             Case: 14-14958   Date Filed: 06/22/2015   Page: 1 of 16


                                                            [DO NOT PUBLISH]



               IN THE UNITED STATES COURT OF APPEALS

                       FOR THE ELEVENTH CIRCUIT
                         ________________________

                               No. 14-14958
                           Non-Argument Calendar
                         ________________________

                     D.C. Docket No. 2:12-cv-02146-KOB


SCOTTSDALE INDEMNITY COMPANY,

                                           Plaintiff-Counter Defendant-Appellee,

                                    versus

MARTINEZ INC,

                                         Defendant-Counter Claimant-Appellant.

                         ________________________

                  Appeal from the United States District Court
                     for the Northern District of Alabama
                         ________________________

                                (June 22, 2015)

Before ROSENBAUM, JULIE CARNES, and FAY, Circuit Judges.

PER CURIAM:

      This declaratory-judgment action concerns a dispute over whether an

insurance policy covers losses incurred by the insured as a result of one of its
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employee’s fraudulent conduct. The district court concluded that the insurer could

avoid coverage under the policy because of material misrepresentations in the

insurance application and, alternatively, because the fraudulent actor’s knowledge

of her own fraud could be imputed to the insured for purposes of determining when

the fraud was “discovered” under the policy. After careful review, we affirm.

                                         I.

      Martinez Inc. (“MBS”) is a building-maintenance company servicing

commercial properties. Greg Martinez has been the company’s president since its

inception. The majority of his time was spent obtaining and servicing clients.

      Before 2004, MBS utilized the accounting firm of Ben Bowen & Associates

for nearly all of its bookkeeping, accounting, and tax services. In 2004, Ben

Bowen recommended that MBS hire an internal accountant to handle its day-to-

day finances. In August 2004, MBS hired Brenda Walters, who later became the

Chief Financial Officer (“CFO”) and Chief Executive Officer (“CEO”). Walters’s

job duties included handling the company’s financial accounting. In that capacity,

she had authority to make withdrawals from and deposits into MBS’s bank

accounts.

      Walters was fired in August 2011 after Martinez discovered that Walters had

been embezzling funds from MBS since at least 2006. An investigation into her

fraudulent activities at MBS revealed that Walters wrote checks to herself and


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others from MBS accounts and otherwise used company funds, such as the petty-

cash account, and company credit cards for personal benefit. In total, Walters stole

more than $2 million from MBS.

      At the time that MBS learned of Walters’s fraud, MBS was insured by

Scottsdale Indemnity Company (“Scottsdale”) under a Business and Management

Indemnity Insurance policy, which ran from September 15, 2010, to September 15,

2011. The policy had a “Crime Coverage Section,” which provided coverage for

losses caused by employee theft or fraud. In January 2012, MBS submitted a

claim for losses of over $2 million based on Walters’s conduct.

      In June 2012, Scottsdale denied coverage on two grounds. First, Scottsdale

asserted that MBS had made material misrepresentations in the insurance renewal

application—which was filled out and submitted by Walters—relating to its

financial accounting practices. According to Scottsdale, the misrepresentations

materially affected the risk of loss it assumed in insuring MBS. The pertinent

provision from the insurance policy excludes coverage as follows:

            In the event the Application . . . contains any
            misrepresentation or omission made with the intent to
            deceive, or contains any misrepresentation or omission
            which materially affects either the acceptance of the risk
            or the hazard assumed by Insurer under this Policy, this
            Policy, including each and all Coverage Sections, shall
            not afford coverage . . . for any Claim alleging, based
            upon, arising out of, attributable to, directly or indirectly
            resulting from, in consequence of, or in any way


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              involving, any untruthful or inaccurate statements,
              representations or information[.] 1

This provision applies to specified insureds only, including

              any Company . . . that is an Insured, if any past or present
              chief executive officer, chief financial officer, general
              counsel, risk manager or human resources director (or
              equivalent positions) of the Parent Company knew the
              facts misrepresented or the omissions, whether or not
              such individual knew of the Application, such materials,
              or this Policy.

