(Article from Insurance Law Alert, November 2018)
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A New York appellate court vacated an arbitration award in an insurance dispute on the basis that the arbitration panel exceeded its authority when it reconsidered a final liability award it had previously rendered. American Internat’l Specialty Lines Ins. Co. v. Allied Capital Corp., 2018 WL 5285241 (N.Y. App. Div. 1st Dep’t Oct. 25, 2018).
Allied sought defense and indemnity from American International Specialty Lines Insurance Company (“AISLIC”) for an underlying False Claims Act suit that it had settled for approximately $10 million. When AISLIC denied coverage, Allied filed for arbitration. During arbitration, the parties agreed that the panel would issue an immediate determination as to AISLIC’s liability under the policies and that a separate evidentiary hearing would be held as to the amount of defenses costs, if any, to which Allied was entitled. The panel issued a partial final award which held that the underlying claims against Allied were covered under the policy and that Allied was entitled to defense and indemnity, but that the $10 million settlement payment was not a covered “loss.” The panel ordered a separate hearing to address defense costs.
Thereafter, the panel issued a “corrected” partial final award. The “corrected” partial final award was based on the panel’s view that it could reconsider the original award because it was not final since issues associated with defense costs were outstanding. The corrected partial final award changed course from the original partial final award by holding that the underlying settlement was a covered loss under AISLIC’s policy. Thereafter, the panel issued a final award granting Allied more than $11 million in damages and interest. A New York trial court denied AISLIC’s motion to vacate the corrected partial award and final award. The appellate court reversed.
The appellate court ruled that the arbitration panel exceeded its authority when it reconsidered the partial final award. The court explained that under the common law doctrine of functus officio, an arbitrator may not entertain an application to change a final award, except to correct a deficiency of form or miscalculation. The appellate court emphasized that the parties had expressly agreed that the panel was “to make an immediate, final determination” as to liability and that any subsequent hearing on defense costs would be separately addressed. Thus, once the panel made a determination as to liability, and expressly labeled it a “partial final award,” “its authority over such issue was ended.” Additionally, the court emphasized that it was not bound by the panel’s statements in the corrected award that the original partial final award was not final because the parties had not bifurcated the proceedings. The court stated that “[b]y that logic, an arbitrator could avoid exceeding his or her authority when reconsidering a partial final award as along as the arbitrator stated that the parties did not bifurcate the proceedings or that the arbitrator did not intend for the award to be final as to a particular issue.”