Now defunct broker-dealer QA3 Financial Corp (QA3) can only seek up to $1 million in coverage under its professional liability policy with Catlin Specialty Insurance Co. for client claims tied to losses from certain high-risk investments, the Second Circuit affirmed yesterday, rebuffing the policyholder's efforts to tap a $7.5 million limit and leaving countless clients who purchase the high-risk alternative investments with no avenue of recourse.
QA3 Financial Corp. had contended that a New York district court failed to properly instruct the jury regarding Catlin's burden of proof to show that its interpretation of the policy's language limiting coverage for claims and damages stemming from "private placement" investments was correct. Among other arguments, the broker-dealer said that the court should have advised the jury on the doctrine of contra proferentem, which states that any ambiguities in a policy must be construed against the insurer. The judges seated on the Second Circuit panel were not persuaded.
In their brief opinion, issued yesterday, the three-judge appellate panel rejected the notion that the trial court's jury instructions were improper, upholding the lower court's denial of QA3's motion for a new trial. In their holding, the court stated "here, the jury understood that, were it to find that Catlin had not met its burden of proving its interpretation was the correct one, the jury would have to ultimately resolve the presumptively inconclusive extrinsic evidence in favor of QA3," the panel said. "Assuming contra proferentem applied, then, the jury understood the essence of the rule: that if it found the evidence inconclusive, it should find in favor of the appellant."
QA3's professional liability policy with Catlin contained a $1 million limit of liability per claim and an aggregate limit of $7.5 million. An endorsement added to the policy expanded the broker-dealer's coverage under the policy to losses arising from private placement investments — high-risk securities sold only to a small number of accredited investors.
According to court records, subsequent to the 2008 financial meltdown, QA3 was hit with dozens of investor claims alleging the firm committed wrongful acts while rendering professional services in connection with private placement investments, including investments in troubled companies as now defunct DBSI, Inc.
Catlin agreed to defend QA3 subject to the $1 million cap, court papers said. QA3 disputed the application of that cap and argued that it should be able to access the $7.5 million limit, as the private placement investments at issue weren't listed as being subject to the cap. In November 2010, Catlin filed the instant suit in New York federal court, seeking a declaration regarding the applicable limit of coverage. QA3 asserted counterclaims for breach of contract and bad faith, although the trial court later dismissed the latter claim. The lower court denied both Catlin's and QA3's motions for summary judgment on the proper limit, ruling that the cap was ambiguous.
As a result, the case proceeded to trial, and the jury found in favor of Catlin after deciding that the insurer's interpretation of the policy language was correct. The district judge denied QA3's motion for a new trial based on erroneous jury instructions.
On appeal, the broker-dealer contended that the lower court erred in failing to instruct the jury on contra proferentem and in not imposing a heightened burden of proof on Catlin.
While the district court didn't give QA3's requested instruction, the Second Circuit panel said, it did instruct the jury that the insurer bore the burden of proving by the preponderance of the evidence that its interpretation of the language limiting coverage was correct.
Based on its denial of QA3's motion for a new trial, the panel also refused to reverse the trial court's dismissal of the broker-dealer's bad faith counterclaim. U.S. Circuit Judges Debra Ann Livingston and Christopher F. Droney and U.S. District Judge Analisa Torres sat on the Second Circuit panel.
The case style is Catlin Specialty Insurance Co. v. QA3 Financial Corp., case number 14-2773, in the U.S. Court of Appeals for the Second Circuit.
The experienced securities litigation attorneys at Colling Gilbert Wright & Carter have litigated and resolved hundreds of FINRA arbitration claims over questionable Wall Street practices, including the misrepresentation and sale of alterative investments including direct private placement (DDP) and non-traded Real Estate Investment Trusts (REIT). If you believe you lost money due to misrepresentations or fraud on the part of your FINRA registered broker dealer, please contact us for a free case evaluation.