Suit Limitation Provision Held Unreasonable by New York Court

On February 13, 2014, the Court of Appeals of New York issued an opinion in Executive Plaza, LLC v. Peerless Ins. Co., — N.E.3d —, 2014 WL 551251 (N.Y. 2014) addressing a certified question from the U.S. Court of Appeals for the Second Circuit concerning application of a two-year suit limitation provision in a fire insurance policy.  The insurance policy at issue included a clause limiting the time in which the insured was able to file suit against the insurance company to two years from the date of the loss.  The insurance policy also had a provision allowing the insured to recover replacement cost benefits, but only after the damaged property was repaired or replaced.  The question before the New York court was whether an insured was precluded from filing suit when the process of repairing or replacing the damaged property takes more than two years.  The court found that the two year limitation period, “applied to a case in which the property cannot reasonably be replaced in two years, is unreasonable and unenforceable.”

The insured in the case owned an office building that was severely damaged in a fire on February 23, 2007.  The cost to repair the damage to the building was more than $1 million, which was the limit of insurance available under the subject policy.  The policy included a provision that gave the insured a choice between recovering the “actual cash value” or “replacement cost,” but did not permit the insured to recover the replacement cost unless and until the repairs to the building were complete.  The insurance company paid the insured $757,812.50 as the actual case value of the insured building.  The insured notified the insurance company that it would be making a replacement cost claim.  The insurance company replied that the insured must provide documentation confirming completion of the repairs before it would pay the replacement cost value benefits.  The insured contends it acted reasonably in attempting to complete the repairs, but was not able to do so within the two year suit limitation provision.

On the second anniversary of the loss, February 23, 2009, the insured filed suit seeking a declaratory judgment that the insurance company was liable for the full replacement cost up to the policy limits.  The insurance company removed the case to the U.S. District Court for the Eastern District of New York, which dismissed the case on the ground that the suit was premature because the insured had not completed the repairs to the damaged building.  When the repairs were completed in October 2010 and the insured demanded replacement cost benefits.  The insurer denied the claim citing the two year limitation.  The insured again filed suit, which was removed to the federal court.  The Eastern District of New York again dismissed the case, finding that the insurance policy “unambiguously bars any and all suits commenced more than two years after the date of the damage or loss,” that the provision was reasonable, and that New York courts consistently uphold the provisions as reasonable.  The insured appealed to the Second Circuit, which certified the question to the Court of Appeals of New York.

The high court of New York determined that the two year suit limitation provision in the insurance policy was unreasonable as applied in these circumstances.  The court made certain to note, however, that its opinion did not mean that two year suit limitation provisions are per seunreasonable; instead, the limitation was unreasonable here.  In particular, the court found that “[i]t is neither fair nor reasonable to require a suit within two years from the date of the loss, while imposing a condition precedent to the suit—in this case, completion of replacement of the property—that cannot be met within that two-year period.  A ‘limitation period’ that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim.”

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