First Alabama Bank of Montgomery, N.A. v. First State Insurance

TJOFLAT, Chief Judge,

concurring in part and dissenting in part:

I concur in part VII of the majority’s opinion affirming the district court’s judgment in favor of appellee First Alabama Bank against appellant Johnson & Higgins. The remainder of the majority opinion, however, troubles me.

Under the guise of Alabama’s law of fraud, the majority, in affirming the district court’s finding of fraud on the part of appellant First State Insurance Company, 1 today announces and applies a new maxim of equity: equity will not suffer a loss to be without a remedy that is extracted from *1072 every party to the transaction that resulted in the loss. 2 After carefully reviewing the extensive record in this case, I find not even a trace of evidence to suggest that First State committed fraud against First Alabama. In the absence of such evidence, I would hold that the district court’s finding of fraud was erroneous. 3 Also, I would hold that the district court erred in its awards of compensatory and punitive damages. I therefore dissent from part III of the majority’s opinion, dealing with the fraud and damages issues, and part VI, dealing with prejudgment interest. I concur only in the result of part VIII, dealing with attorneys’ fees. 4

Furthermore, the district court misinterpreted Alabama public policy in holding the insurance contract at issue void as contrary to public policy. The majority today notes that First Alabama’s fraud claim adequately supports the district court’s award of damages and wisely refrains from “express[ing] any opinion on the correctness of the trial court’s public policy holding.” Ante at 1064. Because I would hold that the district court erred in finding fraud on the part of First State, however, I must address the alternative basis of First State’s liability. Although I agree with the majority that a federal court places itself in an “awkward position” when it attempts to divine a state’s public policy, Alabama’s caselaw is, in my view, sufficiently clear to make this endeavor feasible. I submit that, in time, the district court’s holding, rather than prior occurrence exclusions in claims-made insurance policies, will prove to be the real detriment to Alabama’s public welfare. 5

*1073 After briefly reviewing, in part I of this opinion, the salient facts in this case, I address in part II the fundamental issue on appeal: whether First State committed fraud against First Alabama. The majority has failed to recognize that the facts allegedly concealed and misrepresented were not material and that the alleged concealment and misrepresentation were not the proximate cause of First Alabama’s injury. Moreover, the majority has ignored important principles of agency law in Alabama, and I demonstrate that, when those principles are applied to the facts in this case, First Alabama’s fraud claim simply evaporates. In part III, I examine the district court’s awards of compensatory and punitive damages and show that the court erred in granting those awards. Finally, in part IV, I show how the district court misinterpreted Alabama public policy and that Alabama caselaw indicates that this contract would be enforced by the Alabama courts.

I.

In the fall of 1975, after deciding to consolidate the insurance coverage of its affiliate banks, First Alabama (a holding company) received proposals from several major insurance brokers. After reviewing various proposals, First Alabama announced in December of that year that it had appointed Johnson & Higgins to be its “exclusive Insurance Broker with respect to all lines of insurance.” First Alabama wanted errors and omissions (E & 0) coverage, as part of the overall plan of risk management services, for the trust departments of the banks it owned. To that end, Johnson & Higgins placed Patrick Green in charge of securing trust department E & 0 coverage for First Alabama. Green considered himself to be an expert in the field of trust department E & 0 coverage, and that view was shared by his colleagues and, apparently, his superiors at Johnson & Higgins.

Despite his knowledge of other providers of trust department E & 0 coverage, Green contacted only one primary carrier: First State, which he believed to be the “leader” in that type of coverage. quotations on premiums from First State, Green suggested that representatives of First Alabama meet with representatives of First State; Green believed that carriers are more likely to lower their premiums when they meet with, and are impressed by, representatives of an insured.

On October 29, 1976, Green and John Jenniges of Johnson & Higgins, Ted Ox-holm and Frank Vincent of First State, and Kurt Grinstead and James Bohannon of First Alabama met in First State’s offices in Boston. The meeting centered around a presentation by Bohannon of First Alabama’s audit procedures but concluded with a brief discussion of the availability of trust department E & 0 coverage for acts or omissions occurring prior to the effective date of the policy. According to Ox-holm’s notes of the meeting, First Alabama requested alternate quotes for coverage of (1) all prior acts and (2) acts occurring after January 1, 1975. First State’s precise response to this request is extremely significant but, unfortunately, not to be found in the record. In part II, I explore in detail the various witnesses’ recollections of what was said and the significance of First State’s response. Suffice it to say that Oxholm told the representatives of First Alabama that he would discuss some aspect of the request with First State’s reinsurers in London.

First State proposed to its reinsurers in London that prior acts coverage back to January 1, 1975, be given for a ten percent additional premium and unlimited prior acts coverage be given for a twenty percent additional premium. Reinsurance for up to one million dollars was agreed to, but one reinsurer expressed a lack of enthusiasm over providing coverage for the one-to-five million dollar level. On December 10, 1976, Vincent wrote to Green as follows:

After rather prolonged negotiations with our reinsurers, we have finally placed the necessary reinsurance. However, we regret that we must revise our original premium indications as follows: [premium quotations]

*1074

We are unable to offer any prior acts coverage.

(Emphasis added.) Green, who did not discuss prior acts coverage with any other primary carriers, relayed this information to First Alabama. First Alabama elected to purchase the policy without prior acts coverage from First State, according to Bohannon, because Green told representatives of First Alabama that “there was only one company that was writing [prior acts] coverage, that being First State.”

The remaining facts are predictable. Pri- or acts coverage was indeed available in 1976. First Alabama incurred substantial liability for acts occurring prior to the retroactive date of the trust E & 0 policy. First Alabama notified First State of the liability, and First State denied coverage.

II.

To demonstrate that the district court’s finding that First State committed fraud against First Alabama is erroneous, I first examine First State’s representations to First Alabama, assuming that no agency principles are applicable that would impute Johnson & Higgins’ knowledge to First Alabama. I thus show that, even if the relationships between the three primary actors were as the majority characterizes them — that is, no special relationship existed between First Alabama and Johnson & Higgins — First State committed no fraud. I then apply the familiar rule of agency law that the knowledge of the agent is imputed to the principal, in order to prove that First Alabama’s fraud claim is virtually frivolous.

A.

The common law of fraud in Alabama has been codified at Ala.Code §§ 6-5-100 to -104 (1975). Although familiar, the essential elements of actionable fraud bear repeating. A plaintiff must prove:

(a)a false representation concerning an existing material fact;

(b) a representation which (1) the defendant knew was false when made, or (2) was made recklessly and without regard to its truth or falsity, or (3) was made by telling plaintiff that defendant had knowledge that the representation was true while not having such knowledge;

(c) reliance by the plaintiff on the representation and that he was deceived by it;

(d) reliance which was justified under the circumstances;

(e) damage to the plaintiff proximately resulting from his reliance.

Ellis v. Zuck, 409 F.Supp. 1151, 1157 (N.D.Ala.1976) (citations omitted), aff'd, 546 F.2d 643 (5th Cir.1977). To succeed on a fraud claim based on suppression of material facts, a plaintiff must show that the defendant had a duty to speak arising from (1) a confidential relationship between the parties, (2) the relative bargaining positions of the parties, (3) particular circumstances such as the superior knowledge or expertise of the defendant, or (4) a partial revelation of facts within the defendant’s knowledge. See id. at 1157-58.

First Alabama alleged, and the district court found, that First State committed fraud against First Alabama by both affirmatively misrepresenting certain facts and suppressing other facts. Assuming that First State did misrepresent or suppress facts, nothing that First State said, or failed to say, conceivably constituted a material fact or proximately caused First Alabama’s loss as required under Alabama law.

