New York’s highest court recently held that a policy limitation period, requiring a lawsuit to be brought within two years from the date of loss, is unreasonable and unenforceable…at least under certain circumstances.1
The case involved a loss to an office building severely damaged by fire. The policyholder had $1 million in insurance coverage for the loss. The insurance carrier paid the loss at actual cash value in the amount of $757,812.50. The policyholder made claim for replacement cost benefits under the policy. The insurance carrier notified it that to collect the remaining replacement cost benefits, it would have to provide proof of completion of the repairs. The policy said that the insurance carrier would not pay replacement cost value “until the damaged property is actually repaired or replaced,” and “unless the repairs or replacement are made as soon as reasonably possible.” The policy also had a provision requiring a lawsuit to be brought against the insurance carrier within two years from the date of loss. The policyholder had filed a lawsuit by the two year anniversary of the fire, but the insurance carrier successfully dismissed it by arguing it was premature since the replacement of the building was not complete.
The policyholder argued it acted reasonably in attempts to replace the damaged building, but was unable to do so before the second anniversary of the fire loss. The replacement building was completed in October 2010. The insurance carrier refused to pay the remaining $242,187.50 because the two year limitation period expired. The policyholder filed a second lawsuit against the insurance carrier because of that denial. The insurance carrier removed the case to Federal Court, and the District Court dismissed the case because it was beyond the two year limitations period of the policy for a lawsuit to be filed. The policyholder appealed to the United States Court of Appeals for the Second Circuit. The appellate court did not find a clear answer in New York state law on the issue involved, so it certified a question to the highest state court, the New York Court of Appeals. The question was:
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 (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?
The Court of Appeals of New York held that “the contractual period at issue here—two years from the date of [loss] is not reasonable if, as the Second Circuit’s question requires us to assume, the property cannot reasonably be replaced within two years.” It should be noted that the court did reiterate that it has “enforced contractual limitation periods of one year,” and “there is nothing inherently unreasonable about a two-year period of limitation.”
The court elaborated further:
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 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.
The Court recognized that to hold otherwise would render the replacement cost value coverage insured for valueless just because the repairs are involved and time consuming.
Here, the insured did begin an action on the last day of the limitation period—and the insurer successfully argued that the action was brought too soon. It is unreasonable for it to now say, as it in substance does, that a day later would have been too late.
New York’s Court of Appeals answered the certified question in the affirmative. This was a well written opinion that achieves a result that makes common sense under the circumstances. It is always reassuring when the law makes common sense!