       Second, Scottsdale alternatively denied coverage on the ground that

Walters’s knowledge of her own fraudulent conduct is imputed to the company for

purposes of determining when the loss was “discovered.” In support, Scottsdale

cited two provisions from the policy. One states that knowledge of an officer is

imputed to the company as a whole: “If any Insured, or any partner, officer or

director of that Insured, has knowledge of any information relevant to this Crime

Coverage Section, that knowledge is considered knowledge of every Insured.” The

other relates to “Discovery” of the loss:

              The Insurer will pay for loss sustained by the Insured
              through acts committed or events occurring at any time
              and discovered by the Insured during the Policy Period.
              Discovery of loss occurs when an officer, director,
              Insurance Manager or Risk Manager first becomes aware
              of facts which would cause a reasonable person to
              assume that a loss covered by this Crime Coverage
              Section has been or will be incurred . . . .

       1
         The insurance policy also provided that the insurance application was incorporated into
and constituted a part of the policy.
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Based on these provisions, Scottsdale asserted, the loss was not discovered during

the policy period because Walters’s knowledge of her own embezzlement, before

any policy had been issued by Scottsdale, is imputed to MBS.

      Shortly after denying coverage, Scottsdale filed this lawsuit in the United

States District Court for the Northern District of Alabama, seeking a declaratory

judgment that no coverage exists under the policy in question. Scottsdale moved

for summary judgment. Finding no genuine dispute as to any material fact and that

Scottsdale was entitled to judgment as a matter of law, the district court granted

summary judgment. This appeal followed.

                                        II.

      We review de novo the district court’s grant of a motion for summary

judgment. Travelers Props. Cas. Co. of Am. v. Moore, 763 F.3d 1265, 1268 (11th

Cir. 2014). In reviewing summary judgment, we resolve all factual ambiguities

and draw all reasonable inferences in favor of the non-moving party.            Id.

Summary judgment should be granted “if the moving party shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a

matter of law.” Fed. R. Civ. P. 56(a). We also review de novo the interpretation of

provisions in an insurance contract. St. Paul Fire & Marine Ins. Co. v. ERA

Oxford Realty Co. Greystone, LLC, 572 F.3d 893, 897 (11th Cir. 2009).



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                                         III.

      Under Alabama law, courts must enforce insurance contracts as written

unless an insurance provision is ambiguous. St. Paul Fire & Marine Ins. Co., 572

F.3d at 898. If a provision is ambiguous as to whether coverage is afforded, the

provision must be construed for the benefit of the insured. Id.

                                         A.

      Regarding Scottsdale’s first ground for denying coverage, the policy places

the following limits on when coverage may be denied. As relevant to this case,

there must be (1) a misrepresentation or omission of facts, (2) (a) that was made

with the intent to deceive or (b) which materially affects the risk of loss accepted

by the insurer, (3) that resulted in or in any way involved the claim of loss, and (4)

that was known by a past or present chief executive officer or chief financial

officer of the insured company. We address each requirement in turn.

                                          1.

      MBS first contends that the district court erred in finding as a matter of law

that Walters’s responses on the insurance application were misrepresentations. In

the application, Walters answered “yes” to the following two questions: “Is there

an annual audit or review performance by an independent CPA on the books and

accounts, including a complete verification of all securities and bank balances?”

(“Question 3”); and “Are bank accounts reconciled by someone not authorized to


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deposit or withdraw from those accounts?” (“Question 4”). Scottsdale contended,

and the district court agreed, that these responses were untrue.

      With regard to Question 3, MBS asserts that its accounts were reviewed

every year by Bowen, an independent Certified Public Accountant (“CPA”).

Although Bowen testified that he did not audit the accounts, he “reviewed data and

accounts . . . to verify them for the tax return preparation.” This review included

some steps to ensure the “reasonableness” of the financial information. Based on

Bowen’s testimony, MBS contends that a genuine dispute exists as to whether

Bowen conducted a “review” or “verification” as contemplated by the policy,

particularly when those terms are not defined by the policy itself.

