In a recent decision dismissing claims against a workers compensation insurer as time barred, a New York trial court briefly addressed the often perplexing issue of when a cause of action accrues for breach of insurance and reinsurance contracts. Unfortunately, the court mistakenly characterized the insurance policy as a reinsurance contract and failed to fully analyze the accrual issue.
In New York Bus Operators Compensation Trust v. American Home Assurance Company, a trust created to self-insure the workers compensation liabilities of participating school and charter bus companies (the Trust) filed suit against American Home, which issued an excess workers compensation and employers liability policy providing coverage attaching excess of the Trust’s $150,000 each accident retention. A bus driver of one of the member companies was injured in an accident in 1999. She returned to work a month later but in July 2005, she required surgery for her injuries, was classified as having a permanent, partial disability, and never returned to work. By April 2007, the Trust had exhausted its $150,000 self-insured retention. Two different third party administrators (TPA) failed to notify American Home of the loss, and the Trust continued to pay the benefits. A third TPA finally provided notice on February 27, 2012. By letter to the TPA dated May 18, 2012, American Home denied coverage based on late notice.
The Trust first became aware of American Home’s denial in August 2016. A year later, the Trust sued all three TPAs but not American Home. In 2020, the Trust commenced a declaratory judgment and breach of contract action against American Home. American Home moved to dismiss the complaint on the grounds that both counts were barred by New York’s six-year statute of limitations. American Home argued that the Trust’s claims accrued in April 2007, when the Trust exhausted its $150,000 retention, or, at the latest, on May 18, 2012, when American Home denied coverage. Even using the later date, the Trust’s complaint was more than two years late. The Trust argued that because the policy provides for continuing performance over time (i.e., periodic payments), the statute of limitations is tolled until the last wrongful act or at least does not bar claims for payments that first became due in the six years before suit was filed.
After rejecting the Trust’s “continuing-wrong” arguments (a topic for another day), the court addressed the Trust’s attempt “to avoid the statute of limitations by characterizing the parties’ agreement as a contract of indemnity rather than a contract of insurance.” Setting aside that the court’s opinion appears to mischaracterize the Trust’s argument concerning indemnification, the court’s analysis of the purported argument is muddled and wrong.
First, despite the fact that the contract at issue is plainly an insurance policy (neither party suggested otherwise), the court concluded that “[e]xcess-of-loss insurance is a type of reinsurance  that has been used, as here, by self-insured employers to satisfy certain state workers-compensation insurance requirements.” While there are circumstances in which non-traditional risk bearing entities such as joint power authorities obtain coverage in excess of retentions through reinsurance contracts, the Trust bought insurance, not reinsurance. In addition, while the court identified two authorities in support of its conclusion, those authorities merely stand for the unremarkable proposition that reinsurance can be used by self-insurers to meet statutory workers compensation requirements.
Second, having found that the policy was a reinsurance contract, the court explained how insurance and reinsurance contracts are different but then held that difference doesn’t matter for purposes of determining when a cause of action accrues. The court got it partially right. Unlike the typical insurance policy, a reinsurance contract is, in most instances, a contract of indemnity, not liability. But the court missed the significance of that distinction – i.e., reinsurers often argue that because reinsurance is a contract of indemnity, the reinsured’s cause of action accrues when it pays the underlying claim (and therefore is entitled to indemnification), not when the reinsurer denies the reinsurance claim. While that approach is well established as a matter of U.K. law, the law in most U.S. states remains largely unsettled. The little case law that exists in the U.S. generally holds that in the absence of a specific contractual term identifying when payment is due (e.g., upon receipt of a proof of loss), the reinsured’s cause of action accrues when the reinsurer denies the claim or fails to pay within a reasonable period of time.
When a cause of action accrues under insurance and reinsurance contracts is a complex issue that is fact specific and requires thorough and careful analysis. The opinion in New York Bus Operators Compensation Trust v. American Home Assurance Company does not provide such analysis and is a good example of how courts can be confused by complex (re)insurance concepts, practices and issues.