The majority affirms the district court’s holding based on the following crucial allegations:

1. When First State was asked during the meeting in Boston to provide premium quotations for prior acts coverage, Oxholm replied (according to Kurt Grinstead of First Alabama) that “they would see what they could do, but that it was an issue that London would decide.” 6

*1075 2. First State was able to secure commitments from the London reinsurers of up to one million dollars coverage for prior acts, but it was unable to secure commitments for the one-to-five million dollar range.

3. First State told First Alabama, through Patrick Green, that it was “unable” to provide prior acts coverage and thus, according to the district court, created the impression that it was precluded from offering such coverage because of a decision made by the London reinsurers.

4. First State did not inform First Alabama that the London reinsurers were only reluctant to provide prior acts coverage in the one-to-five million dollar range.

5. Green (according to James Bohannon of First Alabama) informed Bohannon that First State was the only company at the time writing coverage for prior acts. 7

From these allegations, which the district court accepted as true, the court concluded that First State fraudulently “lulled [First Alabama] into not discussing the matter with First State or seeking coverage elsewhere.” First Alabama Bank v. First State Ins. Co., No. 83-G-2082-S, mem. op. at 37 (N.D.Ala. Feb. 20, 1987). Thus, according to the majority today, First Alabama was “induced to accept the insurance without the coverage it desired.” Ante at 1059.

Even assuming that the five allegations listed above correctly characterize the facts in this case, I am convinced that the majority and the district court have misapplied Alabama’s law of fraud. As noted above, a misrepresentation or concealment of facts is not actionable as fraud if the facts were not material or if the defendant’s conduct did not proximately cause the plaintiff’s injury. Torres v. State Farm Fire & Cas. Co., 438 So.2d 757, 758 (Ala.1983). Materiality and proximate cause are both absent from this case. I address these two requirements in order.

1.

A material fact is one that induces action on the part of the plaintiff. Cooper v. Rowe, 208 Ala. 494 , 94 So. 725, 726 (1922); Jackson Co. v. Faulkner, 55 Ala.App. 354 , 315 So.2d 591, 596 (1975). Lord Chancellor Brougham described the concept of materiality as follows:

Now, my lords, what inference do I draw from these cases? It is this, that general fraudulent conduct signifies nothing; that general dishonesty of purpose signifies nothing; that attempts to overreach go for nothing, unless all this dishonesty of purpose, all this fraud, all this intention and design, can be connected with the particular transaction, and not only connected with the particular transaction, but must be made to be the very ground upon which this transaction took place, and must have given rise to this contract.

Attwood v. Small, 6 Clark & Fin. 232, 447 (1838) (emphasis in original), quoted in 2 J. Pomeroy, A Treatise on Equity Jurisprudence § 890, at 1843 (4th ed. 1918).

I submit that the facts allegedly misrepresented and suppressed clearly do not rise to the level of materiality required under Alabama law. This becomes apparent if we assume that First State had disclosed to First Alabama every item of information available to First State. Thus, assume that First State revealed to First Alabama (1) that the decision not to offer prior acts coverage was made by First State, rather *1076 than its reinsurers, and (2) that the reinsur-ers had been willing to commit to coverage of up to one million dollars. In that situation, First Alabama would have received the following statements: (1) a statement by First State that it was unwilling, because of substantial risk, to write the prior acts coverage desired by First Alabama; and (2) a statement by Patrick Green that First State was the only company writing prior acts coverage.

A finding by the district court that First Alabama would have been prompted to look elsewhere for coverage had it been aware of this information would be clearly erroneous. Regardless of First State’s motive in denying coverage, First Alabama— according to a representative of Johnson & Higgins — was faced with a denial by the only company providing such coverage. Given Patrick Green’s statement, nothing First State said or failed to say regarding its reason for denying coverage could conceivably have altered First Alabama’s conduct. Yet, Alabama’s requirement of materiality is not satisfied unless the misrepresentation or suppression induced the plaintiff to change its conduct. See Cooper, 94 So. at 726 . Therefore, First State’s alleged misrepresentation and suppression were not material.

2.

Alabama’s law of fraud also requires that the alleged misrepresentation or concealment of fact be the proximate cause of the plaintiff’s injury. See Ellis, 409 F.Supp. at 1160 ; Torres, 438 So.2d at 758 ; Smith v. Smith, 266 Ala. 118 , 94 So.2d 863, 868 (1957). The doctrine of proximate cause in the context of fraud is identical to the doctrine of proximate cause in the context of ordinary negligence. Just as a negligent act need not be the sole cause of a plaintiff’s injury, a fraudulent misrepresentation or suppression of fact need not be the “sole cause, if it [is] proximate, immediate, and material.” Farrar v. Churchill, 135 U.S. 609, 615 , 10 S.Ct. 771, 773 , 34 L.Ed. 246 (1890); see Marshall v. Crocker, 387 So.2d 176, 178 (Ala.1980) (“[i]t is not indispensable that the misrepresentation or concealment shall be the sole inducement” (quoting Jordan & Sons v. Pickett, 78 Ala. 331, 338 (1884)). However, the injury must be “the natural and probable consequence of the negligent act or omission (or direct wrongful act) which an ordinary prudent person ought reasonably to foresee would result in injury.” Peevy v. Alabama Power Co., 393 So.2d 971, 973 (Ala.1981). Moreover, there must be no “intervention of any new or independent cause, [which] produces the injury.” Morgan v. City of Tuscaloosa, 268 Ala. 493 , 108 So.2d 342, 346 (1959) (quoting Smith v. Alabama Water Serv. Co., 225 Ala. 510 , 143 So. 893, 896 (1932)).

The evidence in this case plainly cannot support a finding of proximate cause. Even assuming that the misrepresentation and suppression of fact by First State were material, the injury would not have occurred but for Green’s alleged representation to First Alabama that First State was the only company writing prior acts coverage. In fact, the district court specifically held that the breakdown at Johnson & Higgins “directly caused the failure of First Alabama Bank to obtain prior acts coverage from First State itself, as well as precluding First Alabama Bank from the opportunity of obtaining such coverage from other sources.” First Alabama Bank v. First State Ins. Co., No. 83-G-2082-S, mem. op. 18 (N.D.Ala. Feb. 20, 1987) (emphasis added). The majority today implies as much when it finds that “[s]ince the bank definitely wanted the coverage and believed that there were no other markets available, First Alabama decided to accept the First State policy with a retroactive date of December 14, 1976.” Ante at 1058-1059. Thus, Green’s statement independently caused First Alabama’s injury.

Of course, if First State reasonably should have foreseen that a Johnson & Higgins representative would make such a statement, then the causal chain would not have been broken. See Morgan, 108 So.2d at 346 . Johnson & Higgins, however, held itself out to have expertise in the field of trust department E & O coverage, and First State recognized that expertise. In light of this expertise, nothing should have *1077 alerted First State to the possibility that Johnson & Higgins was not aware of other companies writing prior acts coverage. Thus, First Alabama’s injury could not have been a foreseeable result of First State’s misrepresentation and suppression of fact, and a finding of proximate cause in this case would be erroneous. 8

This case is analogous to the case of Meeks v. Garner, 93 Ala. 17 , 8 So. 378 (1890). Although rather old, Meeks’ interpretation of Alabama law is still valid. In Meeks, a vendor, who had acquired title to his property by adverse possession, represented to a vendee that the vendor had always possessed title to the land. Although the vendor clearly misrepresented a fact, the court focused on the subsequent conduct of third parties. The court held that a “vendor cannot be held responsible for a fraudulent misrepresentation as to his title, simply because third parties engage in blackmailing or malicious litigation with his vendee, or because others, not competent to judge of the title, refuse to purchase from the vendee.” Meeks, 8 So. at 379. Obviously, the court was concerned with holding a vendor liable for misrepresentations that caused an injury only with the aid of a third party’s independent and unforeseeable conduct. I am similarly concerned and would therefore decline to hold First State liable for Green’s statement.

