 Franklin St, Fl 7
Boston, MA 02110-3113(617) 728-0050
Fax: (617) [email protected]
W SpeicherZurich
3787 Sells Mill RdTaneytown, MD 21787
(410) 840-9144Fax: (800) 329-6106
Michael SpinelliCashin Spinelli & Ferretti LLC
22 Tanwood DrMassapequa, NY 11758
Fax: (631) [email protected]
Michael StoverWright Constable & Skeen LLP
100 N Charles St, Fl 16Baltimore, MD 21201-3805
(410) 659-1321Fax: (410) 659-1350
Fidelity & Surety Law Committee Newsletter Fall 2016
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Dee StudlerSDC CPAs LLC
1444 N Farnsworth Ave, Ste 500Aurora, IL 60505-1644
(630) 820-5770Fax: (630) 820-5765
Frank TanzolaInternational Fidelity Insurance
Company1 Newark Ctr, Fl 20
Newark, NJ 07102-5219(973) 776-8770
Fax: (973) [email protected]
Ty ThompsonMills Paskert Divers
100 N Tampa St, Ste 3700Tampa, FL 33602-5835
(813) 229-3500Fax: (813) 229-3502
Richard TowleChubb Limited
15 Mountainview RdWarren, NJ 07059-6795
(908) 903-3423Fax: (908) [email protected]
Thomas VollbrechtFabyanske Westra Hart &
Thomson P.A.333 S 7th St, Ste 2600
Minneapolis, MN 55402-2437(612) 359-7659
Patricia WagerTorre Lentz Gamell Gary &
Rittmaster LLP100 Jericho Quadrangle, Ste 309
Jericho, NY 11753-2702(516) 240-8969
Fax: (516) [email protected]
Courtney WalkerBerkshire Hathaway Specialty
Insurance4539 Laurelwood Dr,
Memphis, TN 38117-3507(617) 834-8652
Justin WearManier & Herod
150 4th Ave N, Ste 2200Nashville, TN 37219-2494
(615) 244-0030Fax: (615) 242-4203
Michael WeberDinsmore & Shohl LLP
227 W Monroe St, Ste 3850Chicago, IL 60606(312) 775-1742
Fax: (312) [email protected]
Blake WilcoxLiberty Mutual Group
1001 Fourth Avenue, Fl 47Seattle, WA 98154
(206) 473-3264Fax: (425) 376-6533
Douglas WillsChubb
15 Mountainview RdWarren, NJ 07059-6795
(908) 903-5339Fax: (908) [email protected]
©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 ([email protected]).
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, nor the Editors endorse the content or accuracy of any specific legal, personal, or other opinion, proposal or authority.
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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 [email protected] 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. FriedmanChiesa Shahinian & Giantomasi PC Chair, ABA TIPS Fidelity and Surety Law Committee
LETTER FROM THE CHAIR
Fidelity & Surety Law Committee Newsletter Fall 2016
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SOCIAL ENGINEERING FRAUD IN THE CONTEXT OF COMPUTER AND FUNDS TRANSFER FRAUD COVERAGES By: David S. Wilson, Chris McKibbin and Stuart WoodyBlaney 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
make an unauthorized transfer of funds. Recent decisions 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 have found that it is easier to “hack” humans than computers, 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
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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 VALUEBy: 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 on January 1, 2015. Due to issues solely within the control 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
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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 violation of a material statutory, regulatory, or contractual 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” STANDARDBy: Robyn N. Burrows, Watt, Tieder, Hoffar & Fitzgerald, L.L.P.
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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 investments in non-core sectors, or financial issues related 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
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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.
Like contractors, design firms are generating more and 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.
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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 in Apache 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).
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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 by underwriting discrete social engineering fraud coverages. 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.
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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 for the principal, while there exists no similar requirement 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
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