SFAA Virtual Annual Meeting - Webinar Access

We will be hosting a Virtual Annual Meeting on Wednesday, September 29th from 1:30 – 3:30pm EST . Please use this Zoom link to access the webinar on Wednesday, September 29th.

The 2-hour program will consist of:

• Industry updates from John Welch, SFAA Chairman and CNA President & CEO and Lee Covington, SFAA President & CEO
• State and federal advocacy updates
• Inside the Beltway update
• New SFAA brand reveal
• New Contractor Bonding Education and Mentoring Program update
• Additional updates from the SFAA team

Important SFAA Annual Meeting Update—Move to Virtual Event

Due to recent and on-going COVID-19 developments, as well as the reimposed D.C. masking and other potential requirements, and the survey responses many of you provided, SFAA has made the decision to cancel the in-person Annual Meeting scheduled for September 29-30 in Washington, D.C.
 
We will be hosting a virtual meeting within the same time period, for which details will be provided very soon. The SFAA Board Meeting will continue as scheduled via Zoom on Thursday, September 30, from 1:30 – 5:00 p.m. ET. The Virtual Annual Meeting General Session and Committee Meetings will be reschedule sometime prior to the Board Meeting that same week.
 
If you made a hotel reservation, no action is required. The hotel will be cancelling all reservations made under our room block automatically.
 
If you have any questions about your committee meeting, please contact the appropriate SFAA Team Member:
 
Contract Bonds Advisory Committee: Julie Alleyne
 
Commercial Bonds Advisory Committee: Stephen Taylor
 
Fidelity and Fidelity Claims Advisory Committees: Bill Heinbokel
 
Diversity and Human Resource Advisory Committee: Lindsay Graham
 
International Committee: Lee Covington

The Surety & Fidelity Weekly newsletter is published every Monday. The newsletter provides valuable information regarding surety and fidelity industry developments, federal and state legislative activity, legal decisions, new bonding opportunities, regulatory news, upcoming industry events, and much more.

Members automatically receive the newsletter.  Non-Members may sign up to receive the newsletter.

2021: June 1

• SFAA Submits Letter Concerning Unnecessary Bonding Provision on $250 Million Rail Project
• RSVP for Phase 2 of the RiskStream Collaborative Surety Bond - Power of Attorney Lab
• Recording Now Available: TCC 2021 Virtual Keynote Speakers

Accordingly, this guide contains a list of SFAA surety company members that have volunteered to be included together with information as to how they can be contacted for the purposes of authenticating a bond. Since participation in this program is voluntary, not every surety company is listed.

The 2021 Guide is now searchable by Writing Company. 

A group letter written by:

American Association of State Highway and Transportation Officials
American Concrete Pipe Association
American Council of Engineering Companies
American Road & Transportation Builders Association
American Society of Civil Engineers
American Traffic Safety Services Association
Associated General Contractors of America
International Association of Bridge, Structural, Ornamental, and Reinforcing Iron Workers
International Union of Operating Engineers
Laborers International Union of North America
National Asphalt Pavement Association
National Stone, Sand and Gravel Association
Portland Cement Association
The Surety & Fidelity Association of America

April 20, 2020 (sent via email)


Re: Need for Urgent Action from Federal Contracting Authorities Regarding the Acceptance of Electronic Bonds, including Use of Electronic Signatures, Electronic Seals, and Electronic Powers of Attorney, Accompanying Federal Contracts during the COVID-19 Pandemic Crisis

Dear Member of the Chief Acquisition Officers Council:

To ensure that federal construction contracts and other federal obligations with security performance guarantees continue to be provided without significant disruption or impediment during the current COVID-19 crisis, the undersigned organizations representing the surety industry and the construction community respectfully request specific and immediate action be taken by federal procuring agencies concerning the treatment of electronic submission of surety bond documents for federal contracts and obligations. It is vitally important to the efficient provision of construction and related services to address needed federal infrastructure and to the wellbeing of individuals working in the surety and construction communities that procurements continue unimpeded during this time of crisis by permitting acceptance of electronic submission of bond documents, including bid bonds and supporting documents, such as powers of attorney. Moreover, other transactions or obligations, when requiring the protection of surety bonds, such as contracts associated with supplies, materials, equipment, durable medical equipment, IT services, among other types of acquisitions, also need to permit acceptance of electronic submission of surety bonds, such as supply bonds, with digital signatures and seals and without notarization.