B.

Characterizing the relationships between First State, Johnson & Higgins, and First Alabama as the majority characterizes them (that is, without recognizing the agency relationship between First Alabama and Johnson & Higgins), First State committed no actionable fraud. Now, I depart from the majority’s approach and apply principles of agency law that the majority fails to consider. 9 Johnson & Higgins certainly acted as First Alabama’s agent in procuring trust department E & 0 coverage, and, *1078 once the implications of that relationship are factored into the analysis of this case, one can see that First Alabama acted unjustifiably in relying, as it did, on First State’s misrepresentation and suppression of facts. In this section, I review certain relevant principles of Alabama’s agency law and show why those principles are applicable to this case. Then, I examine how the application of those principles affects the justifiability of First Alabama’s reliance on First State’s statements and omissions.

1.

a. The Agency Relationship

As a threshold matter, one must determine whether Johnson & Higgins was First Alabama’s agent in procuring trust department E & 0 coverage. In Alabama, an insurance broker becomes an insured’s agent 10 when two requirements are satisfied. First, the broker must exclusively represent one party when negotiating and transacting business with other parties. In other words, the broker is not the insured’s agent when the broker “acts as intermediate negotiator between the parties to a transaction.” Strumpf v. State, 31 Ala.App. 409 , 18 So.2d 104, 107 (1944). Second, the insured must have the right to control the broker. Brown v. Commercial Dispatch Publishing Co., 504 So.2d 245, 246 (Ala.1987).

All of the evidence in this case suggests that Johnson & Higgins acted solely as the representative of First Alabama in procuring trust department E & O coverage. In a letter written on First Alabama’s letterhead, James Bohannon stated that “we have appointed Johnson & Higgins of Georgia, Inc. as our exclusive Insurance Broker with respect to all lines of insurance.” (Emphasis added.) Bohannon also testified that Johnson & Higgins “would function as an arm of management, so to speak.” Nothing in the record indicates that Johnson & Higgins acted as an “intermediate negotiator” between First Alabama and First State.

Second, Alabama courts hold that no agency relationship exists unless the alleged principal has a right of control over the agent. The Alabama Supreme Court has held that “[f]or one to be an agent, the other party must retain the right to direct the manner in which the business shall be done, as well as the results to be accomplished, or, in other words, not only what shall be done, but how it shall be done.” Brown, 504 So.2d at 246 .

The record clearly indicates that First Alabama possessed the degree of control over Johnson & Higgins contemplated by the Brown court. Green stated in deposition 11 that Johnson & Higgins “took direction from [First Alabama]. We gave them suggestions and took direction.” Johnson & Higgins’ initial proposal to First Alabama emphasized the degree of control that First Alabama would exercise: “Once the quotes are in, we prepare a comparison sheet of premiums, coverage and service, and present alternative insurance plans to you- We often use graphs to explain which plans work best at which retention levels. We offer our recommendation for the best plan.” (Emphasis added.) Thus, First Alabama did not treat Johnson & Higgins as an independent contractor by merely hiring Johnson & Higgins to survey the market and purchase the best policy; rather, Johnson & Higgins was hired to survey the market, present the results of that survey to First Alabama, and purchase *1079 a policy according to First Alabama’s direction. I submit that this degree of control is more than sufficient to establish an agency relationship between First Alabama and Johnson & Higgins.

b. Knowledge Imputed to the Principal

Alabama courts have always adhered to the general rule that the agent’s knowledge is treated as the principal’s knowledge. See, e.g., Carnival Cruise Lines, Inc. v. Goodin, 535 So.2d 98, 103 (Ala. 1988); National Union Fire Ins. Co. v. Lomax Johnson Ins. Agency, Inc., 496 So.2d 737, 739 (Ala.1986). When the agent acquires the knowledge “in transacting the business of the principal in the scope of his authority, the constructive notice thereby drawn is conclusive.” Tennessee Valley Bank v. Williams, 246 Ala. 563 , 21 So.2d 686, 689 (1945); see Sullivan v. Alabama Power Co., 20 So.2d 224, 230 (Ala.1944) (“where notice is thus acquired it is indisputable”). This constructive notice or knowledge is based on a presumption that the agent has fulfilled his duty to make relevant disclosures to his principal. See National Union, 496 So.2d at 739 . 12

The rule of constructive knowledge has been consistently applied to agency relationships found to exist in transactions involving insurance contracts. Alabama courts have long held that notice to an insurer’s agent constitutes notice to the insurer. See, e.g., Connell v. State Farm Mut. Auto. Ins. Co., 482 So.2d 1165, 1167 (Ala.1985); Alabama Farm Bureau Mut. Cas. Ins. Co. v. Moore, 435 So.2d 712, 714 (Ala.1983); Phoenix Ins. Co. v. Copeland, 86 Ala. 551 , 6 So. 143 , 145 (1889). Although no Alabama court, of which I am aware, has considered the issue of imputing knowledge of an insured’s agent to the insured, all of the courts and commentators that have addressed the issue have applied the rule of constructive knowledge. See, e.g., Peel v. American Fidelity Assurance Co., 680 F.2d 374, 377-78 (5th Cir.1982); Merchants Fire Assurance Gorp. v. Lattimore, 263 F.2d 232, 240 (9th Cir.1959); Standard of Am. Life Ins. Co. v. Humphreys, 257 Ark. 618 , 519 S.W.2d 64 , 66 (1975); Tamburine v. Center Savings Assoc., 583 S.W.2d 942, 949 (Tx.Ct.Civ.App. 1979); 16 J. Appleman & J. Appleman, Insurance Law and Practice § 8728, at 350 (1981). As one court has stated, when an insured’s broker/agent communicated with the insurer, “it was as if [the insured] himself did so.” Century Indemnity Co. v. Jameson, 333 Mass. 503 , 131 N.E.2d 767, 769 (1956).

Given (1) the overwhelming authority in support of the proposition that the knowledge of the insured’s agent should be imputed to the insured, and (2) the Alabama courts’ consistency in applying agency principles to the insurance context, cf. National Union Fire Ins. Co. v. Schwab, 241 Ala. 657 , 4 So.2d 128, 130 (1941) (“insured must bear the consequences of false swearing by the agent”), I predict that the Alabama courts would adopt the rule of constructive notice with regard to an insured and his agent.

After carefully reviewing the record, I have found that Patrick Green of Johnson & Higgins acquired crucial information and knowledge that, under the rules of agency, should be imputed to First Alabama. First, Green stated several times that, at the time he was acting as First Alabama’s agent in procuring trust department E & 0 coverage, he knew that First State and other companies wrote such coverage without the prior acts exclusion. Green testified as follows:

Q And you didn’t find out that [First State] did on occasion endorse that coverage [for prior acts] out until much later; is that not true?

THE WITNESS: No. I don’t know that’s true. A few of these exclusions can be purchased, can be eliminated. You can get them back.

Q Did you know that in 1976?

A Yes.

*1080 A

If [prior acts coverage] was available with Scarborough, I’m sure I knew....

I said the Scarborough policy was a higher price, and [a representative of First Alabama] said, to hell with that, let’s go....

Q ... [I]n connection with this first placement in 1976, did you ever represent to ... First Alabama ... at any time in connection with this first placement that there were no other markets available for Trust E & 0 at that time?

A I wouldn’t say that. I wouldn’t say there were no markets. There [were] other markets.... I knew about the markets. I wouldn’t have said that at all.

Q All right, sir. Did you say — do you recall saying anything to anyone in connection with First Alabama ... that there was no other market available that would write prior acts coverage for them?

A No. I don’t remember any such conversation.

Q At the time you placed First Alabama ... or recommended to [First Alabama's] Insurance Committee the placement with First State ..., were you aware of other markets that were available at that time?

