Is a two year contractual limitation period in a fire insurance policy reasonable and enforceable where the insured property cannot reasonably be replaced in two years? Answer: No.
Executive Plaza, LLC v. Peerless Insurance Company, 2014 NY Slip Op 00898 (decided February 13, 2014),
involve[d] a fire insurance policy that contain[ed] a clause limiting the time in which the insured may bring suit under the policy. The limitation period [was] two years, running from the date of the fire. The policy also [said] that the insured may recover the cost of replacing destroyed property — but only after the property has already been replaced. Thus, if (as happened in this case) the process of replacing the property takes more than two years, the insured's claim will be time-barred before it comes into existence. Id. at 1-2.
The Second Circuit Court of Appeals certified the following question to the New York Court of Appeals:
"If a fire insurance policy contains
- a provision allowing reimbursement of replacement costs only after the property was replaced and requiring the property to be replaced 'as soon as reasonably possible after the loss'; and
- a provision requiring an insured to bring suit within two years after the loss; is an insured covered for replacement costs if the insured property cannot reasonably be replaced within two years?" Id. at 2-3.
The Court of Appeals answered the certified question by holding that a two year “contractual limitation period, applied to a case in which the property cannot be reasonably replaced in two years, is unreasonable and unenforceable.” Id. at 2.
The Court of Appeals explained that:
It is true, as the District Court pointed out, that there is nothing inherently unreasonable about a two-year period of limitation. In fact, we have enforced contractual [*4] limitation periods of one year (Blitman Constr. Corp. v Insurance. Co. of N. Am., 66 NY2d 820 ; Sapinkopf v Cunard S.S. Co., Ltd., 254 NY 111, 114 ) and six months (Continental Leather Co. v Liverpool, Brazil & Riv. Plate Steam Nav. Co., 259 NY 621 ; Aron & Co. v Panama R.R. Co., 255 NY 513, 519 ; see also John J. Kassner, 46 NY2d at 552). The problem with the limitation period in this case is not its duration, but its accrual date. 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. It is true that nothing required defendant to insure plaintiff for replacement cost in excess of actual cash value, but having chosen to do so defendant may not insist on a "limitation period" that renders the coverage valueless when the repairs are time-consuming. Id. at 3-4.