Most federal agencies typically require contract documents to have “wet ink signatures” on surety bonds and embossed corporate seals on original, printed documents. During this time in which employees of most surety businesses are working remotely from their homes, a requirement that requires physical presence of multiple persons creates the potential for substantial roadblocks and for endangering the health and safety of persons processing such documents. In fact, local and state stay at home orders and adherence to health directives and guidelines makes it virtually impossible for bond producers, acting as attorneys-in-fact for surety companies, and surety principals to sign contract documents in person.

Consequently, NASBP and SFAA request, due to the current pandemic, that federal procuring agencies expressly mandate acceptance of electronically executed and issued surety bonds and powers of attorneys, with e-corporate seals. We also urge suspension of the need for notarization, where required, of such documents during this crisis period, as it requires in-person presence. Remote online notarization (RON) is not a workable alternative because 1) many states do not yet allow it; 2) most of RON is not a widely available option; and (3) where RON is deemed legally acceptable in a minority of states it requires prior certification of the notary.

We note that the Office of Management and Budget Office (OMB) recently issued memo M-20- 16, requiring heads of federal departments and agencies to change operations and services, particularly where people congregate – with exceptions for the protection of public health and safety, including law enforcement and criminal-justice functions. The acceptance of electronic bond documents can be derived from the following point included in M-20-16, “Consider streamlining regulations and approval processes for critical services..”

The U.S. General Services Administration (GSA) already has taken critical action, approving and issuing a class deviation from the Federal Acquisition Regulation, which allows vendors and sureties the use of electronic signatures in lieu of manual signatures and eliminates the requirement for any seals for bonds. A copy of that class deviation is attached for your reference. NASBP and SFAA respectfully request that you undertake immediate action in the same or similar manner to that undertaken by GSA, making the acceptance of electronically generated, executed, and issued bonds clear.

For the welfare of the economy, the efficient provision of essential services to the federal government, and the safety of persons in the distribution chain for surety bonds, NASBP and SFAA, along with the signed organizations below, believe it is imperative for all federal procuring agencies to act quickly to accept electronically generated and/or transmitted bond documents as original documents with the characteristics described in the accompanying memo. Doing so will protect the welfare of thousands of individuals and will facilitate and expedite the critical contracting process for needed services to the federal government during this extraordinary period.

For any questions you may have regarding our request, please contact Larry LeClair, NASBP, Director, Government Relations, at lleclair@nasbp.org or Dalton DeFendis, SFAA, Director of Federal Government Affairs, at ddefendis@surety.org.
We appreciate your immediate attention to and action on this urgent and critical request.

Respectfully the undersigned associations,

American Property and Casualty Insurance Association
American Subcontractors Association
Associated General Contractors of America
National Association of Surety Bond Producers
National Electrical Contractors Association
The Sheet Metal and Air Conditioning Contractors' National Association
The Surety & Fidelity Association of America
Women Construction Owners & Executives

April 6, 2020

The President
The White House
Washington, DC 20500

Dear Mr. President:

We, the undersigned trade and professional organizations representing tens of thousands of firms and individuals engaged in architecture, engineering, surveying and mapping, prime contracting, subcontracting, specialty trade contracting, supplying, construction and program management and surety bond production would like to join with the many other organizations in urging further guidance to clarify “essential Infrastructure” and “essential businesses and services.”

As the nation and your Administration contend with the real threats presented by COVID-19, we want to encourage the issuance of exemptions for operations and maintenance of “essential infrastructure” that allows individuals to provide such services that are impossible to perform from home. Such infrastructure should include essential design, construction and related services of public works, including airport operations, roads and highways, public transportation, energy, and of critical importance today, expanding, retrofitting, and rehabilitating structures to meet healthcare and other systems and facilities related COVID-19 production needs.

This work is essential to our nation’s ability to deliver what is needed during this emergency. These include medical services and supplies, food, and daily necessary goods to the American people.

The current version of DHS guidance, Identification of Essential Critical Infrastructure Workers, continues to have ambiguities that require clarification. We respectfully urge the broadest definition of the services, occupations, and projects our organizations represent so that we serve our fellow citizens, operate in a safe manner in accordance with CDC and other relevant protocols, contribute to the effort to combat COVID-19, and sustain our economy in these difficult times.

