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November 28, 2017 Articles

Clarification—A Valid Exception to Functus Officio

By Sarah Miller Espinosa

General Re Life Corp. v. Lincoln National Life Insurance Co.
On March 31, 2017, the U.S. District Court for the District of Connecticut issued a ruling and order in the matter of General Re Life Corp. v. Lincoln National Life Insurance Co., No. 15-cv-1860 (D. Conn. Mar. 31, 2017). In 2002, General Re executed an Automatic Self-Administered YRT Reinsurance Agreement with Lincoln. Pursuant to that agreement, General Re had the right to increase the reinsurance premiums if the new rates were based exclusively on a change in the anticipated mortality. In the event of such an increase, the agreement specified that Lincoln could elect to recapture the life insurance policies and terminate the reinsurance. In 2014, General Re informed Lincoln and increased the rates. Lincoln demanded arbitration, asserting the rate increase was improper.

Arbitration Award
The matter was heard by a panel of three arbitrators. In issuing the award, the majority of arbitrators determined there had been a change in the anticipated mortality and General Re was permitted to increase rates under the terms of the agreement. The award specified in part that if Lincoln elected to terminate reinsurance as a result of the rate increases, “all 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.” The award also specified that Lincoln reimburse General Re for certain expenses and costs. The panel retained jurisdiction “to the extent necessary to resolve any dispute over the calculation and payment of the amounts awarded herein.”

Remedy Disputed
Lincoln invoked its right to recapture. General Re informed Lincoln it would remit about $5.5 million, the amount General Re believed to be the net recapture balance, and transmitted that amount to Lincoln on October 15, 2015. On October 26, 2015, Lincoln requested that the arbitration panel resolve the dispute between the parties as to the appropriate calculation of the recapture amount pursuant to the remedy portion of the award. General Re asserted that Lincoln’s request was outside the scope of the arbitrators’ authority in that Lincoln sought reconsideration of the award.

Clarification of Arbitration Award
On November 19, 2015, a majority of the arbitrators issued a clarification, with one arbitrator dissenting. The clarification interpreted the award’s remedy order in light of the original agreement of the parties. The clarification resulted in a requirement that General Re make an additional payment of $17 million to $18 million to Lincoln. General Re filed a petition seeking to confirm the original award. Lincoln filed a cross-petition to confirm the clarification.

Exceptions to Functus Officio
The court noted the limited authority of federal courts to review arbitration awards per the Federal Arbitration Act and noted the Second Circuit’s repeated strong deference to the arbitration process and arbitral awards. The issue here, the court reasoned, was whether the arbitrators exceeded their authority when they issued the clarification. With limited exceptions, under the doctrine of functus officio, once an arbitrator issues an award deciding the issues submitted to arbitration, the arbitrator has no authority to reconsider the award, absent an agreement from the parties.

The district court, citing Colonial Penn, 943 F. 2d at 332, stated:

[T]here are three commonly recognized exceptions to the doctrine of functus officio:

(1) An arbitrator can correct a mistake which is apparent on the face of his award; (2) where the award does not adjudicate an issue which has been submitted, then as to such issue the arbitrator has not exhausted his function and it remains open to him for subsequent determination; and (3) where the award, although seemingly complete, leaves doubt whether the submission has been fully executed, an ambiguity arises which the arbitrator is entitled to clarify.

Determining Ambiguity
The court further reasoned that the Second Circuit has “repeatedly discussed whether arbitration awards are ambiguous, such that a court may not enforce the award but should, instead, remand the award to the arbitrators for their clarification.” Thus, the district court reasoned, if the award were, in fact, ambiguous, the clarification would be appropriate. Here, the district court found the award was indeed ambiguous. In reaching this conclusion, the court noted the following factors: The parties were unable to agree as to its meaning, the arbitrators themselves believed the award to be ambiguous, and the clarification did not modify “the spirit and basic effect” of the award. Finally, the court explained “that the vast majority of cases holding that a clarification was legitimate under an exception to functus officio doctrine were similar to this case in that the clarifications generally concerned relief that was awarded, rather than the substance of the underlying dispute that led the parties to seek arbitration.”

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