A I just went through the whole renewal situation with the Fulton Bank 13 which was back in June or July of that year, which is about the same time [I] was going through First Alabama....

Furthermore, Green knew that it was possible, if not likely, that First State, rather than its reinsurers, made the decision not to provide coverage for prior acts.

Q Now, [Vincent says in his letter of December 10, 1976], “We [are] unable to offer any prior acts coverage.”

A Correct.

Q What did that relate to?

A Exactly what it says, they wouldn’t give prior acts coverage.

Q When you read that, did you understand that to mean that he was not permitted to provide prior acts coverage?

THE WITNESS: Cameron and Colby [the parent of First State] would not provide the coverage.

A Frank [Vincent] makes his own deals with reinsurers, any insurance company does. It is not up to me to speculate who wouldn’t provide it.

(Emphasis added.)

This knowledge was acquired by Green “in transacting the business of [First Alabama] in the scope of his authority.” See Tennessee Valley Bank, 21 So.2d at 689 . 14 Therefore, a conclusive presumption arises under Alabama law that First Alabama had *1081 constructive notice of this information. See id, 15

2.

As I note above, Alabama courts require a plaintiffs reliance on a defendant’s fraudulent statements to be justifiable. For many years, the Alabama Supreme Court’s definition of justifiable reliance has remained unchanged — always couched in terms of reasonableness. The Alabama Supreme Court has stated that “[bjecause it is the policy of courts not only to discourage fraud but also to discourage negligence and inattention to one’s own interests, the right of reliance comes with a concomitant duty on the part of the plaintiffs to exercise some measure of precaution to safeguard their interests.” Southern States Ford, Inc. v. Proctor, 541 So.2d 1081, 1083 (Ala.1989) (quoting Torres v. State Farm Fire & Cas. Co., 438 So.2d 757, 758-59 (Ala.1983)). Therefore, “[wjhere a party has reason to doubt the truth of the representation or is informed of the truth before the acts, he has no right *1082 to act on the representation.” Taylor v. Moorman Mfg. Co., 475 So.2d 1187, 1189 (Ala.1985); see Tillis v. Smith Sons Lumber Co., 188 Ala. 122 , 65 So. 1015, 1019 (1914).

The Alabama Supreme Court, however, appears to have relaxed the reasonableness requirement somewhat. In I.N. Hickox v. Stover, 551 So.2d 259, 263 (Ala.1989) (quoting Southern States Ford, 541 So.2d at 1081 (Hornsby, C.J., specially concurring) (unpublished)), the court established the following test:

A plaintiff, given the particular facts of his knowledge, understanding, and present ability to fully comprehend the nature of the subject transaction and its ramifications, has not justifiably relied on the defendant’s representation if that representation is “one so patently and obviously false that he must have closed his eyes to avoid the discovery of the truth.”

Thus, the court seems to have made proving justifiable reliance easier. See id. 551 So.2d at 266-67 (Houston, J., concurring in part and dissenting in part) (arguing that majority overruled concept of reasonable reliance as set forth in Torres).

Given, however, that First Alabama acquired constructive knowledge of other markets for prior acts coverage and of the possibility that First State made an independent decision not to provide prior acts coverage, one can only conclude that First Alabama’s purported reliance on First State’s misrepresentation and suppression of fact was unjustifiable, even under the less stringent Hickox standard. First Alabama constructively knew that other companies, as well as First State, were writing prior acts coverage. Moreover, it constructively knew that the decision not to provide prior acts coverage could very well have been made by First State independently. Yet, by relying on First State’s statements, First Alabama purportedly was “lulled” into not seeking coverage elsewhere or pursuing the matter further with First State. To rely in this manner on First State’s misrepresentation and suppression of fact was simply unjustifiable — First Alabama must have “closed [its] eyes to avoid the discovery of the truth.” See id. 551 So.2d at 263 . Consequently, the district court erred in finding that First State committed actionable fraud against First Alabama.

III.

Although assessing damages against First State should not even be an issue in this case, I am compelled to express my views on the district court’s and majority’s treatment of this issue. The district court assessed actual damages against First State in the amount of $3,000,000 and punitive damages in the amount of $3,000,000. The majority cursorily affirms both awards. Even assuming that First State committed actionable fraud against First Alabama, I think the district court erred in making both awards.

A. Actual Damages

In Alabama, the general measure of damages for fraud includes all damages naturally and proximately resulting from the wrong. Winn-Dixie Montgomery, Inc. v. Henderson, 371 So.2d 899, 902 (Ala.1979). The plaintiff, however, must affirmatively prove to the factfinder the amount of damages; if he fails to do so, the omission may not be corrected by speculation or conjecture. Continental Volkswagen, Inc. v. Soutullo, 54 Ala.App. 410 , 309 So.2d 119, 122-23 (1975).

Assuming that First Alabama could have purchased the prior acts coverage elsewhere, it failed to meet its burden by not adducing evidence as to the amount of additional premium it would have had to pay to secure prior acts coverage. I find the district court’s failure to address this issue particularly disturbing. When a plaintiff seeks damages of this nature, a court “must [take] into consideration in calculating the loss to the plaintiff that which he has saved by reason of not having to perform.” Whiting v. Dodd, 39 Ala.App. 80 , 94 So.2d 411, 414 (1957) (emphasis added). 16 *1083 Neither the record nor the district court tells us what First Alabama saved in premiums by not having prior acts coverage.

In essence, the court granted First Alabama relief that it did not seek — reformation 17 — by reforming the parties’ insurance contract to include coverage for prior acts and giving First Alabama a judgment under that coverage. The district court called this de facto reformation “damages.” Even assuming that First Alabama had sought reformation, a court may reform a contract only to reflect the true intent of the parties; it may not reform a contract to create a new agreement. Rohleder v. Family Shows, Inc., 435 So.2d 95, 97 (Ala.Ct.Civ.App.1983). Furthermore, reformation — an equitable remedy — may be granted only when there is no adequate legal remedy. Moss v. Crabtree, 245 Ala. 610 , 18 So.2d 467, 468 (1944). The district court’s de facto reformation did create a new agreement — one clearly not intended by either party at the time they entered into the contract — and did so when the standard measure of damages clearly would have been adequate. Thus, the district court erred regardless of whether its award could be characterized as damages or reformation.

B. Punitive Damages

Equally troubling is the award of $3,000,-000 in punitive damages. Of course, in such a case as this, where no actionable fraud was committed, the district court may not award punitive damages based on the defendant’s misrepresentation and suppression of fact. See Coastal Concrete Co. v. Patterson, 503 So.2d 824, 830 (Ala. 1987) (fraud claim must support award of at least nominal compensatory damages before jury may award punitive damages). Even if First State did commit actionable fraud, however, the district court erred in awarding punitive damages to First Alabama. 18

Punitive damages may not be imposed without evidence to support a finding that the defendant intended to deceive the plaintiff, Hopkins v. Lawyers Title Ins. Corp., 514 So.2d 786, 790-91 (Ala.1986), or acted in wanton or reckless disregard of the plaintiff’s rights, Gulf Atlantic Life Ins. Co. v. Barnes, 405 So.2d 916, 925 (Ala. 1981). The district court found such evidence. The district court found that “First State intended to mislead and did successfully mislead [First Alabama].” First Alabama Bank v. First State Ins. Co., No. 83-G-2082-S, mem. op. at 37 (N.D.Ala. *1084 Feb. 20, 1987). It also found that “the representations made and the failure to disclose material facts by First State were an attempt to gain a negotiating advantage by concealment of a very material fact— egregious fraud — the kind deserving of punishment by the imposition of punitive damages.” Id. at 45.