We look forward to working with you and your Administration so the various related industries we represent can continue our work of providing necessary construction and related services to the nation and doing our part to see us through this pandemic.

Sincerely,

American Council of Engineering Companies
American Society of Civil Engineers
American Subcontractors Association
Associated General Contractors of America
Construction Management Association of America
Council on Federal Procurement of Architectural and Engineering Services
Design-Build Institute of America
Geospatial Equipment and Technology Institute
Independent Electrical Contractors
International Institute of Building Enclosure Consultants
National Association of Surety Bond Producers
National Electrical Contractors Association
National Society of Professional Surveyors
Sheet Metal and Air Conditioning Contractors National Association
Subsurface Utility Engineering Association
Surety & Fidelity Association of America
U.S. Geospatial Executives Organization
Women Construction Owners & Executives

10340 Democracy Lane, Suite 300
Fairfax, Virginia 22030
P (703) 787-6665; F (703) 787-7550 

Last week Congress approved a $2 Trillion legislative package (CARES Act) that included provisions to allocate $350 billion for federally-backed loans to support U.S. companies with less then 500 employees. The Paycheck Protection Program, included as part of the legislative stimulus signed into law last week, is separate from the SBA program’s Economic Injury Disaster Loans (EIDL), which has been available for companies experiencing financial hardship as a result of COVID-19 since early March.

Step-by-Step Guidance

UPDATE: The U.S. Treasury Department has issued additional details and a loan application form (PDF) to apply for Paycheck Protection Program loans. Starting April 3, small businesses and sole proprietorships will be able to apply for loans through existing SBA lenders. Starting April 10, independent contractors and self-employed individuals can apply for loans through existing SBA lenders. There is a funding cap, so the Treasury Department recommends applying as soon as possible. Please share the loan application with your small business contractor clients so they can begin the application process as soon as possible.

UPDATE: Additional FAQs With Further Guidance From Treasury Department

Q. Where can I apply for the Paycheck Protection Program?

A. You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. Visit www.sba.gov for a list of SBA lenders.

Q. What do I need to apply?

A. You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Loan form linked above.

Q. What other documents will I need to include in my application?

A. You will need to provide your lender with payroll documentation.

Q. Do I need to first look for other funds before applying to this program?

A. No. Treasury is waiving the usual SBA requirement that you try to obtain some or all of the loan funds from other sources (i.e., we are waiving the Credit Elsewhere requirement)

Q. When do I need to start paying interest on my loan?

A. All payments are deferred for 6 months; however, interest will continue to accrue over this period.

Q. When is my loan due?

A. In 2 years. There are no prepayment penalties or fees if you pay off your loan earlier then 2 years.

Q. Do I need to pledge any collateral for these loans?

A. No. No collateral is required.

Q. Do I need to personally guarantee this loan?

A. No. There is no personal guarantee requirement. ***However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.***

Q. What do I need to certify?

A. As part of your application, you need to certify in good faith that:

• Current economic uncertainty makes the loan necessary to support your ongoing operations.
• The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.
• You have not and will not receive another loan under this program.
• You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.
• Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.
• All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.
• You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS. And you also understand, acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.

The U.S. Chamber of Commerce has created a thorough walkthrough to help U.S. businesses determine if they are eligible to receive a small business loan, linked here. Importantly, this step-by-step guidance provides:

1)      Who is eligible for these loans

2)      What lenders will be looking for in the application process

3)      How much companies are allowed to borrow

4)      How to seek loan forgiveness

Companies still interested in applying for the disaster relief loans (EIDL) can find further resources here; however, SBA guidance is directing potential new applicants to the PPP loan portal. Additionally, we included some frequently asked questions and answers below to address some of the top concerns small business owners have raised as they navigate the options available to them through the SBA loan programs. For real time updates from the Chamber of Commerce, including additional information on which lenders are participating in the program, please click here. If your small business contractor clients need real time help with a representative of the SBA, please click here to find the closest SBA district office.

Additional Brief FAQs for Small Business Entities Interested in Taking Next Steps to Apply for a Loan

Q. If I have applied for, or received an Economic Injury Disaster Loan (EIDL) related to the COVID-19 virus before the Paycheck Protection Program became available, will I be able to refinance into a PPP loan?

