In a win for Wiley’s client, the United States District Court for the Middle District of Tennessee, applying Tennessee law, has held that an exclusion precluding coverage for claims “in any way related to” a specific entity applied broadly and was not intended merely to exclude claims brought against that entity. Capwealth Advisors, LLC v. Twin City Fire Ins. Co., Case No. 21-cv-00036 (M.D. Tenn. Mar. 29, 2023). In this case, the court held that the exclusion unambiguously applied to a lawsuit brought by the Securities & Exchange Commission alleging that the insured had a conflict of interest arising from its affiliation with the specific entity.
The insured, an investment advisor, had an affiliated broker-dealer until 2018. Mutual funds would pay the broker-dealer fees when it purchased the funds on behalf of the insured’s clients. After the broker-dealer closed, the SEC investigated and eventually brought an enforcement action against the insured. The SEC’s theory was 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.
By endorsement, the policy contained a “specific entity exclusion” that barred coverage for any claim “by or against, or based upon, arising from, or in any way related to” the affiliated introducing broker. In coverage litigation, the insured argued that the exclusion did not apply to the investigation or enforcement action because the claim was against the insured, and not against the broker-dealer. The insured argued that the exclusion was meant to clarify that the policy did not provide coverage for the broker-dealer.
On summary judgment, the coverage court disagreed, finding that the claim fell “within the contours of being ‘in any way related to’” to the broker-dealer. The court held that the insured’s interpretation “introduce[d] surplusage” into the policy and would render the phrase “in any way related to” meaningless. Next, the court reasoned that the claim “most likely would not have occurred absent [the insured’s] affiliation with” the broker-dealer, thus the claim was at least “in some way related to” the broker-dealer and possibly “even central” to the claim. Finally, the court rejected reliance on extrinsic evidence provided by the insured because the policy language was clear and unambiguous, and declined to find that application of the exclusion rendered the policy illusory.
The court acknowledged that the insured might be disappointed by the decision but found that it nevertheless had an obligation to apply the policy language as written, stating “[t]he ultimate duty of the Court is to enforce the words of the contract (the Policy) as written. And as discussed, when a contract is unambiguous, the Court must look to the text to arrive at an interpretation it deems consistent with the intention of the parties.”
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