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Am. Int’l Specialty Lines Ins. Co. v. Allied Capital Corp., Index. No. 656341/16, 2018 NY Slip Op 07194 (N.Y. App. Div. Oct. 25, 2018) [click for opinion]

This appeal arose out of the settlement of a separate litigation in which respondent Allied Capital Corporation (“Allied”) agreed to pay the government $10.1 million. Allied, which maintained two insurance policies with American International Specialty Lines Insurance Company (“AISLIC”), treated its payment of the $10.1 million as a “Loss” under its insurance policies and sought indemnification for the same from AISLIC.

When AISLIC denied coverage, Allied filed for arbitration, alleging that AISLIC breached its obligations under the policies to defend and indemnify it against the claims raised in the litigation. Both parties filed summary disposition motions and 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 ordered as to the calculation of the amount of defense costs to which Allied would be entitled in the event that the panel determined that AISLIC was liable to Allied.

On March 8, 2016, the panel issued a partial final award (the “PFA”) which found that the government had alleged covered claims against Allied, and Allied was thus entitled to defense and indemnification from AISLIC. However, the panel found that the $10.1 million settlement payment did not amount to a “Loss” under the policies and that AISLIC did not have to indemnify Allied for that amount. As previously agreed, the panel then ordered an evidentiary hearing solely to determine the amount that Allied should be awarded in defense costs.

Allied requested reconsideration of the PFA on the basis, among others, that the majority of the panel erred in finding that Allied did not suffer a “Loss” as defined by the policies. On August 18, 2016, after a hearing, the panel issued a corrected partial final award (the “Corrected PFA”) which concluded, inter alia, that the panel had the authority to reconsider the PFA because it had not issued a final award as the amount of defense costs to which Allied was entitled, and thus the panel was not functus officio with respect to the PFA and could correct errors and reconsider the findings made therein. The panel found in the Corrected PFA that the $10.1 million paid by Allied to settle the litigation amounted to a “Loss” under the policies, and that damages would be revised in a final award.

AISLIC consequently filed a petition in the New York State Supreme Court seeking to vacate the Corrected PFA and to confirm the PFA as written. Allied moved to dismiss the petition, arguing that it was not ripe as the panel had yet to issue a final award. In the meantime, the panel issued a final award on the quantification of damages and granted Allied $7,509,144.91 in damages plus interest at the rate of 9% in the amount of $4,356,744.16.

AISLIC thereafter amended its petition to vacate the Corrected PFA and the final award, and to confirm the PFA. While the trial court denied AISLIC’s petition, on appeal, the Appellate Division agreed with AISLIC that the Corrected PFA and final award should be vacated and the PFA should be confirmed on the ground that “[v]acatur of an arbitrator’s award is statutorily limited to occasions involving fraud, corruption or bias . . . or occasions when the arbitrator exceeded his or her power, or so imperfectly executed it so that a final and definite award was not made.”

The court held that the panel was functus officio with respect to the PFA, because AISLIC and Allied had agreed that the panel was to make an immediate, final determination as to the issue of AISLIC’s liability under the policies, including whether Allied had suffered an insurable “Loss.” The panel and parties understood that the PFA would be a final award with respect to that issue, and the panel’s reconsideration of the PFA was therefore improper and exceeded its authority.

A version of this post originally appeared in the January 2019 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.