Colonial Penn Ins. Co. v. Omaha Indem. Co.

Issue Discussed: Functus Officio

Submitted by Linsey M. Routledge, Simone Bonnet

Date Promulgated: September 5, 1991


Colonial Penn Ins. Co. v. Omaha Indem. Co., (943 F.2d 327)

Case Number: 90-1872

Filed: 4/9/1991

Court: U.S. Court of Appeals for the Third Circuit

Issues Decided:  (1) Whether arbitrators exceed their powers when they issue a second award following a first final award and (2) the circumstances under which an arbitral award may be corrected due to an erroneous assumption of fact.

Colonial Penn Insurance Company (“Colonial Penn”), as reinsured, demanded arbitration against Omaha Indemnity Company (“Omaha”), as reinsurer, under a 1984 agreement pursuant to which Omaha was to indemnify Colonial Penn for ninety percent of losses under a book of short-term auto rental policies.  Omaha honored the agreement until 1986, when it claimed that Royal American Managers, Inc., which had entered into the reinsurance agreement on Omaha’s behalf, had lacked the authority to bind Omaha to the contract.  The parties entered into arbitration Following the hearing, the panel issued a unanimous “Final Award”, which provided that Omaha would pay $10 million to Colonial Penn, and that Omaha would “release any and all claims to the reserves (including IBNR) currently held by Colonial Penn to pay losses and loss adjustment expenses arising out of the business which was the subject of the Reinsurance Agreement between the parties.”

Colonial Penn’s counsel then pointed out that Colonial Penn was not holding reserves on the reinsurance program and Omaha was not making claims against any reserves.  The umpire responded that he had believed Colonial Penn was holding reserves, and that it was the panel’s intention that Colonial Penn keep the amount of those reserves.  In response to the umpire’s suggestion that the Final Award should be clarified in light of the mistake, Omaha’s counsel stated that he found the Final Award to be clear and unambiguous.  Omaha’s counsel sent a letter reiterating that he found the Final Award to be clear, while Colonial Penn’s counsel sent the panel a letter requesting “an amended award which reflects the panel’s understanding as to the amount it awarded Colonial Penn.”

Shortly thereafter, a two-panel majority issued a second and substitute award in response to the parties’ supposed “joint request for clarification”, accompanied by a letter repudiating part of the first arbitration award.  The new award provided that Omaha would pay Colonial Penn the $10 million previously awarded and, in addition, $8,988,783 representing Omaha’s share of reserves necessary to pay the losses and loss adjustment expenses arising out of the business subject to the reinsurance agreement.  Colonial Penn subsequently filed a motion in the district court to confirm the second arbitration award, while Omaha moved to confirm the first arbitration award.  The district court denied Omaha’s motion and granted Colonial Penn’s motion confirming the second arbitration award in the amount of $18,988,783, and ordered Omaha to pay the unpaid balance and post-judgment interest.  Omaha appealed.

The Court of Appeals reversed and remanded.  It explained that “[a]s a general rule, once an arbitration panel renders a decision regarding the issues submitted, it becomes functus officio and lacks any power to reexamine that decision.”  The court noted that the doctrine contains limitations: “(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.”  Colonial Penn had argued that the first exception was applicable, citing a “mistake evident on the face of the first arbitration award because the panel ordered Omaha to release its claim to Colonial Penn’s reserves when Colonial Penn was holding no reserves to which Omaha had any claim.”

The Court of Appeals, however, agreed with Omaha that the district court’s interpretation and application of the ‘mistake on the face of the award’ standard cannot be sustained.  That exception is meant to apply to clerical or computational errors.  Here, however, a provision for the release of claims did not on its face, without more, suggest a mistake.  The Court of Appeals expressed concern that, “[i]n extending the limited exception for mistakes apparent on the face of the award to a situation where extraneous facts must be considered, the district court opened a Pandora’s box which could subvert the policies on which the application of functus officio to arbitral decisions are predicated.”  The Court of Appeals also criticized the panel’s letter accompanying the second award, stating that “[i]t is generally improper for an arbitration panel to impeach its final award absent consent of the parties.”  Ultimately, the Court of Appeals found that it was “legal error for the court to confirm the second arbitration award, which was entered in derogation of the functus officio doctrine.”

In light of the district court’s error, the Court of Appeals remanded the case and acknowledged that, under what is now 9 U.S.C. § 10(b) of the Federal Arbitration Act, the district court might choose to remand the matter to the arbitration panel to resolve any remaining ambiguity.  The key distinction between the panel’s second award and a clarification pursuant to a judicially-sanctioned remand, according to the appellate court, was that “unlike the exception to the functus officio doctrine which confines the arbitrators to correcting mistakes apparent on the face of the award, an ambiguity in the award for which the court may remand to the arbitrators may be shown not only from the face of the award but from an extraneous but objectively ascertainable fact.”  In other words, while a panel is empowered to fix clerical or arithmetic errors in a final award, only a court can permit a panel to revisit an award that contains more substantive factual mistakes.  The Court of Appeals cautioned that it was not “suggesting that the district court should order a remand in this case,” but merely instructing “that such a remand is within its power upon a finding of ambiguity” in the first award.



[1] Linsey M. Routledge is Senior Counsel at Clyde & Co US LLP and Simone Bonnet is a Vice President of VALE Insurance Partners, LLC.