A. Yes. If you received an EIDL loan related to the virus between January 31, 2020 and the date at which the PPP becomes available, you would be able to refinance the EIDL into the PPP for loan forgiveness purposes. However, you may not take out an EIDL and a PPP for the same purposes. Remaining portions of the EIDL, for purposes other than those laid out in loan forgiveness terms for a PPP loan, would remain a loan. If you took advantage of an emergency EIDL grant award of up to $10,000, that amount would be subtracted from the amount forgiven under PPP.

Q. When is the application deadline for the Paycheck Protection Program?

A. Applicants are eligible to apply for the PPP loan until June 30th, 2020.

Q. What is the maximum amount I can borrow?

A. The amount any small business is eligible to borrow is 250 percent of their average monthly payroll expenses, up to a total of $10 million. This amount is intended to cover 8 weeks of payroll expenses and any additional amounts for making payments towards debt obligations. This 8 week period may be applied to any time frame between February 15, 2020 and June 30, 2020. Seasonal business expenses will be measured using a 12-week period beginning February 15, 2019, or March 1, 2019, whichever the seasonal employer chooses.

Q. How can I use the money such that the loan will be forgiven and when is the loan forgiven?

A. The amount of principal that may be forgiven is equal to the sum of expenses for payroll, and existing interest payments on mortgages, rent payments, leases, and utility service agreements. Payroll costs include employee salaries (up to an annual rate of pay of $100,000), hourly wages and cash tips, paid sick or medical leave, and group health insurance premiums. If you would like to use the Paycheck Protection Program for other business-related expenses, like inventory, you can, but that portion of the loan will not be forgiven. The loan is forgiven at the end of the 8-week period after you take out the loan. Borrowers will work with lenders to verify covered expenses and the proper amount of forgiveness. If you have already laid off some employees, you can still be forgiven for the full amount of your payroll cost if you rehire your employees by June 30, 2020. If the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued in the 8-week covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by you and the lender.

Q. What is the covered period of the loan?

A. The covered period during which expenses can be forgiven extends from February 15, 2020 to June 30, 2020. Borrowers can choose which 8 weeks they want to count towards the covered period, which can start as early as February 15, 2020.

Q. When can we expect further guidance from the SBA on this new program?

A. The SBA has until April 10, 2020 to issue regulations implementing this new program. That rulemaking will not be subject to typical public notice and comment processes. The SBA also has until April 26, 2020 to issue specific guidance on loan payment deferment relief and the loan forgiveness provisions.

Based on our efforts over the last two weeks, the SFAA team is well prepared to work remotely to provide our members the full services we have always provided, including information and services available through our website.  We will continue to monitor the situation and will communicate any changes to plans.  We have NOT cancelled our Annual Meeting scheduled for May 27-28, but we will assess the meeting as we get closer to May. 

For your convenience, I am providing a link to the emails and phone numbers for all SFAA team members. Click here. We don’t expect any interruption in our member services, but if you experience any problems, please contact me directly and I will make sure the right team member or I get right back to you.

It is our sincere hope that measures like this, taken by so many, will help to blunt the impact of this health crisis in the United States. We wish you and your team the very best as we forge through this together!

All the best,

Lee

SFAA submits comments on Treasury’s Request for Information regarding potential changes to how the Bureau of the Fiscal Service assesses and evaluates sureties writing bonds in the U.S.

17th Annual Contractors' Guide to Surety Bonding - November 2019

View previous editions

SFAA participated in Gamma Iota Sigma’s International Conference in Dallas last week, where over 600 students studying insurance and risk management gathered to hear from industry leaders and learn about career opportunities.

With talent being a top priority for SFAA member companies, the Association made a concerted effort to educate students on the uniqueness of surety and fidelity, and the rewarding careers the industry provides. Many students who visited SFAA’s booth did not have much exposure to the industry, but upon hearing about this $7.8 billion “niche,” were interested in learning more and considering surety in their internship or job searches.

In order to give students a better understanding of surety and fidelity, SFAA sponsored a session entitled “See Your Future in 2020: Discover a Career in Surety and Fidelity.” The session was led by Michael Assels of Travelers, a Gamma alumnus, who spoke about the pillars of surety, the uniqueness of the three-party contract, and what a day in the life of an underwriter is like. Attendance was strong with nearly every seat filled, and with other students listening as they attended the career fair.