      But we need not labor over defining the policy terms “review” or

“verification.” See St. Paul Fire & Marine Ins. Co., 572 F.3d at 897 (“If a word or

phrase is not defined in the policy, then the court should construe the word or

phrase according to the meaning a person of ordinary intelligence would

reasonably give it.”) (quotation omitted). In the district court, MBS acknowledged

in its response to Scottsdale’s motion for summary judgment that Bowen’s review

did not include such a “complete verification.” See Doc. 46 at 17 (“Admittedly,

MARTINEZ did not have a complete verification of all securities and bank

balances performed[.]”). MBS cannot now argue the opposite for the first time on

appeal. See Access Now, Inc. v. Sw. Airlines Co., 385 F.3d 1324, 1331 (11th Cir.


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2004) (“This Court has repeatedly held that an issue not raised in the district court

and raised for the first time in an appeal will not be considered by this court.”)

(internal quotation marks omitted).

      In any case, no genuine factual dispute exists regarding whether Bowen

conducted an “annual audit or review” that “includ[ed] a complete verification of

all securities and bank balances.” Bowen testified that he did not verify the

accuracy of MBS’s bank balances at any time after 2004, and that he never

conducted an audit or a “formal report-generating review.” Although he reviewed

the accounts for “reasonableness” for tax-preparation purposes, he verified the

accuracy of the information he received from MBS in only a “very cursory way.”

In sum, no reasonable jury could conclude that an “annual audit or review

performance by an independent CPA on the books and accounts, including a

complete verification of all securities and bank balances” occurred. Consequently,

the district court properly found that Walters’s response to Question 3 was a

misrepresentation.

      With regard to Question 4, MBS points to evidence that Walters’s assistant,

Jennifer Smith, reconciled the accounts at the time of the policy application. Smith

was not authorized to deposit into or withdrawal from MBS’s accounts. Therefore,

according to MBS, the response to Question 4 was not false because the accounts




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were in fact “reconciled by someone not authorized to deposit or withdraw from

those accounts.”

      Even if we found plausible MBS’s contention that the response was not

technically false, we would nonetheless agree with the district court that the answer

to Question 4 was a misrepresentation. The answer that Walters provided on the

application represented to Scottsdale that reconciliation functions at MBS were

separated from deposit and withdrawal authority, when, in fact, no such separation

of authority existed, as Walters would have been well aware. Other undisputed

evidence—which MBS claims is irrelevant—showed that Walters, who was

authorized to deposit or withdraw from the accounts, also performed reconciliation

functions. For example, Walters had access to Smith’s password and computer

and used them to alter Smith’s reconciliations of the accounts. Thus, MBS’s

accounts were reconciled, at least in part, by someone who had withdrawal and

deposit authority. Accordingly, the district court properly found that there was no

genuine dispute about whether Walters’s answer to Question 4 was a

misrepresentation.

                                         2.

      MBS next contends that the district court erred in finding as a matter of law

that Walters’s misrepresentations were made with the intent to deceive or that they

were material to the risk of loss assumed by Scottsdale in insuring MBS. Because


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we conclude that the misrepresentations were material, we do not address whether

they were made with the intent to deceive.

      “Under Alabama law, the materiality of a misrepresentation on an

application for an insurance policy is generally a jury question.” Nationwide Mut.

Fire Ins. Co. v. Pabon, 903 So. 2d 759, 767 (Ala. 2004). Nonetheless, “some

misrepresentations, whether made intentionally or innocently, increase the risk of

loss as a matter of law and are therefore material to the issuance of the policy.”

Id.; see Richerzhagen v. Nat’l Home Life Assurance Co. of New York, 523 So. 2d

344, 347 (Ala. 1988) (“If the facts as to materiality are undisputed, then the

question need not be submitted to the jury.”).

