Barclay Damon
Barclay Damon

Legal Alert

New York Court of Appeals to Consider Insurance Policy Replacement Cost Provisions and Statute of Limitations

The United States Court of Appeals for the Second Circuit in New York recently certified a question to the New York Court of Appeals (New York’s highest court) concerning the perplexing issue of the interplay between a fire insurance policy provision requiring the insured to file suit on the policy within two years, and also providing that when seeking replacement cost coverage, the insurer must replace the damaged property “as soon as reasonably possible.” Executive Plaza, LLC v. Peerless Insurance Co., United States Court of Appeals, 2nd Circuit (May 23, 2013).

A building owned by Executive Plaza, LLC (“Executive”) was destroyed by fire on February 23, 2007. Peerless Insurance Co., (“Peerless”) had issued a policy of insurance covering the building.

By July 2007, Peerless had paid Executive the actual case value of the property in the sum of $757,812.50. Because of the necessity of obtaining a variance and other consent from local governmental entities, a final building permit was not granted until November 2008. The building was “substantially replaced by October, 2010.”

The policy provided that no legal action could be commenced against the company unless there was full compliance with all of the terms of the insurance policy, and “[t]he action is brought within two years after the date on which the direct physical loss or damage occurred.”

In addition, the policy provided that Peerless would pay either the actual cash value, or the replacement cost of the property up to the policy limit. The insured had the option to first receive the actual cash value of the property, and then later seek the balance of the replacement cost. In that event, the insured was required to actually repair or replace the property, and to make the repairs or replacement “as soon as reasonably possible after the loss or damage.”

On February 23, 2009, within the two-year limitations period, but before it had completed rebuilding the property, Executive filed suit in the Nassau County Supreme Court, to recover the replacement cost. Peerless removed the case to the Eastern District Federal Court. The District Court dismissed the action as replacement of the property had not been completed.

Subsequently, when replacement was substantially complete, Executive demanded an additional $242,087.50, representing the replacement cost of the property, less the previous actual cash value payment. Peerless rejected the demand.

Executive then filed suit in the Supreme Court, Nassau County, which Peerless again removed to the Eastern District. The Eastern District Court dismissed the second action as time-barred. Executive appealed to the Second Circuit.

Executive contended that requiring it to rebuild a property “as soon as reasonably possible,” but also before the two-year limitations period for filing suit expired, “defies logic” where rebuilding the property within two years is not reasonably possible.

The Second Circuit decided to certify the question of the two-year suit limitations and the replacement cost requirements of the policy to the New York Court of Appeals, finding that the New York Court of Appeals had not previously addressed the question, that the issue is of significant importance to the State of New York and its public policy considerations, and that the Court’s answer to the certified question would be determinative of the issue.

The Second Circuit noted that if the Court of Appeals were to determine that the suit limitations clause, and the replacement value provision, “read together, are unenforceable as a matter of public policy, then we would be obliged to remand to the District Court to determine whether Executive rebuilt the insured property ‘as soon as reasonably possible.’”

This certified question involves a significant issue of policy interpretation in instances where an insured is unable to complete a repair or replacement within the two-year limitations period. We will monitor the Court of Appeals review of this important issue and report further.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact Anthony J. Piazza, Chair of the firm’s Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or apiazza@hblaw.com.