“I see something new every day,” Mr. Assels said, stressing that being a surety underwriter is not your typical insurance job. “I might be in the office for a few days, out visiting agents in the field, or visiting clients out of state to hear about a new project they want to bid on.”

Mr. Assels, who had never known about surety until he landed an internship in college, also spoke about the investment surety companies make in their employees.

“The companies will train you right, and they will trust you,” he said, noting that he has considerable autonomy, including the ability to make underwriting decisions up to a certain dollar amount.

Mr. Assels encouraged students who were considering actuarial careers to give surety a chance, noting that surety underwriters do very thorough financial analysis, which would suit their skillset and interest.

Myron Adamson of Bunker Hill Community College in Boston attended the session and came away very interested in surety and a possible career in the industry.

“I knew very little about surety before, if anything,” he said. “The presentation answered my questions and opened up a door for me I didn’t know was there. I really like the mix of sales and interpersonal skills and analysis that is required.”

John Hammond, Senior Vice President of AIG, and a member of Gamma Iota Sigma’s Board of Trustees, expressed his pleasure in SFAA being part of the conference.

“It’s important to give students a fuller picture of insurance and let them know what else is out there,” he said. Gamma Iota Sigma leadership also thanked SFAA for taking part and expressed interest in highlight surety as career option on their website, giving it greater exposure to students at the 85 colleges and universities with a Gamma chapter.

The conference also served as a venue to launch The Surety Foundation’s scholarship and internship program for underrepresented students for 2020. Diversity is of increasing importance to this next generation of insurance professionals, with 60% saying they want their employer to commit to and demonstrate diversity at all levels of the company, and 47% desiring diversity in company leadership, according to a recruiting survey of students released by Gamma.

The Surety Foundation’s decision last year to expand its definition of underrepresented students to include women, veterans, disabled students, and LGTB persons, paid dividends. The 2019 intern class was the first all-female class in the Foundation’s history, with six scholarships being awarded to interns from Merchants, Nationwide, and Travelers.

Examples of The Surety Foundation’s legacy and member company generosity were also visible at the conference.

Nia Gumbs, a former intern, also stopped by SFAA’s booth to thank the Association and the Foundation for providing her with valuable professional experience and a scholarship. She plans to attend graduate school and hopes to use her insurance experience in her career when she finishes.

The Surety Foundation plans to release the 2020 intern and scholarship application in the coming weeks and encourages all member companies to consider hiring interns as we work to build a talent pipeline for the industry’s future. Companies interested in learning more about the program should contact Barbara Reiff at 202-778-3626 or breiff@surety.org.

Engineering New Record (ENR) Surety Section 2019 posted.

View previous ENR Surety Supplements

The 2018 July/August Edition of the SFAA Newsletter has been posted.  Beginning this year, each Newsletter will be available to the public. In addition to our regular Association news, we will be providing original content for our members and supporters to share. In this issue, we have an in depth article on The Hunt for Talent.

(for non-Members)

(for Members only)

July 3, 2018:

Ironshore Specialty Insurance Company (NAIC #25445) voluntarily relinquished its Treasury Certificate of Authority, which became effective June 30, 2018.

July 3, 2018:

Texas Pacific Indemnity Company (NAIC #20389) merged into its parent company, Pacific Indemnity Company, which was effective on September 30, 2017.

View list of Additions and Terminations

The Special Edition of the 2018 Annual Meeting SFAA Newsletter has been posted.  Read about updates from the Board of Directors meeting, Committee meeting updates, the Annual Meeting General Session and Congressional Action Day.

(for non-Members)

A man from Troy, New York was arrested for practicing architecture without a license. He was accused of defrauding municipalities, businesses and construction firms in three counties over the course of seven years. New York Attorney General Eric Schneiderman’s office stated the individual allegedly falsified field reports, building plans and inspections, which put the safety of all those who lived in or visited the buildings at-risk.

Occupational licensing is a credentialing requirement that certain professions must obtain before being allowed to practice to help protect the health and safety of consumers. Without it, more issues like the above examples will occur, but there is a growing debate across the country as to the effectiveness of the occupational licensing requirements.

