Gordon Rees Scully Mansukhani partners Dennis O. Brown and Greil Roberts obtained a significant appeal win in a complex insurance coverage case for a major insurer client on October 25, 2018, when a New York state appeals court vacated a nearly $12 Million arbitration award to Allied Capital Corporation.
The appeal arose out of an arbitration that began in 2010. Allied Capital sought coverage from its insurer for a $10.1 million payment made to settle claims by the federal government arising out of the False Claims Act. The insurer denied coverage, and Allied filed for arbitration under its insurance policies, seeking to be compensated for the $10.1 million settlement payment plus defense costs.
In March 2016, the arbitration panel found the $10.1 million settlement was not a “Loss” under the policy. However, the arbitration panel decided that Allied was entitled to its defense costs, though it reserved the amount of defense costs to be awarded for a subsequent proceeding. Not long thereafter, Allied sought reconsideration of the March 2016 award on the basis that the majority of the arbitration panel erred in finding that Allied did not suffer a “Loss” under the policy. The arbitration panel determined that it was permitted to reconsider the March 2016 award and reversed itself, finding that the $10.1 million amount was a “Loss” under the policy.
Gordon & Rees petitioned in New York state court for an order vacating the reconsidered award, arguing that the panel exceeded its authority based on the common law doctrine of functus officio. Under functus officio, an arbitrator can not alter its final award except in limited circumstances. Gordon & Rees argued that the March 2016 partial final award was final in the sense that it determined the extent of the insurer’s liability for Allied’s claim, and thus the arbitration panel should not have been able to reconsider that decision. The state court denied the petition, and the insurer appealed.
On October 25, 2018, in a 4-1 decision, the Appellate Division of the Supreme Court of New York, First Department, agreed with Gordon & Rees’ position that the panel exceeded its authority and improperly reconsidered the March 2016 award. The fact that the amount of damages for defense costs had not been decided, the Court found, was not authority for the panel to reconsider the award: “In this case, the panel was functus officio with respect to the [partial final award] and thus, the panel’s reconsideration of the [partial final award] on substantive grounds was improper and exceeded its authority”.