A trier of fact, however, “has no untrammeled discretion to speculate upon the existence of fraudulent intent. Any finding on the issue must be based on reasonable inferences from the evidence, and intent to defraud must be clearly proved by a preponderance of the evidence.” Purcell Co. v. Spriggs Enters., 431 So.2d 515, 519 (Ala.1983). I have carefully searched the record and have not found even a scintilla of evidence to support a reasonable inference that First State had an intent to deceive First Alabama or acted in wanton and reckless disregard of First Alabama’s rights. To attribute this level of culpability to First State merely because it told a highly sophisticated brokerage firm it was “unable” to provide the coverage is patently ridiculous. I am continually confronted with two questions: (1) Why would Johnson & Higgins be deceived by this statement? and (2) Why would First State think that, with this statement, it could deceive a major brokerage firm that certainly was aware of all the relevant information? The record, the district court, and the majority provide no answers.

The district court’s findings on this issue were merely speculations and therefore cannot support an award of punitive damages.

IV.

The district court held, in a second opinion devoted entirely to the public policy issue, that “[i]n this factual setting the prior acts exclusion violates the public policy of Alabama.” 19 First Alabama Bank v. First State Ins. Co., No. 83-G-2082-S, mem. op. at 41 (N.D.Ala. May 26, 1988). The district court was careful to note that not all claims-made policies with prior acts exclusions are void in Alabama; it held merely that, given the circumstances of this case, this particular contract violates public policy. Despite this narrow holding, the district court reached an incorrect result for two reasons. First, tightly interwoven with the district court’s characterization of the circumstances of this case is an assumption that First State committed actionable fraud against First Alabama. Having shown that this assumption is erroneous, I am compelled to analyze the public policy issue from a completely different perspective. Second, the district court simply misconstrues the cases that test insurance contracts in light of public policy.

In this part, I first explore how courts in general, and Alabama courts in particular, examine contracts in light of public policy concerns and show that the district court adopted an improper approach to this question. I then examine the contract at issue, applying a better-founded interpretation of Alabama public policy.

A.

The district court correctly noted that no Alabama court has directly considered a claims-made policy with a prior acts exclusion in light of the state’s public policy. Thus, the court attempted to glean from related cases guiding principles that Alabama courts presumably would use in evaluating this contract, concluding that the courts generally construe public policy to favor (1) coverage coextensive with the insured’s legal liability, and (2) freedom of contract. I agree that courts are often concerned with these two principles, but submit that the underlying concerns of these principles are (1) the adequate provision of goods and services to the public, and (2) the relative bargaining power of the parties to the contract; therefore, insurance contracts should be evaluated in light *1085 of these more general concerns. 20 To prove the validity of these principles, I review the statutes and caselaw on this issue. 21

1. A Definition of “Public Interest”

In Alabama, “[t]he true test to determine whether a contract is unenforceable because of public policy is whether the public interest is injuriously affected in such a substantial manner that private rights thereunder should yield to the public interest.” Taylor v. Martin, 466 So.2d 977, 979 (Ala.Ct.Civ.App.1985). “If it definitely appears that enforcement of a contract will not be followed by injurious results generally, at least what the parties have agreed to ought not to be struck down.” Lowery v. Zorn, 243 Ala. 285 , 9 So.2d 872, 874 (1942). Alabama cases generally give us no more guidance than these cursory statements. What is the “public interest,” and when is it substantially injured? What are “injurious results”? One finds many cases in which contracts are tested against public policy, but rarely does one find a case in which the court attempts to answer these more general questions or provide guidance for later courts evaluating slightly different contracts.

Examining the many tributary statutes and cases that have fed into the modern statement of the public policy test provides many helpful insights into the Alabama courts’ conception of the “public interest.” First, one inevitably encounters the policy disfavoring contracts in restraint of trade, which is now codified at Ala.Code §§ 8-1-1, -10-1 to -10-3 (1975). In cases enforcing that policy, immediately apparent is the Alabama courts’ view that encouraging the provision of necessary goods and services enhances the public interest. In Maddox v. Fuller, 233 Ala. 662 , 173 So. 12 (1937), for example, the Alabama Supreme Court held a covenant not to compete in the ginning industry valid under Alabama public policy. The court focused on the fact that the “public was deprived of no existing ginning facilities” and that unfettered competition in the market would create a “situation wherein additional capital outlay and overhead operating expenses may lead to abuses hurtful to the public interest, and ultimately to a crippling of efficient services at reasonable cost.” Id., 173 So. at 16 (emphasis added).

Again, in Harris v. Theus, 149 Ala. 133 , 43 So. 131 (1907), the Alabama Supreme Court noted the following important considerations when it examined a contract to sell a business and a covenant not to compete: “Nothing is abandoned, and only a transfer is accomplished. The same occupation continues. The same number of mouths are fed.” Id., 43 So. at 133 (quoting Tuscaloosa Ice Mfg. Co. v. Williams, 127 Ala. 110 , 28 So. 669 , 671-72 (1899) (quoting in turn Oliver v. Gilmore, 52 F. 562, 568 (C.C.D. Mass.1892))). These cases clearly indicate that the Alabama courts define the “public interest” to include an interest in maintaining a supply of goods and services at a reasonable price. See James S. Kemper & Co. Southeast v. Cox & Assocs., 434 So.2d 1380, 1384 (Ala.1983) (contracts in restraint of trade “not only deprive the public of efficient service, but tend to impoverish the individual”).

Second, tracing back through the history of Alabama’s public policy test reveals an underlying concern with the liberty of contract and, necessarily, the relative bargaining positions of the parties. In Anderson v. Blair, 202 Ala. 209 , 80 So. 31 (1918), the Alabama Supreme Court noted:

It must not be forgotten that you are not to extend arbitrarily those rules which say that a given contract is void as *1086 being against public policy, because, if there is one thing which more than another public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by courts of justice.

Id., 80 So. at 33 (emphasis added) (quoting Printing & Numerical Registering Co. v. Sampson, 19 L.R.-Eq. 462, 465 (1875) (Jessel, M.R.)); see Lowery, 9 So.2d at 874 . Obviously, the Alabama Supreme Court has considered a contract that was not “voluntarily and fairly made” to be detrimental to the public interest. See Lowery, 9 So.2d at 874 ; cf. Morgan v. South Central Bell Tele. Co., 466 So.2d 107, 117 (Ala.1985) (criteria used to determine whether exculpatory clause contrary to public policy include (1) relative bargaining positions, (2) whether contract of adhesion involved, and (3) whether weaker party subject to stronger party’s control).

In Lowery , the court cited Baltimore & O.S. Ry. v. Voigt, 176 U.S. 498 , 20 S.Ct. 385 , 44 L.Ed. 560 (1900), which in turn quoted extensively from Railroad Co. v. Lockwood, 84 U.S. (17 Wall.) 357 , 21 L.Ed. 627 (1873). Lockwood provides perhaps the clearest exposition of when a contract is not voluntarily and fairly made and, hence, detrimental to the public interest. Analyzing a contract that limited a common carrier’s liability for acts constituting ordinary negligence, the Court stated:

The carrier and his customer do not stand on a footing of equality. The latter is only one individual of a million. He cannot afford to higgle or stand out and seek redress in the courts. His business will not admit such a course. He prefers, rather, to accept any bill of lading, or sign any paper the carrier presents; often, indeed, without knowing what the one or the other contains. In most cases, he has no alternative but to do this, or abandon his business....

Conceding, therefore, that special contracts, made by common carriers with their customers, limiting their liability, are good and valid so far as they are just and reasonable; to the extent, for example, of excusing them for all losses happening by accident, without any negligence or fraud on their part; when they ask to go still further, and to be excused for negligence — an excuse so repugnant to the law of their foundation and to the public good — they have no longer any plea of justice or reason to support such a stipulation, but the contrary. And then, the inequality of the parties, the compulsion under which the customer is placed, and the obligations of the carrier to the public, operate with full force to divest the transaction of validity.

