The Sixth Circuit US Court of Appeals on Friday ruled against Hartford Financial Services Group Inc. Maintained entity victory, finding an exclusion in a policy issued to a financial advisory firm barred coverage for an investigation and lawsuit filed by the U.S. Securities and Exchange Commission. A former unit.
In an unpublished opinion, the three-judge appellate panel ruled Capwealth Advisors LLC v. Twin Cities Fire Insurance Co. That exclusion of a specific entity was evident and Twin Cities was relieved of covering the investigation and lawsuit against Capwealth Investment Services, the broker arm of Capwealth Advisors LLC.
The court also rejected Capwealth’s argument that if the exclusion was explicit, it made the coverage unenforceable.
Capwealth Advisors and CWIS were both formed in 2009 and place orders for clients when they buy and sell securities. Timothy Pagliara founded companies, and Timothy Murphy was an investment advisor. Court records show the two made money by collecting SEC 12b-1 fees when buying and selling mutual fund shares.
CWIS began winding down operations in 2014 and closed in June 2018. In August 2019, CapWealth obtained an investment advisor liability policy from Twin Cities that covered claims of potentially wrongful actions when advising clients about investments.
In 2020, the SEC initiated an investigation of CapWealth, Mr. Pagliara and Mr. Murphy over potential conflicts of interest arising from CWIS’s generation of 12b-1 fees on mutual fund shares recommended by CapWealth. The SEC ultimately filed a lawsuit alleging that from June 2015 to June 2018, Capwealth, Mr. Pagliara and Mr. Murphy had conflicts of interest in the way they received income from 12b-1 fees through CWIS.
After the claim was rejected, Capwealth sued the Twin Cities in federal court in Tennessee. The trial judge granted summary judgment to the Hartford entity, finding that the specific-entity exclusion barred coverage for the SEC investigation and lawsuit because the allegations focused on conduct that occurred while CWIS was in business.
Capwealth appealed, arguing that the exclusion was vague and that even if it was not, it made the coverage misleading.
Representatives of the parties did not respond to requests for comment.
