In its recent decision in Executive Plaza, LLC v. Peerless Ins. Co., 2014 NY Slip Op 898, 2014 N.Y. LEXIS 165 (N.Y. Feb. 13, 2014), the Court of Appeals of New York, New York’s highest court, on a question certified from the United States Court of Appeals for the Second Circuit, had occasion to consider the enforceability of a policy provision restricting the time in which an insured could bring suit against the insurer.
Peerless insured Executive Plaza under a fire loss policy that provided $1 million in coverage for “actual cash value” or “replacement cost.” The policy conditioned coverage on the lost or damaged property first being repaired or replaced, and that such repairs and replacements be made “as soon as reasonably possible after the loss or damage.” The policy also contained a clause titled “Legal Action Against Us,” which stated, in pertinent part, that no suit could be brought under the policy unless the “action is brought within 2 years after the date on which the direct physical loss or damage occurred.”
Following a fire loss, Peerless paid Executive Plaza approximately $758,000 in actual cash value. Executive Plaza subsequently notified Peerless that it would be seeking the balance of the policy’s limits in replacement costs. In response, Peerless advised Executive Plaza that to be entitled to reimbursement for any replacement costs, it would need to submit documentation verifying completion of the repairs. Executive Plaza claims that it undertook reasonable efforts to perform such repairs, but that it was not able to do so within two years of the fire that caused the loss. In fact, Executive Plaza was not able to complete the repairs until nearly three years and eight months after the fire. At that time, Executive Plaza sought reimbursement for the replacement costs under the policy. Peerless denied coverage for the costs on the ground that the two-year limitation period had expired.
In the ensuing coverage litigation, the United States District Court for the Eastern District of New York granted Peerless’ motion to dismiss on the basis of the “Legal Action Against Us” clause, noting “that the two-year limitation period in the Policy is reasonable, as New York Courts have consistently upheld two-year limitations periods in insurance contracts as reasonable.” The matter was appealed to the Second Circuit, which in turn certified the question:
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?
In considering the issue, the Court of Appeals noted its own prior case law allowing for a contractual modification of a statute of limitations. In fact, the Court had previously upheld “time to sue” periods in insurance policies of even shorter durations. The guiding principle in these cases, explained the court, is whether the limited time period is reasonable under the circumstances. With this in mind, the court focused on the issue of whether it was reasonable to expect that an insured, within two years of a fire, could be able to repair and replace all damaged property. The Court concluded that the two-year period was not necessarily unreasonable, but that the accrual date for the two-year period was. As the Court explained:
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.