In recent years, there has been bipartisan consideration of occupational licensing and the impact on the economy, labor force and small businesses. The Obama Administration, the Trump Administration and Congress have put resources into studying and addressing issues with occupational licensing. Several national state legislative associations are doing the same. The increased interest stems from the growing number of occupations that need licenses. According to the Brookings Institute, less than five percent of the workforce needed to be licensed in the 1950s as compared to over 30 percent today. There is a concern that many occupational licensing requirements have become simply a barrier to entry by rather than a way to protect consumers.

Perhaps the solution to the occupational licensing issue is to rely more on the use of surety bonds rather than imposing more administrative or bureaucratic burdens on the licensee. Why? The North Carolina Commissioner of Banks Ray Grace explains in the SFAA and Governing Institute’s joint publication, A Government Leader’s Guide to Bonds, “We look at surety bonds, not just for quick and reliable payment in the event that the company defaults on obligations or is unable to honor them, but we also look at them as an additional measure of due diligence that applied to these companies.”

During the underwriting process, a surety company reviews an individual or company’s financials and capabilities to engage in the business being licensed. Through this process, the surety company is vetting the individual or company to make sure they can uphold the obligations of the bond. When a surety company issues a bond, this signals that in the surety’s opinion, the individual or company is competent and qualified to do the work.

The ultimate goal of occupational licensing is consumer protection. Lawmakers should focus on how to strengthen the aspects that are working, such as including surety bonds on license requirements. The protection provided by surety bonds can do more for consumer safety and protection than increasing some of the burdensome requirements to get the license. And if trouble does arise, the surety company is there to pay claims.

“Whether it’s nail salons, mortgage brokers or the money transmission industry, bonds are good public policy for state and local agencies. Whenever there is an obligation, there needs to be assurance that agencies can protect consumers and seek remedy for any malfeasance. Bonds give states and localities a pathway to achieve this aim,” A Government Leader’s Guide to Bonds.

View the March/April 2018 Newsletter 

The statistical department of The Surety & Fidelity Association of America (SFAA) reviewed the data from 2013 to 2016 and reported the areas of largest premium increases were in private contract bonds and judicial court guarantee bonds. Other areas with significant premium increase include: airport buildings at state/municipal, federal and private level; private building and building related construction; private completion bonds; state/municipal subdivision bonds; coal reclamation bonds; and mechanic’s lien bonds.

“The increase in premium indicates that public and private owners, banks, and state and local leaders see value in our product,” says Ross Fisher, chair of The Surety & Fidelity Association of America and senior vice president of Specialty Commercial at The Hartford. “What is interesting is the significant increase in the use of surety bonds in private construction. Savvy construction lenders, developers and private owners understand that surety bonds provide the most comprehensive protection – ensuring that the contract will be completed and workers will be paid.”

“It makes perfect sense for an increasing number of private owners to require surety bonds,” said SFAA President Lynn M. Schubert. “With surety bonds, the risks of contract completion are shifted from the owner to the surety company. Requiring surety bonds in private construction protects companies and shareholders from the enormous costs of contractor failure.”

Since 1998, the surety industry has protected more than $9 trillion in contract and commercial surety exposure - $600 billion in 2017 alone. Approximately $25 billion in losses were paid out, and another $50 billion in loss adjustment, underwriting and general expenses were incurred since 1998. The continuing low loss ratio signals that the adherence to underwriting criteria and prequalification, along with a greater emphasis placed on efficiency regarding expenses, remain strong factors in the industry’s growth.

“The expansion of the private construction market demonstrates that the promotional and educational efforts on behalf of the industry have raised awareness on the benefits of surety bonds and have shown others what we in the industry have known for years – that bonding protects,” said Mr. Fisher.

View the March/April 2018 Newsletter 

Social engineering scams prompt coverage litigation, crime policy changes

By Erin Ayers, Advisen

Recent court decisions have offered conflicting views on whether and how crime insurance policies should respond to social engineering scams, reflecting an ongoing industry discussion on how best to handle this rising tide of crime.

In late July, the United States District Court for the Southern District of New York ruled that the “funds transfer fraud” provision in a crime policy issued to Medidata Solutions by Federal Insurance, a Chubb subsidiary, would cover the loss of funds due to spoof emails directing a wire transfer. In a similar case decided Aug. 1, American Tooling Center v. Travelers, the United States District Court for the Eastern District determined that the “computer fraud” provision of a Travelers policy would not cover a similar social engineering scam.