      In general, a fact is material if it would have increased the risk of loss to the

insurer and would have induced a rational underwriter to reject the risk or accept it

only at an increased premium. Clark v. Ala. Farm Bureau Mut. Cas. Ins. Co., 465

So. 2d 1135, 1139 (Ala. Civ. App. 1984). Ala. Code § 27–14–7 likewise provides

that an insurer may avoid a policy where a misrepresentation is material “to the

acceptance of the risk or to the hazard assumed by the insurer,” or where it would

have caused the insurer in good faith not to issue the policy or not to issue the

policy at the premium rate as applied for. See Pabon, 903 So. 2d at 767.

      We     conclude     that    undisputed     evidence      establishes   that   the

misrepresentations were material to the issuance of the policy. Paul Tomasi, the


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President of E-Risk, Scottsdale’s underwriter, executed a declaration stating that

Scottsdale’s underwriting policies assigned a higher rating factor and higher total

premium where an insured answers “no” to Questions 3 and 4. He explained that

the answers to those questions are “extremely important in assessing the crime risk

to be assumed because many, if not most, employee theft losses involve employees

who handle money and who have access to the insured’s receipts, checkbook or

deposits.” Further, Tomasi noted, “internal accounting controls” and independent

oversight to ensure the controls are working and to increase the likelihood of early

detection “directly bear[] on the potential exposure to loss faced by the insurer.”

Such oversight and early detection were particularly important, Tomasi stated, for

policies like MBS’s, which covered losses sustained at any time but discovered

during the policy period. Thus, Tomasi attested that E-Risk as general agent for

Scottsdale would normally have charged an increased premium for the policy in

question had Walters provided correct answers about MBS’s accounting practices.

See Clark, 465 So. 2d at 1139.

      MBS contends that the deposition testimony of Michael Kinsley, the

individual underwriter at E-Risk who handled MBS’s account, contradicts

Tomasi’s declaration and shows that the responses to Questions 3 and 4 were not

in fact taken into account in assessing the risk of loss in this case. On that basis,




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MBS asserts that genuine issues of fact remain about whether the

misrepresentations were material. We respectfully disagree.

      Kinsley’s testimony reflects that E-Risk’s software program, which normally

generates a baseline quotation based on the answers provided in the insurance

application, could not automatically generate a quotation for MBS for the “Crime

Coverage Section” due to its “nature of operations.”       The software program

adjusted the baseline rate based on how an applicant’s business operations were

categorized. Thus, the nature of MBS’s business operations did not fit into one of

the software’s categories, so a quotation could not automatically be generated. But

the fact that a quotation was not automatically generated does not suggest or imply

that Kinsley or Scottsdale did not take into account the responses to Questions 3

and 4 in determining the premium, or that the misrepresentations did not affect the

risk of loss or the hazard assumed by Scottsdale.

      MBS also asserts that Kinsley did not or could not have taken into account

the responses to Questions 3 and 4 because he did not understand what was

involved in an audit or review of financial records. But this does not contradict

Tomasi’s testimony that “No” responses to these questions would normally have

resulted in a higher premium. Kinsley did not need to personally understand the

reasons behind Scottsdale’s and E-Risk’s policies in order to apply them. Nor was

Kinsley’s discretion to adjust the premium rate sufficient evidence to create a


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material issue of fact regarding whether the lack of accounting controls and

oversight materially affected the risk of loss.

      MBS also argues that summary judgment cannot be granted based solely on

the testimony of the underwriter. This Court has recognized that “under Alabama

law, the uncontradicted testimony of an insurance company’s underwriter that a

misrepresentation was material and that the company in good faith would not have

issued the policy as written, is not necessarily dispositive.” Bennett v. Mut. of

Omaha Ins. Co., 976 F.2d 659, 661 (11th Cir. 1992); see also Nationwide Mut.

Fire Ins. Co. v. Guster Law Firm, LLC, 944 F. Supp. 2d 1116, 1128 (N.D. Ala.