Id. at 379-82 (emphasis added); see also 14 S. Williston, A Treatise on the Law of Contracts § 1628, at 6 (3d ed. 1972).

These cases show that the Alabama courts, and American courts in general, define “public interest” primarily as society’s concern for protecting parties in clearly inferior bargaining positions and encouraging the supply of goods and services at reasonable prices. I submit that all of the cases cited by the district court support this definition. I therefore turn to the major cases cited by the court to show that the principles I have developed still guide the courts in their struggles to declare public policy with regard to the insurance industry.

2. Insurance Contracts and the Public Interest

The district court discusses two cases at length — Langley v. Mutual Fire, Marine & Inland Ins. Co., 512 So.2d 752 (Ala.1987), overruled on other grounds, I.N. Hickox v. Stover, 551 So.2d 259 (Ala.1989), and James & Hackworth v. Continental Cas. Co., 522 F.Supp. 785 (N.D.Ala.1980). In both of those cases, the insured filed a claim after the expiration date of a claims-made policy. Both courts upheld the policies against public policy attacks, obviously basing their decisions on the fact that both insureds were given the opportunity to purchase extended coverage and voluntarily turned down that coverage. See James & *1087 Hackworth, 522 F.Supp. at 788-89 ; Langley, 512 So.2d at 760 . These decisions are in accord with the guiding principle that public policy frowns on contracts enforced to the detriment of a party with inferior bargaining power. The insureds had an alternative to the contract they accepted and were under no compulsion to accept a policy without extended coverage. The same principle can be found at work in other cases cited by the court. See, e.g., St. Paul Fire & Marine Ins. Co. v. General Mut. Ins. Co., 282 Ala. 695 , 213 So.2d 856, 859 (1968); Rotwein v. General Accident Group & Continental Cas. Co., 103 N.J.Super. 406 , 247 A.2d 370, 377-78 (Law Div.1968).

Closely related to these eases are the cases that have held policies void as against public policy. In every case cited by the district court in support of this proposition, the court held that the insurance policy at issue constituted a contract of adhesion. 22 See, e.g., Sparks v. St. Paul Ins. Co., 100 N.J. 325 , 495 A.2d 406, 415-16 (1985); Jones v. Continental Cas. Co., 123 N.J.Super. 353 , 303 A.2d 91, 94 (Ch.Div. 1973). In these cases, the individual insureds had no alternative but to accept or to reject the policy, entering into contracts that the Lockwood and Lowery courts certainly would have declared void based on the inequality of bargaining positions. See Lockwood, 84 U.S. (17 Wall.) at 381-82 ; Lowery, 9 So.2d at 874 .

Having traced the development of the public policy test and distilled a generalized definition of public interest, and now having proved that definition to be the guiding principle in every recent relevant case of which I am aware, I believe it is safe to test the contract at issue with the principles developed in this section. Therefore, I consider next the trust department E & O policy issued by First State to First Alabama.

B.

In this section, I show that the insurance contract in this case was not void as against public policy, given the twofold definition of the public interest developed above. First, the contract resulted from the negotiations of two powerful and sophisticated corporations and reflects a deliberate choice on the part of First Alabama. Second, holding this contract void would result in decreasing the supply of this type of coverage in Alabama. 23 I address each point in turn.

1.

First Alabama is a major corporation that retained as its agent the brokerage firm of Johnson & Higgins, a recognized expert in the field of trust department E & O coverage. First Alabama hired Johnson & Higgins because of its expertise; therefore, Johnson & Higgins’ vast knowledge of the marketplace was imputed to its principal, First Alabama. 24 Representatives of First Alabama and Johnson & Higgins met with representatives of First State in Boston to discuss the price and other terms of the policy. The favorable impression created by First Alabama at that meeting apparently resulted in more advantageous premiums.

Then, Johnson & Higgins, acting as First Alabama’s agent, made a voluntary decision to recommend acceptance of the policy, with full knowledge of the policy’s terms and that other insurers provided pri- or acts coverage. As I note above, see supra at 1079-80, Johnson & Higgins’ knowledge of the marketplace and of the possibility that First State made an independent decision not to offer prior acts coverage should be imputed to First Alabama. Given this background, I find it impossible to hold that the contract was *1088 one of adhesion or resulted from unequal bargaining positions. 25 The contract was “voluntarily and fairly made” and therefore should not be held void as against public policy. See Lowery, 9 So.2d at 874 ; Anderson, 80 So. at 33 .

2.

Alabama’s definition of public interest provides a second reason for not holding this contract void: such a holding would discourage insurance companies from writing trust department E & 0 coverage with prior acts exclusions. Although the district court purported to issue a narrow holding, it sends a strong warning to insurance companies to write coverage with a prior acts exclusion at their own risk. The holding creates the possibility that an insurance company’s prior acts exclusion will be held void. Given the fact-sensitive nature of such a decision, 26 however, the company will be unable to predict accurately when a court will strike its exclusion and impose substantial liability.

This possibility is sufficient to persuade insurance companies that writing trust department E & 0 coverage with prior acts exclusions is simply too risky in Alabama. Yet, the record indicates that insurance companies prefer to write such coverage for new clients with the prior acts exclusion. When an insurance company writes trust E & 0 coverage for a new client, it cannot estimate the risk of liability from prior acts because the company is not familiar with the new client’s method of conducting business before it became the insurance company’s client. Without the ability to estimate risk, the insurance company cannot profitably write coverage and will simply refuse to do so. Thus, the court’s holding could significantly reduce the supply of trust department E & 0 coverage for new clients. I believe that the “same number of mouths” will not be fed after the district court’s decision, see Harris v. Theus, 149 Ala. 133 , 43 So. 131, 133 (1907); therefore, it is the court's holding, rather than the prior acts exclusion, that violates Alabama's public policy.

Y.

For the foregoing reasons, I would affirm the district court’s judgment with regard to Johnson & Higgins, vacate with regard to First State, and instruct the district court, upon receipt of the mandate, to enter judgment in favor of First State.

. First State is a wholly owned subsidiary of appellant Cameron & Colby Company, Inc. Cameron & Colby was named as a defendant in this suit, and the district court found that it also committed fraud through its subsidiary. Because of the identity of interests, I refer to both Cameron & Colby and First State simply as "First State.”

. The venerable maxim actually states that equity will not suffer a wrong to be without a remedy. 1 F. Lawrence, A Treatise on the Substantive Law of Equity Jurisprudence § 38 (1929).

. Generally, we review a district court's finding of fraud as a finding of fact under the clearly erroneous standard of Federal Rule of Civil Procedure 52(a). See Citibank, N.A. v. Citibanc Group, Inc., 724 F.2d 1540, 1544 (11th Cir.1984). This deferential treatment of a finding of fraud is proper: the existence of actionable fraud is merely an ultimate fact supported by several subsidiary findings of fact, such as "misrepresentation,” "reliance,” and "causation.” This case, however, does not call for such deferential review. We have held that when a district court applies an incorrect legal standard, the findings resulting from that misapplication “lose the insulation of [Rule] 52(a).” Corley v. Jackson Police Dep’t, 566 F.2d 994 , 1001-02 (5th Cir.1978); see also Peterson Indus. v. Lake View Trust & Sav. Bank, 584 F.2d 166, 168 (7th Cir.1978); 9 C. Wright & A. Miller, Federal Practice and Procedure § 2585 (1971), cited in Henson v. City of Dundee, 682 F.2d 897 , 906 & n. 13 (11th Cir. 1982). The district court in this case made a finding of fraud without considering certain important principles of fraud and agency law. As I show in part II of this opinion, that finding resulted from a misapprehension of Alabama law; therefore, the district court’s finding of fraud should not be granted any greater deference than we would grant to a pure legal holding.

