New York Court of Appeals Finds Two-Year Suit Limitation Provision Unenforceable in Replacement Cost Holdback Claim
In May, 2013, the United States Court of Appeals for the Second Circuit in New York certified a question to the New York Court of Appeals regarding the interplay between a property insurance policy provision requiring the insured to file any suit under the policy within two years, and also providing that, when seeking replacement cost coverage, the insured must replace the damaged property “as soon as reasonably possible."
On February 13, 2014, the New York Court of Appeals answered the certified question affirmatively, and held that applying the policy two-year limitations period to a claim for replacement cost holdback was “unreasonable” where the property could not reasonably be repaired within two years of the date of loss. Executive Plaza, LLC v. Peerless Insurance Company, N.Y. Court of Appeals, February 13, 2014.
A building owned by Executive Plaza was damaged by fire on February 23, 2007. Peerless had issued a $1,000,000 property insurance policy to Executive Plaza which provided that the insured had the option to obtain payment of the “actual cash value” loss or the “replacement cost” of the damaged property. However, the policy provided that the Company would not pay on a replacement cost basis “[u]ntil the lost or damaged property is actually repaired or replaced, and***[u]nless the repairs or replacement are made as soon as reasonably possible after the loss or damage.”
The policy further provided that no action could be brought against the insurer unless the action was commenced “within 2 years after the date on which the direct physical loss or damage occurred.”
The insurer paid the “actual cash value” of the destroyed building in the sum of $757,812.50 to Executive Plaza in July, 2007. Thereafter, plaintiff sought recovery of the replacement cost claim up to the $1,000,000 policy limit, and the insurer responded that plaintiff needed to provide “documentation verifying the completion of repairs.”
Executive Plaza alleged that it took reasonable steps to replace the damaged building, but was not able to do so prior to February 23, 2009, the second anniversary of the fire. In order to preserve its rights, Executive Plaza filed a declaratory judgment action in Supreme Court on that date seeking a declaration that the insurer was liable for replacement costs up to the policy limit. Peerless removed the action to federal court, and obtained a dismissal of the action on the grounds that the insured had not completed replacement of the building at that time.
Replacement of the building was completed in October, 2010, and plaintiff again sought payment of the unpaid portion of the policy limits. Peerless denied liability on the ground that the two-year suit limitation period had expired. Plaintiff again brought suit in Supreme Court, which was removed by Peerless to federal court where it moved to dismiss based upon the two-year contractual limitation. The District Court granted the insurer’s motion. On appeal to the Second Circuit, that Court certified a question based on the foregoing policy provisions to the New York Court of Appeals inquiring whether “an insured [is] covered for replacement costs if the insured property cannot reasonably be replaced within two years?”
The New York Court of Appeals started its analysis by noting that “[a]n agreement which modifies the statute of limitations by specifying a shorter, but reasonable, period within which to commence an action, is enforceable***.” However, noting that the Second Circuit’s certified question assumed that the property could not reasonably be replaced within two years, the Court ruled that the suit limitation at issue was “not reasonable”. The Court stated:
It 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.
The Court noted the anomalous position maintained by the insurer. Executive Plaza had brought suit on the last day of the two-year limitations period in order to protect its rights, which the insurer claimed was premature, and had the action dismissed. The Court held that it “is unreasonable for it now to say, as it in substance does, that a day later would have been too late.”
The Court’s ruling provides guidance for insureds and insurers in the perplexing area of insurance coverage holdback claims. The test enunciated by the Court is a factual one: whether, under the circumstances, the property can reasonably be repaired or replaced within the two-year limitations period. Where it cannot be accomplished, the limitations period will not be enforceable.
If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact John R. Casey at (518) 429-4277 or email@example.com.