Applying New York law, the United States Court of Appeals for the Second Circuit has held that a claim against a broker-dealer was subject to a $1 million limit on liability, rejecting the insured’s argument that the claim was subject to a $7.5 million limit. Catlin Spec. Ins. Co. v. QA3 Fin. Corp., 2015 WL 6684207 (2d Cir. Nov. 3, 2015). The court also held that the insurer’s failure to settle within the higher limit was not in bad faith because the insurer had an arguable basis for denying coverage above the $1 million limit.

Clients of the broker-dealer brought suit in connection with losses sustained on investments. The broker-dealer was issued a professional liability insurance policy that included an endorsement providing that claims relating to certain investments were subject to a $1 million limit rather than the $7.5 million limit reflected on the declarations page.

The broker-dealer’s insurer brought a declaratory judgment action to determine whether a $1 million limit or a $7.5 million limit applied to the claim. The policyholder counterclaimed for breach of contract and bad faith. The trial court dismissed the bad faith claim but held that the policy was ambiguous with regard to the applicable limit of liability. After a jury trial, in which both parties presented evidence of the endorsement’s intended meaning, the jury ruled in favor the insurer, and the court subsequently denied the insured’s motion for a new trial based on erroneous jury instructions.

The Second Circuit affirmed, rejecting the insured’s arguments that the jury instructions were erroneous. First, the court held that the district court did not err in refusing to explicitly instruct the jury on contra proferentem because, assuming that was applicable, the jury understood the essence of the rule. Second, the court held that the district court did not err in refusing to instruct the jury that the insurer had to meet the heighted burden applicable when an insurer seeks to invoke an exclusion. In fact, such an instruction would have been improper because, under New York law, a limitation of liability is not an exclusion.

The court also held that the insured’s bad faith claim was properly dismissed. Under New York law, an insurer is not in bad faith when there is an arguable basis for denying coverage. In this case, the insurer refused to settle based on its interpretation of the endorsement, which a jury later concluded was correct. Therefore, the insurer had an arguable basis for denying coverage.