The majority is greatly troubled by my departure from the clearly erroneous standard in this case. Apparently, the majority would make such a departure only when the questioned finding resulted from a "misunderstanding of governing rules of evidence or procedure." Ante at note 6. This statement itself represents a misunderstanding of this circuit’s law. For example, in one of the cases cited by the majority, Johnson v. Uncle Ben's Inc., 628 F.2d 419 (5th Cir.1980), the court departed from the clearly erroneous standard when the district court assigned an inappropriate weight to statistical evidence in a Title VII case and consequently found no discrimination. Id. at 421-22. Such an error is not merely a misunderstanding of the rules of evidence or procedure — it is a misunderstanding of a substantive legal principle. When such an error occurs, ”[w]e must undertake an independent analysis of the record before us in light of the correct legal standards.” Id. at 422.

Here, as in Johnson, the district court failed to weigh evidence relating to substantive legal rules: materiality, causation, and justifiability of reliance. The district court’s failure to weigh that evidence resulted from a misapprehension of substantive principles of Alabama law. Therefore, we are required to “undertake an independent analysis of the record before us in light of the correct legal standards,” id. at 422.

. Because First State did not commit actionable fraud against First Alabama, I express no opinion on First State’s affirmative defense of failure to comply with a condition precedent, dealt with in part IV of the majority’s opinion.

. Of course, the district court’s holding will not bind any other courts. But, until the Alabama Supreme Court addresses this issue, the district court’s holding could affect even suits brought in state courts since Alabama’s lower courts might consider the holding to be evidence of Alabama's public policy.

. Patrick Green testified, however, that a representative of First State responded that it was "not willing to give that coverage right now. Let's write it for a year or two. Let’s see how you are.” Furthermore, Green testified that the only reference to the London reinsurers was *1075 made in regard to the price of the contemplated policy. This testimony raises doubt about Grin-stead’s impression that the prior acts coverage was left entirely to the discretion of the London reinsurers. Nevertheless, the district court apparently accepted Grinstead’s version of First State’s response, and I will assume in this opinion that the district court correctly interpreted the evidence.

. The record indicates that this allegation is highly suspect. When asked whether he made such a statement, Green testified that he "wouldn’t say that_ There was other mar-kets_ I knew about the markets. I wouldn’t have said that at all.” Significantly, while Bo-hannon’s testimony could be characterized as self-serving, Green’s testimony was, if anything, contrary to his own interest since it tends to show that Green acted negligently. Nevertheless, I accept, for the purposes of this opinion, the district court’s findings.

. See supra note 3.

. The majority explicitly refuses to deal with the issue of agency, noting that First State failed to raise the issue in the district court. Ante at note 8. I must part company with the majority on this point. In First Alabama's amended complaint (the pleading on which it went to trial), it alleged that First State fraudulently misrepresented and suppressed certain material facts, that First State knew First Alabama would rely on those misrepresentations, and that the misrepresentations caused First Alabama's injury. By making these specific allegations, and simply by making a claim of fraud, First Alabama raised the issues of justifiable reliance and proximate cause. These issues must be raised by a claim of fraud in Alabama because no such claim will succeed without proof of these elements. First State specifically denied the section of First Alabama’s complaint in which the allegations of fraud were made. By so denying these allegations, First State put First Alabama to the proof on all elements of its claim of fraud. See FDIC v. Siraco, 174 F.2d 360, 362 (2d Cir.1949); 5 C. Wright & A. Miller, Federal Practice and Procedure § 1266, at 283 (1969).

The use of agency rules in this case does not constitute an affirmative defense, see Fed.R. Civ.P. 8(c) (agency and unjustifiable reliance not affirmative defenses); rather, the existence of an agency relationship between Johnson & Higgins and First Alabama precludes findings of justifiable reliance and proximate cause. Because agency rules are completely bound up in First Alabama’s claim, the agency issue was, by necessity, before the district court: whenever a legal theory might directly contradict a substantive element of a plaintiff’s prima facie case, a defendant need not specifically plead that theory for it to be presented to the district court. See Sanden v. Mayo Clinic, 495 F.2d 221, 224 (8th Cir.1974); Goodwin v. Townsend, 197 F.2d 970, 971 (3d Cir.1952). The district court might not have expressly dealt with the agency relationship, but we may explore any theory that bears directly on one of the elements of First Alabama’s claim.

Even if the agency relationship was not before the district court, the issue fits at least one of several exceptions to the general rule that courts of appeals do not consider issues not presented to the district court. Significantly, a federal appellate court may consider an issue not raised in the district court where the interest of substantial justice is at stake, where the proper resolution is beyond any doubt, or where that issue presents significant questions of general impact or of great public concern. Dean Witter Reynolds, Inc. v. Fernandez, 741 F.2d 355, 360-61 (11th Cir.1984).

Substantial justice certainly is at stake when the failure to apply a well-established principle of law will result in significant liability for the defendant. Moreover, the resolution of this issue is beyond any doubt — application of agency principles is simple and certain and clearly delineates liability in this case. Finally, this is a question of general impact since insurance companies in Alabama must be allowed to deal with their insured’s broker quickly, efficiently, and on a sophisticated level.

. Alabama caselaw presupposes that an insurance broker can be an insured's legal agent. See, e.g., Washington Nat'l Ins. Co. v. Strickland, 491 So.2d 872, 875 (Ala.1985) (independent broker usually agent of insured); Highlands Underwriters Ins. Co. v. Elegante Inns, Inc., 361 So.2d 1060, 1065 (Ala.1978) (“When the agent or broker has failed in the duty he assumes, the principal may sue either for breach of the contract or, in tort, for breach of the duty imposed on the agent or broker.” (Emphasis added.)).

. The parties jointly submitted excerpts from depositions to the district court; thus, all such deposition testimony acquired the same force and effect as live testimony at trial before the court. All references in this opinion to deposition testimony are references to deposition testimony submitted to the district court at trial.

. Perhaps more fundamentally, the rule might have arisen from the courts’ tendency to view the agent as the principal’s alter ego. See Fay v. Swicker, 154 Ohio St. 341 , 96 N.E.2d 196, 199 (1950). Alabama courts, however, have not expressly adopted this rationale.

. During the Fulton Bank renewal, Green learned that two companies, Scarborough Insurance Company and GATX Insurance Company offered trust department E & 0 coverage with prior acts coverage.

. One could argue that knowledge regarding other markets for prior acts coverage was acquired by Green while transacting business for other banks, thus preventing the application of the constructive notice rule. Alabama courts will not impute an agent’s knowledge if that knowledge is acquired while not acting for the principal. This exception, however, has only been applied to situations in which the agent obtained "private individual knowledge ... acquired in personal contacts as if he had no official relation to plaintiff.” See Tennessee Valley Bank, 21 So.2d at 689. More precisely stated, the rule will not impute knowledge “acquired by the agent, which he receives outside of the line of his duty, or while engaged in the transaction of his purely personal affairs.” Central of Georgia Ry. Co. v. Joseph, 125 Ala. 313 , 28 So. 35 , 37 (1900).

First Alabama retained Johnson & Higgins not just to secure a policy; it was retained to use its expertise in trust department E & O coverage to search the markets and advise First Alabama. Johnson & Higgins' ability to acquire and maintain its expertise in this area motivated First Alabama to retain Johnson & Higgins. Consequently, Green's knowledge of other companies writing prior acts coverage, acquired during the same time period in which he was searching the market for First Alabama, would greatly enhance Johnson & Higgins’ expertise in the area and must fall within its line of duty to provide expertise to First Alabama.

