New York Court of Appeals Rules Contractual Limitations Period Unenforceable, Resolving Conflicting Policy Conditions in Favor of Coverage

02/17/2014

In a decision issued on February 13, the New York Court of Appeals ruled that a policy’s contractual limitations provision requiring suit to be filed within two years of a loss is “unreasonable and unenforceable” when the insured’s property cannot be reasonably replaced (as necessary to fulfill a separate condition of coverage) within the two-year limitations period.

Many commercial property policies offer insureds the option to recover the “replacement cost” of lost or damaged property, but only if the property is actually repaired or replaced. If the property is not replaced, the insured may only be entitled to recover the “actual cash value,” i.e., the replacement cost less depreciation. In Executive Plaza, LLC v. Peerless Insurance Company, a similar policy condition requiring replacement of damaged property conflicted with a separate policy term stating that no action could be maintained against the insurer unless brought within two (2) years after the date the loss or damage occurred.

Despite Executive Plaza’s efforts, damage caused by a 2007 fire to an office building could not reasonably be replaced within two years of the loss. When Executive Plaza filed suit to preserve its “replacement cost” claim on the second anniversary of the fire, Peerless successfully moved to dismiss the suit as premature. When Executive Plaza re-filed suit upon completion of the repairs, Peerless again successfully moved to dismiss the suit as untimely.

Ultimately, after the issue was certified by the Second Circuit Court of Appeals, New York’s high court held that, while a two-year limitations period is not inherently unreasonable, “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.” Recognizing the conflicting obligations created by the policy’s terms, the court reasoned that a suit that is too early on the last day of the limitations period cannot be too late only a day later.

Insureds must continue to act reasonably to comply with otherwise enforceable contractual limitations provisions. For those faced with the Hobson’s choice illustrated in Executive Plaza, the Court’s decision provides some common-sense relief, with which policyholders should be familiar. More broadly, the Court’s opinion also serves as an important vindication of the general rule that when policy terms conflict, the resulting uncertainty must be resolved in favor of coverage for the insured.

If you have any questions about the New York Court of Appeals’ decision in Executive Plaza, LLC v. Peerless Insurance Company or about commercial property insurance recovery generally, please contact one of the Haynes and Boone Insurance Coverage Practice Group partners listed below.  

Ernest Martin, Jr.
214.651.5641
ernest.martin@haynesboone.com

 Micah E. Skidmore
214.651.5654
micah.skidmore@haynesboone.com

 

Werner A. Powers
214.651.5581
werner.powers@haynesboone.com

 David Taubenfeld
214.651.5531
david.taubenfeld@haynesboone.com

 

Leslie C. Thorne
512.867.8445
leslie.thorne@haynesboone.com

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