Sixth Circuit Affirms Decision Holding Specific Entity Exclusion Bars Coverage and Does Not Render Policy Illusory

In a win for Wiley’s client, the United States Court of Appeals for the Sixth Circuit affirmed a district court’s decision on summary judgment holding that a “specific entity exclusion” precluded coverage for an SEC investigation of the insured, rejecting the insured’s primary argument on appeal that application of the exclusion rendered the policy’s coverage illusory under Tennessee law. Capwealth Advisors, LLC v. Twin City Fire Ins. Co., No. 23-5359 (6th Cir. Mar. 15, 2024). A summary of the district court opinion is available here.

The insured, an investment advisor, had an affiliated broker-dealer until 2018. After the broker-dealer closed, the SEC investigated and eventually brought an enforcement action against the investment advisor, alleging that, because the insured received a portion of fees received by the broker-dealer through its affiliation with the entity, the insured had an impermissible conflict of interest.

The trial court evaluated whether a “specific entity exclusion,” which barred coverage for any claim “by or against, or based upon, arising from, or in any way related to” the shuttered affiliated broker-dealer, precluded coverage for the SEC investigation. The court held on summary judgment that the claim fell squarely within the exclusion.

The Sixth Circuit affirmed the decision, holding that the claim “comfortably” fell within the exclusion’s scope as it was “plainly related to” the excluded broker-dealer. The court noted that the lead-in language at issue, “in any way related to,” has “expansive meaning.” In addition, the court rejected the insured’s attempt to parse the complaint into individual causes of action for purposes of analyzing the relevant “claim” as contrary to the policy’s terms.

The court also held that the exclusion did not render coverage illusory. As a threshold matter, the court declined to predict what standard the Tennessee Supreme Court would apply because the insured’s argument failed under any standard. Specifically, the insured argued that the exclusion could be read to preclude coverage for all claims against two of the insured’s principals and for any claim arising before the broker-dealer’s closure in 2018. As to the former point, the court held that the insured was “fighting a straw man” because the insured’s interpretation was “far broader” than the exclusion’s language required, which would not exclude coverage for claims against the principals solely in their capacities as employees of the insured and not the broker-dealer. Next, the court held that the policy was not illusory even if every claim prior to 2018 was excluded because coverage is not illusory simply because there is a temporal limitation for claims arising from events in the past.

Finally, the court noted that the insured’s request to certify the case to the Tennessee Supreme Court was both unnecessary and untimely, having been raised for the first time on appeal. Likewise, the court held that the insured waived the right to rely on the concurrent-cause doctrine, which it did not raise until appeal, rejecting the insured’s argument that the concurrent-cause doctrine is a subset of contractual ambiguity arguments raised below. Rather, the court held that it is a separate argument and one that the insured forfeited.


Practice Areas

Wiley Executive Summary

Sign up for updates

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. You may disable these by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.