. The majority, citing the general rule that a third party may not invoke the constructive knowledge rule to perpetrate a fraud on the principal, thinks that First State, because it has unclean hands, cannot take advantage of the constructive knowledge rule. See ante at note 8. The majority’s argument is circular. According to the majority, if First State defrauded First Alabama, First State cannot raise the constructive knowledge rule. But if First State cannot raise the constructive knowledge rule, then it defrauded First Alabama.

The proper way to analyze the majority’s concern about First State’s clean hands is to ask two questions. First, does the record indicate that First State had reason to believe that Johnson & Higgins knew about the availability of prior acts coverage? If yes, then I cannot conceive how First State intended to use the constructive knowledge rule to perpetrate a fraud— First State could not expect to get away with it, unless it had reason to believe that Johnson & Higgins would not convey the information to First Alabama. Given Johnson & Higgins’ reputation as an expert in the field of trust department E & 0 coverage, the answer to this first question must be "yes," Second, does the record indicate that First State had reason to believe that Johnson & Higgins would not tell First Alabama about the availability of prior acts coverage? See Mutual Life Ins. Co. v. Hilton-Green, 241 U.S. 613, 622-23 , 36 S.Ct. 676, 680 , 60 L.Ed. 1202 (1916) (third party may not take advantage of constructive knowledge rule if it had reason to believe that agent would not communicate information to principal). If First State had no reason to think that Johnson & Higgins would fail to convey the information, then I cannot conceive how First State could be using the constructive knowledge rule to shield its own fraudulent conduct. In fact, the record contains no indication that First State had reason to believe that Johnson & Higgins would not communicate the information to First Alabama.

Finally, the majority argues that, even if First State can claim the benefit of the constructive knowledge rule, the district court "specifically concluded that Johnson & Higgins, through its employee Green, had absolutely no knowledge of the 'availability of prior acts coverage from markets other than First State and failed to seek or determine the existence or terms of such other coverage.' ” Ante at note 8. The majority would have a point if, indeed, the district, court made such a finding; but, it did not. The district court found as follows:

The evidence indicates that Green surveyed the market regarding trust errors and omissions coverage, in general, for Fulton National Bank and not regarding prior acts coverage. Even based upon his experience as a broker, Mr. Green was apparently not fully aware of the extent and availability of prior acts coverage. Mr. Green told Mosely and Bohannon and others at First Alabama Bank that there was no other source for prior acts coverage other than First State. This representation is against the evidence presented at trial which clearly indicated that there were other carriers who at least offered prior acts coverage. For example, Green had obtained prior acts coverage in a 1976 Scarborough policy for Fulton National Bank. Scarborough policies provided prior acts coverage as a matter of course; yet Green failed to communicate to anyone with First Alabama Bank any findings respecting the availability of prior acts coverage, or First Alabama Bank’s eligibility for such coverage. Mr. Green did not submit any applications with any other carriers or discuss First Alabama Bank with them, thereby foreclosing First Alabama Bank from even the possibility of obtaining coverage from other sources.

First Alabama Bank v. First State Ins. Co., No. 83-G-2082-S, mem. op. 17-18 (N.D.Ala. Feb. 20, 1987) (emphasis added).

The district court’s findings simply do not permit us to conclude that Johnson & Higgins "had absolutely no knowledge of the ‘availability of prior acts coverage.’ ’’ Furthermore, the district court's holding that First State’s misrepresentation was not “intentional, reckless or egregious," id. at 32, buttresses nothing but the fact that Johnson & Higgins was merely negligent. That holding cannot be taken to mean that Johnson & Higgins had no knowledge of prior acts coverage.

. The majority would place the burden of producing such evidence on the defendant. See ante at note 9. Such a holding directly contradicts Alabama’s rule that the plaintiff must af *1083 firmatively prove the amount of his damages and that courts may not speculate if the plaintiff fails to offer such proof. See Continental Volkswagen, 309 So.2d at 122-23 .

. Nowhere in its complaint or amended complaint does First Alabama seek reformation of the insurance contract.

. In Alabama, a finding of fraud does not automatically confer upon the trier of fact the power to award punitive damages. In Hopkins v. Lawyers Title Ins. Corp., 514 So.2d 786 (Ala.1986), the Alabama Supreme Court held that "[a]lthough the evidence before us may be sufficient to support a finding of legal fraud, a finding of legal fraud in this context will not automatically give rise to a consideration of punitive damages by the jury.” Id. at 790 ; see Cecil Crews Chevrolet-Oldsmobile, Inc. v. Williams, 394 So.2d 912, 914 (Ala.1981); Hall Motor Co. v. Furman, 285 Ala. 499 , 234 So.2d 37, 41 (1970).

Although the line separating the minimum level of culpability required to support an award of punitive damages and the minimum level of culpability required to support a claim of fraud is thin at best, Alabama courts have adhered to that distinction. To support a claim of fraud, a plaintiff must show that the defendant recklessly misrepresented a material fact. Winn-Dixie Montgomery, Inc. v. Henderson, 395 So.2d 475, 476 (Ala.1981). To support an award of punitive damages, a trier of fact must find that the defendant misrepresented a material fact with wanton and reckless disregard for the rights of others. Gulf Atlantic Life Ins. Co. v. Barnes, 405 So.2d 916, 925 (Ala.1981); Mid-State Homes, Inc. v. Johnson, 294 Ala. 59 , 311 So.2d 312, 317 (1975). Alabama courts define wanton conduct as (1) an intentional act (2) committed with knowledge of existing conditions that would make injury likely and (3) with reckless indifference to the consequences of that act. See Brown v. Turner, 497 So.2d 1119, 1120 (Ala.1986); Birmingham Elec. Co. v. McQueen, 253 Ala. 395 , 44 So.2d 598, 600 (1950). Wanton conduct thus requires a higher level of culpability than reckless conduct, and this distinction accounts for the ability of Alabama courts to find fraud without finding the culpability required to support an award of punitive damages.

. Particularly appropriate today is the famous dicta from Richardson v. Mellish, 2 Bing. 229, 252, 130 Eng.Rep. 294, 303 (1824): public policy is "a very unruly horse, and when once you get astride it you never know where it will carry you. It may lead you from the sound law. It is never argued at all but when other points fail."

. By so defining public policy, I do not mean to imply that this definition applies to all types of contracts. For example, when evaluating a trust, public policy should also be defined to disfavor contracts that discourage marriage. And there are many other aspects of public policy that are relevant to other types of contracts. See E. Farnsworth, Contracts § 5.2 (1982). I believe, however, that the two underlying concerns stated in the text fully define public policy in the context of this type of insurance policy.

. Alabama’s public policy is expressed in its constitution, statutes, and common law. Couch v. Hutchinson, 2 Ala.App. 444 , 57 So. 75, 76 (1911).

.I note that the district court cites Stein, Hinkle, Dawe & Assocs. Inc. v. Continental Cas. Co., 110 Mich.App. 410 , 313 N.W.2d 299 (1981), and Heen & Flint Assocs. v. Travelers Indemnity Co., 93 Misc.2d 1 , 400 N.Y.S.2d 994 (Sup.Ct.1977). Neither of these cases appears to be on point since, in refusing to enforce the policies as written, the courts relied on the doctrines of reasonable expectations and unconscionability. Those doctrines are not at issue here.

. See supra note 5.

. See supra at 1079-81.

. I would also submit that this holding would be more consistent than the district court’s opinion with Langley v. Mutual Fire, Marine & Inland Ins. Co., 512 So.2d 752 (Ala.1987), ove rruled on other grounds, I.N. Hickox v. Stover, 551 So.2d 259 (Ala.1989). In Langley , the court stated in dicta, “[t]he claims-made insurance contract in the present case does not purport to provide retroactive coverage at all beyond the retroactive date of the policy, regardless of whether the insured's previous coverage was with Mutual Fire. Thus, there is no freedom of contract violation in this case." Id. at 759-60 (emphasis added).

. See supra at 1084.