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AIG wins coverage dispute involving arbitration award

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In a victory for American International Group Inc., a New York state appeals court has vacated a $11.9 million arbitration award to Allied Capital Corp. in connection with a coverage dispute involving a federal False Claims Act lawsuit, stating the arbitrator was not entitled to reconsider its initial award in the case.

The complex proceedings in American International Specialty Lines Insurance Co. v. Allied Capital Corp. stems from a whistleblower lawsuit alleging New York-based Allied Capital had violated the FCA.

Allied Capital had agreed to pay the government $10.1 million to settle the case, according to Thursday’s ruling by the appellate division of the Supreme Court of New York in New York.

Allied treated its payment as a loss and sought defense and indemnification costs from its insurer, American Specialty, a unit of New York-based AIG, under two policies the insurer had issued.

When the insurer denied coverage, Allied file for arbitration, alleging it had breached its obligations under its coverage to defend and indemnify it, according to the ruling. It sought indemnification for the $10.1 million settlement and $1.4 million in defense costs incurred.

The parties agreed the panel would issue an immediate determination as to AIG’s liability under the policies, and defense costs would be the topic for a separate proceeding, according to the ruling.

In March 2016, the panel issued a 2-1 ruling that said the $10.1 million settlement was not a “loss” under the policies and therefore American Specialty did not have to indemnify Allied for that amount. The panel then ordered a hearing on the defense costs issue.

In August 2016, the panel issued a “corrected” ruling stating it had the authority to reconsider its $10.1 million award because it had not issued a final award, as the defense costs to which Allied was entitled remained an open issue, and the proceeding was never bifurcated. It issued a final award granting Allied a total of $11.9 million in April 2017.

American Specialty filed suit, arguing the arbitration panel had exceeded its authority in issuing the final award. The New York Supreme Court ruled in AIG’s favor, which was affirmed by the appeals court in its divided ruling.

When the panel reconsidered the award, “it exceeded its authority based on the common law doctrine of functus officio,” which “provides that absent an agreement to the contrary, after an arbitrator renders a final award, the arbitrator may not entertain an application to change the award” except to correct a deficiency, because of a miscalculation,  or to eliminate a matter not submitted, said the ruling.

The dissenting opinion said, “There is no basis to conclude that the arbitrators exceeded their authority by revising the issue” of whether the settlement was a covered loss.

Arbitration is one of the issues the U.S. Supreme Court will be considering in its new term.