The Court stated, “Although fraudulent emails were used to impersonate a vendor and dupe ATC into making a transfer of funds, such emails do not constitute the ‘use of any computer to fraudulently cause a transfer.’ There was no infiltration or ‘hacking’ of ATC’s computer system. The emails themselves did not directly cause the transfer of funds; rather, ATC authorized the transfer based upon the information received in the emails.”

The cases added a new layer to the issue and offer a few takeaways, according to Roman Itskovich, founder and chief risk officer for CyberJack, a cyber insurance startup with roots in the tech world. He commented, “The comparison is interesting because it clearly demonstrates two trends. The first: there’s a lack of general understanding of what is and what is not covered under cyber related coverages. The many variations of cyber coverage wording in the market and the relatively small amount of case law in this space doesn’t help. Furthermore, explicit exclusions of cyber triggers are not common in many policies. The second is that cyber attack vectors permeate increasingly more lines of traditional, non-technological insurance.”

Updating policies

However, while case law gets has been getting hashed out, the insurance industry appears to have already come up with a solution – loss of funds due to social engineering or impersonation fraud should be covered by endorsements on crime policies. Experts say that updates to the “computer fraud” provisions of crime policies were long overdue, having been drafted in some cases decades ago, and should reduce litigation in coming years.

“Lots of people have blurred the lines or had trouble distinguishing between cyber insurance and crime insurance,” said Bill Jennings, crime manager with Beazley. “We try to oversimplify the distinction. If there’s money that’s missing, that’s a crime policy. It’s there’s data missing, that’s cyber.”

Cyber policies can also act as excess coverage or difference-in-conditions over crime policies, according to Robert Parisi, cyber product leader for Marsh.

“The one thing that these two cases can do is make clear to the buyer that this isn’t well settled,” said Parisi, adding that pressing insurers for clear policy language is key. He predicted brokers would hold insurers’ “feet to the fire” for broad coverage.

He added, “What we’re telling clients is, ‘look at how your risk profile is changing.’ Social engineering is a fact of life and there are ways to manage the risk.”

“There’s a whole host of ways to minimize this type of activity happening, not the least of which is better employee training,” he said. “At its core, this is a people and process issue. Don’t turn a blind eye to what is a developing, evolving, and here-to-stay issue.”

Parisi noted, “Crossing your fingers and hoping for the best is never really the best business model.”

The confusion and ambiguity in these cases derives from old policy language – language that should clearly cover social engineering, according to Scott Godes, partner with Barnes & Thornburg, LLP. Courts finding coverage under crime policies have made the right call, with ambiguous language decided against the policy drafter being a bedrock principle of contract litigation, he told Advisen.

“The insurance industry should write clear forms and they should honor the forms that are open-ended and unclear,” Godes said. “Rather than fighting the policyholders on every claim, they should pay.”

The Surety and Fidelity Association of America, a trade group that develops standard forms for use by insurers, is in the process of updating crime forms to make clear that social engineering scams weren’t envisioned as part of the traditional crime policies and instituting endorsements to the policy. Robert Duke, the SFAA’s general counsel, told Advisen that association members say social engineering represents a top concern – hence the efforts to revise wording to make explicit what computer fraud is meant to cover.

“Everything we do today involves a computer, whether it’s communication or typing a letter,” said Duke. “If a court interprets computer fraud to mean simply a loss caused by fraud and a computer is involved, that interpretation would convert what was intended to cover computer fraud into covering all fraud.”

The original computer fraud provision envisioned scenarios involving no intervention by employees of the affected organization, but rather hackers or outside parties directly tampering with an insured’s computer systems to effect funds transfers, he explained.

Now, coverage expressly designed for social engineering is more readily available, Duke added, a newer development over the last 24 months.

With most insurers offering specific endorsements, crime underwriters can more effectively price and underwrite the risk, with a specific eye toward the controls put in place by insureds to avoid social engineering. Beazley’s Jennings told Advisen that the Medidata and American Tooling cases originated in 2014 and 2015 – at a time when social engineering scams were less frequently addressed by insurance policies.

“Three years on the internet is like 1,000 years. Where we are right now is not as gray and fuzzy as it would have been three years,” he said. “It was never our intent to be picking up that type of social engineering loss under a computer fraud provision. These days, it’s much more black and white.”

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