2013) (same). On on at least one occasion since our decision in Bennett, however,

the Alabama Supreme Court has relied solely on the testimony of an insurer’s

underwriter to conclude that a misrepresentation was material to the insurer’s risk

of loss as a matter of law. See Pabon, 903 So. 2d at 767-68 (relying on an

underwriter’s testimony about underwriting standings to conclude that an insured’s

misrepresentation as to whether a family member recently had filed for bankruptcy

was material as a matter of law).

      Here, while not necessarily dispositive, Tomasi’s testimony was supported

by other uncontradicted evidence in the record. For example, Scottsdale submitted

evidence of its underwriting guidelines, which provided that an upward “rating

modifier” applied where “no” responses are given to Questions 3 and 4.          In


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addition, the fact that the questions were asked on the insurance application and

that the application warned that all responses were considered material further

supports the materiality of the responses.2 See Alfa Life Ins. Corp. v. Lewis, 910

So. 2d 757, 762 (Ala. 2005) (finding an answer material because the question was

asked in the insurance application and the application warned that the answer

would have made her ineligible for coverage). Finally, that Walters’s criminal

conduct itself was allowed to continue over a lengthy period of five to seven years,

when it likely would have been found had the controls inquired about in Questions

3 and 4 been in place, indirectly exemplifies the materiality of the

misrepresentations. As the district court stated, “Indeed, if MBS had in place a

complete independent audit and bank reconciliation independent of Walters, her

scheme would not have been successful for as long as it was.”

       For these reasons, the district court did not err in concluding as a matter of

law that the misrepresentations were material to the risk of loss.




       2
           The policy contained a provision deeming all statements in the insurance application
material to the acceptance of the risk or the hazard assumed by Scottsdale. We do not rely on
this provision exclusively to find materiality, see State Farm Fire & Cas. Co. v. Oliver, 854 F.2d
416, 419-20 (11th Cir. 1988) (stating that the insurance contract cannot make the requirements
for voiding an insurance policy more stringent on the insured than those provided by Ala. Code
§ 24–14–7), but the provision is, nonetheless, evidence that Scottsdale considered the responses
to be material.
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                                         3.

      MBS does not contest that the misrepresentations and the claim of loss based

on Walters’s conduct were related to one another. For reasons already stated, we

likewise find the evidence undisputed that the third requirement is met.

                                         4.

      Finally, there is no genuine dispute of fact that Walters, who was the

CEO/CFO of MBS, knew the facts misrepresented, even assuming that she did not

intend to deceive Scottsdale.    With regard to Question 4, Walters knew that

someone with withdrawal and deposit authority was performing reconciliation

functions, namely, Walters. Regarding Question 3, as CFO, Walters handled all of

MBS’s financial accounting, including supplying financial information to Bowen

for purposes of preparing tax returns. It is also undisputed that Walters was

embezzling funds from MBS for many years and that she altered MBS’s financial

records to cover up her theft.     Based on this evidence, and for the reasons

explained above, the district court did not err in finding that no reasonable jury

could conclude that Walters did not know of the facts misrepresented.

                                         B.

      Alternatively, the district court determined that coverage could be avoided

under the policy because the losses suffered by MBS were not “discovered” during

the policy period.   According to the court, Walters’s knowledge of her own


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fraudulent activity is imputed to MBS, so MBS knew of the loss (through Walters)

before the policy period.

      On appeal, MBS argues that Walters’s knowledge cannot be imputed to

MBS because Walters was acting adverse to MBS’s interests. If the discovery

provision in the policy could be construed to exclude coverage in these

circumstances, MBS contends, it would effectively “exclude from coverage all

claims for misdeeds of officers and directors—the very people in a position to

cause a loss to an insured.”

      We decline to address this alternative ground because the district court

properly granted summary judgment on the first ground for the reasons explained

above.

                                       IV.

      In sum, we affirm the entry of summary judgment in favor of Scottsdale.

      AFFIRMED.




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