Reinsurance and Insurance Arbitrator and Umpire Ronald S. Gass
ARIAS-U.S. Certified Arbitrator and Umpire
AAA Roster of Neutrals
Reinsurance and Insurance Dispute Resolution Services Consultant

The Functus Officio Doctrine And The Finality (Or Not) Of Partial “Final” Awards

At the parties’ request or on their own initiative, panels may bifurcate complex arbitrations into two phases – one to consider liability and the other damages. These panels will typically issue some form of interim award regarding liability and then proceed to the damages phase, after which they will issue a final award that usually completely disposes of the case. However, there are occasions when this pattern is interrupted such as when one party seeks to confirm (or vacate) the liability phase’s interim award before the damages phase is heard and decided. This can raise troubling questions about award finality and the panel’s power to reconsider its liability phase rulings due to the functus officio doctrine (i.e., arbitrators are without further authority or legal competence to reconsider an award because the duties and functions of the original commission were fully discharged – functus officio is Latin for “a task performed”).

An interesting New York federal district court case recently considered a cedent’s attempt to confirm one of two elements of a single arbitrator’s “Partial Final Award” on liability and to vacate the other before damages were determined. When the court remanded the case to the arbitrator because his award was not deemed “final” without the damages ruling, the arbitrator subsequently reconsidered and modified the second element of his previous liability decision, which resulted in a higher damages award against the reinsurer. On a subsequent cross-motion to vacate the award, the reinsurer argued that the arbitrator was without the power to modify his prior liability award due to the functus officio doctrine.

In this case, the reinsurer issued a three-year facultative certificate to a cedent for a 20% share of the cedent’s losses in the $15 million excess $5 million layer of an excess umbrella policy the cedent had issued to one of its insureds. When the insured subsequently filed asbestos claims exceeding $6 million and the reinsurer failed to pay its 20% share of the losses ceded to its layer, the cedent initiated an arbitration before a single arbitrator.

In his “Partial Final Award,” the arbitrator made two specific liability findings based on his interpretation of the fact cert wording. First, the reinsurer was liable to the cedent for losses incurred on an aggregate basis pursuant to the terms of the underlying policy. Second, the reinsurer was not liable to the cedent for the payment of defense costs when no indemnity payment was made by the insured to a third-party claimant. With regard to this second liability finding, the arbitrator ordered the cedent to submit a schedule indicating the indemnity payments subject to the reinsurance and the associated defense costs so that he could determine damages.

Before presenting the arbitrator with the requested damages schedule, however, the cedent petitioned the federal district court to confirm the Partial Final Award’s first liability finding but to vacate the second. The reinsurer opposed the petition as premature arguing that there was no “final” award pursuant to the Federal Arbitration Act because damages remained unresolved. Concurring that the cedent’s petition might be premature at this stage in the arbitration, the district court remanded the matter to the arbitrator for further proceedings. After holding a hearing on damages and in the course of issuing his final award, the arbitrator reconsidered his second liability finding and expanded it to hold that the reinsurer was liable for the cedent’s payment of defense costs to its insured in all cases and not only when it had made a related indemnity payment to a third-party claimant. This increased the reinsurer’s liability to $3 million.

When the cedent returned to district court to confirm the final award, the reinsurer cross-petitioned to vacate it on the ground that the arbitrator was functus officio with respect to the second liability finding of the Partial Final Award and thus lacked the power to modify his previous ruling. Applying Second Circuit precedent, the district court observed that an arbitration award is generally not deemed final unless the arbitrator decides both the issue of liability and damages. Because the Partial Final Award left the damages issue open, it was not “final” for the purposes of judicial review and confirmation (as the reinsurer had previously argued). To be “final,” according to the court, an arbitration award must fully determine each issue so that no further proceedings are necessary to finalize the parties’ obligations under the award. This case did not fit one of the recognized exceptions to this general rule, i.e., when the parties specifically request the arbitrators to make an immediate determination of liability, leaving the calculation of damages for a later time. Here there was neither a request from the parties for bifurcated rulings nor did the arbitrator give any prior indication that he would defer the issue of damages until a later date.

Another finality exception is when a partial award finally disposes of a separate, independent claim whether or not the parties have asked the arbitrator to decide it separately, i.e., the issue must be clearly severable from the other issues before it may be deemed final and subject to confirmation. The court held that the arbitrator’s Partial Final Award required further arbitration on damages to finalize the parties’ obligations and that the materials on damages lead the arbitrator to reconsider his interpretation of the reinsurer’s liability for defense costs. “The issues of liability and damages,” observed the court, “were so intertwined that the evidence for damages bore on the scope of liability.”

Because the questions of liability and damages were “inseparable,” the arbitrator’s initial liability ruling on defense costs was not a final resolution of a separate and independent claim. The court noted that the arbitrator himself ultimately determined that his Partial Final Award was not final when, upon the court’s remand, he considered that he had the authority to reconsider his prior partial award in conjunction with the damages hearing evidence, which persuaded him that he had misconstrued the fac cert wording in the first instance. Confirming the final award, the court concluded that the arbitrator’s Partial Final Award did not render him functus officio and that he, therefore, had the power to reconsider his second liability ruling and to issue a final award.

This case highlights the need for arbitrators to be cautious about how they draft their interim awards so that they are not inadvertently and prematurely dispossessed of the power to modify prior rulings by to the functus officio doctrine before concluding both the liability and damages phases of the arbitration. Award terminology can play an important role here, and prudence dictates the judicious use of the word “final” (as in “Partial Final Award”). If arbitrators intend to retain jurisdiction over a matter that is likely to require interim rulings, perhaps usage of terms like “interim” or “preliminary” in the title and body of the ruling will signal a reviewing court that the arbitrators are expressly retaining the power to amend or modify their prior rulings until such time as their “final” award is rendered. This case also raises the interesting question of how the functus officio doctrine applies to declaratory judgment-type awards in which a panel at a party’s request expressly seeks to retain the power to modify and fine-tune their declaratory rulings for several months or even years after issuing their “final” award on the merits.

Employers’ Surplus Lines Insurance Co. v. Global Reinsurance Corporation -- United States Branch, No. 07 Civ. 2521 (HB), 2008 U.S. Dist. LEXIS 8253 (S.D.N.Y. Feb. 6, 2008).

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