Facts and Underlying Litigation
Will New York courts enforce a time-limitation period for suits for replacement costs against an insurer under a property policy, even if the insured could not have completed the replacement work in the required time period? No, said the Court of Appeals in its opinion in Executive Plaza, LLC v. Peerless Insurance Co.
Briefly, the key facts in Executive Plaza are as follows: The insured purchased a fire insurance policy with a $1 million limit. The policy offered the insured a choice in coverage – payment of “actual cash value” or “replacement costs.” If the insured elected the latter form of coverage, the policy further provided that coverage would only attach if “the lost or damaged property is actually repaired or replaced” and that all repairs and replacements be made “as soon as reasonably possible after the loss or damage.” As to both forms of coverage, the policy provided that any “legal action” against the insurer under the policy must be “brought within 2 years after the date on which the direct physical [loss] or damage occurred.”
In February 2007, when the insured’s office building suffered severe fire damage, it sought coverage for the loss under its fire policy. Initially, the insured sought and recovered the “actual cash value” ($757,000) for the damaged building. However, it later informed the insurer that it would also make a replacement-cost claim for the approximately $243,000 remaining on its $1 million limit. There was no dispute in the record that the insured acted reasonably to replace the damaged building; however, despite its efforts, it was unable to do so within two years of the building’s damage.
Subsequently, the insured sued the insurer in state court seeking recovery for the replacement costs in question. The insurer responded by removing the suit to federal court, where it successfully moved to dismiss on the ground that the claim was premature since the insured had not yet completed replacement work on the building. That did not occur until October 2010 – 20 months after the expiration of the two-year limitation period provided in the policy for suits against the insurer. Once the insured completed the building repairs, it again sued the insurer in state court, which again removed the suit to federal court, where, this time, it successfully moved to dismiss the claim. In granting the dismissal motion, the federal court cited the deadline set forth in the policy, which barred suits against the insurer filed more than two years after the date of any loss or damage. The court noted that New York courts have consistently upheld the “reasonableness” of such limitation periods.
Court of Appeals Decision
The insured appealed to the Second Circuit, which certified to the Court of Appeals the question of whether a two-year limitation period for suits for replacement costs under the policy is enforceable “if the insured property cannot reasonably be replaced within two years.”
The Court of Appeals held that it was not enforceable. At the outset of its decision, the Executive Plaza court acknowledged that it has enforced shortened limitation periods for actions under policies, noting that there is nothing “inherently unreasonable” about such limitations. The problem in Executive Plaza, however, was not the limitation period, but rather the “accrual period.” The court held that it was unfair and unreasonable to require suit filings within two years of a loss while “imposing a condition precedent to the suit – in this case, completion of replacement of the property – that cannot be met within that period.” As the court put it, a “‘limitation period’ that expires before suit [can] be brought is not really a limitation period at all, but simply a nullification of the claims.”
In so ruling, the court distinguished the result here from an earlier case where it sustained a 12-month suit limitation period in a property policy, noting that, unlike the policy here, that policy “enabled the insured to ‘protect itself’ by … beginning an action before expiration of the limitation period.” (Emphasis supplied.)
Practical Lesson of Executive Plaza
In terms of lessons learned from Executive Plaza, several comments are in order. To begin with, the decision is not a repudiation of limitation on suit periods in property policies. To the contrary, the court reaffirmed in no uncertain terms that such limitations are not “inherently unreasonable.” Second, it was clear from the record in Executive Plaza that the insured had acted reasonably and diligently to complete the repairs and replacement work to the damaged building, but despite its efforts, was unable to do so within two years of the loss date. In other cases, however, the reasonableness of the insured’s efforts is likely to be a disputed fact issue that will need to be resolved on a case-by-case basis. Finally, the outcome here turned on property policy wording that barred the insured from suing until completion of the repairs. What if the policy had permitted the insured to file a protective suit before the expiration of the limitation period? Would the result have been different? The Executive Plaza opinion suggests that in that event an argument could be made that an insured confronting an approaching suit limitation period who fails to file a protective suit before the limitation period lapses has acted “unreasonably” and should be granted no relief from the policy’s suit filing deadline.