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Insurer not obligated to pay for CEO's embezzlement, renewal lies


Scottsdale Insurance Indemnity Co. is not obligated to indemnify a building maintenance company for the more than $2 million embezzled by its CEO and chief financial officer because of false answers she had provided on the firm’s insurance renewal application, says an appeals court, in upholding a lower court ruling.

Birmingham, Alabama-based Martinez Inc. hired Brenda Walters, who later became the company’s chief financial officer and CEO, in August 2004, according to Monday’s ruling by the 11th U.S. Circuit Court of Appeals in Atlanta in Scottsdale Indemnity Co. v. Martinez Inc.

Ms. Walters was fired in August 2011 after Martinez discovered that she had been embezzling funds totaling more than $2 million since at least 2006, according to the ruling.

An investigation revealed that she wrote checks to herself and others from the company’s accounts, and others and used company funds such as the petty cash account and company credit cards for her personal benefit.

At the time Martinez learned of the fraud it was insured by Scottsdale, Arizona-based Scottsdale Insurance Indemnity Co. under a business and management indemnity insurance policy which ran from Sept. 15, 2010 to Sep. 15, 2011, according to the ruling. The policy included a “crime coverage section” that provided losses caused by employee theft or fraud.

Scottsdale denied coverage under the policy on grounds including that the firm had made “material misrepresentations” in its insurance renewal application.

Ms. Walters had responded “yes” on the application to the question of whether bank accounts were reconciled by someone not authorized to deposit or withdraw for those accounts. “Scottsdale contended, and the district court agreed that these responses were untrue,” said the ruling.

A three-judge appellate panel agreed with the U.S. District Court in Birmingham’s decision to grant summary judgment to Scottsdale in the case.

“The answer that Walters provided on the application represented to Scottsdale that reconciliation functions at (Martinez) were separate from deposit and withdrawal authority when, in fact, no such separation of authority existed, as Walters would have been well aware,” said the panel, which held also that these misrepresentations were “material to the issuance of the policy.”

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