The 6th Circuit U.S. Court of Appeals upheld a win for a Hartford Financial Services Group Inc. unit Friday, finding an exclusion in a policy it issued to a financial advisory firm barred coverage for an investigation and suit filed by the U.S. Securities & Exchange Commission against a prior entity.

In an unpublished opinion, the three-judge appellate panel ruled in CapWealth Advisors LLC v. Twin City Fire Insurance Co. that a specific-entity exclusion was unambiguous and relieved Twin City from covering the investigation and suit against CapWealth Investment Services, the broker arm of CapWealth Advisors LLC.

The court also rejected CapWealth’s argument that if the exclusion was unambiguous, it made coverage unattainable.

CapWealth Advisors and CWIS were both formed in 2009 and placed orders for clients when they bought and sold securities. Timothy Pagliara founded the companies, and Timothy Murphy was an investment advisor. The duo made money by collecting SEC 12b-1 fees when buying and selling shares of mutual funds, court records show.

CWIS started winding down operations in 2014 and closed in June 2018. In August 2019, CapWealth obtained an investment advisor liability policy from Twin City that potentially covered claims for wrongful acts when advising clients about investments. 

In 2020, the SEC began investigating CapWealth, Mr. Pagliara and Mr. Murphy on potential conflicts of interest stemming from CWIS’ generation of 12b-1 fees on mutual fund shares recommended by CapWealth. The SEC eventually filed a lawsuit alleging that there was a conflict of interest in the manner in which CapWealth, Mr. Pagliara and Mr. Murphy received proceeds from 12b-1 fees through CWIS from June 2015 until June 2018.  

CapWealth sued Twin City in federal court in Tennessee after it rejected the claim. The trial judge awarded summary judgment to the Hartford unit, finding the specific-entity exclusion barred coverage for the SEC investigation and lawsuit because the allegations focused on conduct occurring while CWIS was in business.

CapWealth appealed, arguing that the exclusion was ambiguous and even if it was not, it made coverage illusory.

Representatives for the parties did not respond to requests for comment.