In answer to a question certified by the Second Circuit, New York Court of Appeals has held that a two-year suit limitation provision in a property insurance policy – which the court acknowledged was not an “inherently unreasonable” provision – was unenforceable under the factual circumstances of the case before it.  Executive Plaza, LLC v. Peerless Ins. Co., — N.Y.3d –, 2014 WL 551251, 2014 N.Y. LEXIS 165 (N.Y. Feb. 13, 2014).  In doing so, the court held for the first time that such a limitation period may be rendered unreasonable by what it called an inappropriate accrual date.

Peerless Insurance Company issued a $1 million fire insurance policy to Executive Plaza.  This gave Executive the choice to select payment of “actual cash value” or payment of  “replacement cost.”  The policy also provided that Peerless would not pay the replacement cost for any loss or damage until the property had actually been repaired or replaced.  Finally, the policy contained a suit limitation clause that required the insured to commence any legal action within two years from the date of loss.

On February 23, 2007, Executive’s office building in Island Park, New York was severely damaged in a fire.  Peerless paid the actual cash value of the destroyed building, and Executive then notified the insurer that it would be making a replacement cost claim for the balance of the $1 million policy limit.  Peerless responded that Executive could only do so after providing “documentation verifying the completion of repairs.”

Executive did not complete the repairs within two years of the loss, and the certified question directed the Court of Appeals to assume that “the insured property [could not] reasonably be replaced” within that time frame.  Faced with this dilemma, the insured filed an action against Peerless in state court on February 23, 2009, seeking a declaratory judgment that the insurer was liable for the replacement costs up to the policy limit.  Peerless removed the case to federal court and then argued that Executive’s suit was premature because the repairs had yet to be  completed.  The federal district court agreed with Peerless, and it dismissed Executive’s case.

In October of 2010, the repairs to the building were complete, and Executive again sued Peerless in state court for the replacement cost.  Peerless removed to federal court once again, and this time it argued that Executive’s suit should be dismissed because it was barred by the policy’s two-year suit limitation provision.  The federal court again granted Peerless’ motion to dismiss, finding that the policy “unambiguously bars any and all suits commenced more than two years after the date of damage or loss” and noting that “the two-year suit limitation in the [p]olicy is reasonable, as New York Courts have consistently upheld two-year limitations periods in insurance contracts as reasonable.” Executive Plaza, LLC v. Peerless Ins. Co., 2012 WL 910086 (E.D.N.Y. March 13, 2012).

Executive appealed to the United States Court of Appeals for the Second Circuit, which certified the following question to the Court of Appeals:

If a fire insurance policy contains:

  1. 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
  2. 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?

New York’s highest court accepted certification, and a unanimous panel answered the question in the affirmative.  The Court of Appeals stated that although “there is nothing inherently unreasonable about a two-year period of limitation[,]” it is not enforceable in a property insurance policy if the property cannot reasonably be replaced within two years.  Judge Robert S. Smith’s opinion explained that “[t]he problem with the limitation period in this case is not its duration, but its accrual date[]” as “[i]t is neither fair nor reasonable to require a suit within two years from the date of loss, while imposing a condition precedent to the suit – in this case, the completion of replacement of the property – that cannot be met within that two-year period.”  Under such circumstances, the court held that the limitation period “is not really a limitation period at all, but simply a nullification of the claim.”

To a degree it was the federal district court that was at fault here, for it should never have accepted the insurance company’s argument that the declaratory judgment action filed immediately before the expiration of the two year period was impermissible because it was premature.  As Judge Smith’s opinion explained, in a prior decision enforcing a suit limitation provision

we pointed out that the policy enabled the insured to “protect itself by . . . beginning an action before expiration of the limitation period” . . . Here, the insured did begin an action on the last day of the limitation period — and the insurer  successfully argued that that action was brought too soon.  It is unreasonable for it now to say, as it in substance does, that a day later would have been too late.

This decision is a cautionary tale.  Even though a policy may contain a reasonable suit limitation provision, if it also provides that repairs must be completed before the insurer pays the replacement cost and the insured’s loss is such that this cannot be done, the insurer cannot automatically rely the suit limitation provision to bar coverage.