Gen. Re Life Corp. v. Lincoln Nat’l Life Ins. Co., No. 17-2496-cv (2d Cir. Nov. 28, 2018) [click for opinion]

General Re Life Insurance Corp. (“General Re”) sought review from the Second Circuit Court of Appeals of an order denying its petition to confirm an initial arbitration award and granting the cross-petition of Lincoln National Life Insurance Company (“Lincoln”) to affirm the award issued after the arbitral panel clarified the original award. The Second Circuit ultimately affirmed the lower court’s decision, joining the Third, Fifth, Sixth, Seventh, and Ninth Circuits in recognizing an exception to the doctrine of functus officio.

As background, General Re and Lincoln had previously entered into an Automatic Self-Administered YRT Reinsurance Agreement (the “Agreement”). The Agreement provided that General Re could increase premiums under certain circumstances but that, if General Re exercised this option, Lincoln could “recapture” its life insurance premiums, rather than pay the increased premiums. In such case, Lincoln would no longer have reinsurance as of the recapture effective date.

Generally Re subsequently exercised its right to increase the reinsurance premiums, effective April 1, 2014. Lincoln elected to arbitrate the validity of the rate increase, and the parties agreed that during the pendency of the arbitration Lincoln would continue paying General Re the pre-increase premium and that General Re would continue paying the claims as they arose. The arbitrators ultimately concluded in their award that General Re was entitled to increase the premiums and advised that, if Lincoln opted to exercise its right to recapture following the arbitration, “[a]ll premium and claim transactions paid by one party to the other following the effective date of the recapture (i.e., from April 1, 2014) shall be unwound.”

Following the issuance of this award, Lincoln invoked its right to recapture, and a dispute developed around how the Final Award’s language would affect the handling of premium payments made by Lincoln to General Re before the April 1, 2014 recapture date. Pursuant to the Agreement, Lincoln paid General Re in advance for a year of reinsurance when the underlying life insurance policy was renewed. For example, in February 2014, Lincoln paid General Re for a year’s worth of reinsurance for all policies renewing in February. General Re argued that it was entitled to keep all premiums paid before April 1, 2014—including “unearned premiums” advanced for the months following April 1, 2014—but would not be liable for any reinsured claim for deaths that occurred after April 1, 2014. Lincoln contended that General Re would be required to refund the unearned premiums, and would only pay claims for deaths that occurred before April 1, 2014.

When the parties could not resolve this dispute, Lincoln, over General Re’s objection, sought clarification from the arbitration panel on the language of its Final Award as it related to the unearned premiums. The panel issued a “clarification,” indicating that the Final Award had contained ambiguities “requiring clarification” and that both parties were reading the Final Award in a manner inconsistent with the language of the Agreement. The arbitrators advised that the Final Award was not intended to change the terms of the Agreement and only dealt with the prospective unwinding of premiums and claim transactions on or after April 1, 2014. According to this clarification, when read in the context of the Agreement, the Final Award entitled General Re to retain the unearned premiums it held as of the date of the recapture but General Re remained liable for paying claims for all covered deaths associated with those premiums, even those deaths that occurred on or after April 1, 2014.

General Re then petitioned the U.S. District Court for the District of Connecticut to confirm the original, unclarified Final Award, and Lincoln cross-petitioned to confirm the clarification. The district court confirmed the clarification and denied the petition to confirm the unclarified award. On appeal, General Re raised several arguments for why the clarification should not have been confirmed, including, most importantly, that the arbitration panel had exceeded its powers in issuing the clarification under the doctrine of functus officio. Under that doctrine, once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions ends, and they have no further authority, absent agreement of the parties, to redetermine those issues.

The Second Circuit rejected General Re’s functus officio argument and, instead, recognized an exception to that doctrine where an arbitral award fails to address a contingency that later arises or when the award is susceptible to more than one interpretation. The court reasoned that adopting this exception would further the well-settled rule that, when a court is asked to confirm an ambiguous award, it should instead remand the issue to the arbitrators for clarification. The court concluded that an arbitrator does not become functus officiowhen it issues a clarification of an ambiguous final award so long as three conditions are met: (1) the final award is ambiguous, (2) the clarification merely clarifies the award rather than substantively modifying it, and (3) the clarification comports with the parties’ intent as set forth in the agreement that gave rise to arbitration.

The Second Circuit concluded that all these pre-conditions were met in the present case. The court acknowledged that deference was owed to the arbitrators’ determination that the Final Award was ambiguous and further reasoned that the award was ambiguous because it was clearly susceptible to multiple interpretations. The court further concluded that, because the clarification simply explained that the Final Award should be read in the context of the Agreement, it did not alter the Final Award itself. Based on this reasoning, the court affirmed the district court’s decision.

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.

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