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Colonial Penn Insurance Co. v. Omaha Indemnity Co.

argued: April 9, 1991.

COLONIAL PENN INSURANCE COMPANY
v.
THE OMAHA INDEMNITY COMPANY; MUTUAL OF OMAHA INSURANCE COMPANY; AND ROYAL AMERICAN MANAGERS, INC., THE OMAHA INDEMNITY COMPANY, APPELLANT V. NATIONAL RISK UNDERWRITERS, INC.



On Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil No. 87-01844.

Sloviter, Chief Judge, Greenberg and John Minor Wisdom,*fn* Circuit Judges.

Author: Sloviter

Opinion OF THE COURT

SLOVITER, Chief Judge

After an arbitration panel issued a final award in favor of one of the parties, a majority of the panel issued a new award "clarifying" the original award and increasing the amount awarded. The district court granted the successful party's motion to confirm the second award, and denied the other party's motion to confirm the first award. This appeal presents the question whether the arbitrators exceeded their powers when they issued a second award, and, if so, the circumstances under which an arbitral award may be corrected because of an erroneous assumption of fact.

I.

Background Facts and Procedural History

In October 1984, Colonial Penn Insurance Company entered into a reinsurance agreement, signed by Royal American Managers, Inc. (RAM) on behalf of Omaha Indemnity Company, pursuant to which Omaha (the reinsurer) was to indemnify Colonial Penn (the reinsured) against ninety percent of the losses Colonial Penn might experience on a book of short-term auto rental policies. Omaha apparently honored the agreement by accepting Colonial Penn's premiums and paying the agreed upon share of claims and expenses until September 1986 when it ceased funding the claims and asserted that RAM lacked authority to bind Omaha to the contract.

Colonial Penn filed this diversity action for breach of contract in the United States District Court for the Eastern District of Pennsylvania against Omaha, its parent Mutual of Omaha Insurance Company, and RAM. Omaha and Mutual of Omaha thereafter joined National Risk Underwriters, Inc. (NRU), Colonial Penn's underwriting manager, as a third-party defendant. Colonial Penn also asserted a claim against NRU for indemnification. In December 1987, the district court dismissed Omaha's claim against NRU, granted Omaha's motion to compel binding arbitration of its dispute with Colonial Penn as provided in the reinsurance agreement, and stayed the proceedings as to the parties other than Omaha and Colonial Penn.

A panel of three arbitrators was formed, whereby each party appointed an arbitrator and the two arbitrators together selected an umpire. Colonial Penn claimed that it had incurred losses and expenses of approximately $29 million as a result of Omaha's repudiation. In defense, Omaha contended, inter alia, that the parties had previously agreed to a rescission of the agreement pursuant to which Omaha had paid to Colonial Penn $9.6 million dollars representing premiums that RAM had collected from Colonial Penn but failed to remit to Omaha. After the parties engaged in extensive discovery and briefing of legal and factual issues, they participated in an eight-day arbitration hearing.

The panel issued a unanimous "Final Award" on January 18, 1990, which provided in pertinent part:

FINAL AWARD

After due consideration of the extensive evidence introduced by the parties in this proceeding and careful examination of the briefs and arguments in support of their respective positions on each of the pertinent issues, the Panel unanimously finds, concludes and ORDERS that:

1. Omaha Indemnity shall pay the sum of $10 million to Colonial Penn without further delay in satisfaction of Omaha Indemnity's obligations to Colonial Penn under the Reinsurance Agreement between the parties dated October 1, 1984.

2. Omaha Indemnity Company shall further release any and all claims to the reserves (including IBNR)*fn1 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.

3. Upon payment of the sum of $10 million to Colonial Penn and release of all claims to such reserves, Omaha Indemnity shall be relieved of any further liability for the payment of losses and loss adjustment expenses under the Reinsurance Agreement between the parties and also released from any other claims arising out of ...


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