Foran Glennon Palandech Ponzi & Rudloff

April 2014

New York Court of Appeals Rejects Contractual Suit Limitation Period

Morgan Smith

The Court of Appeals of New York recently addressed whether a fire insurance policy’s two-year period for bringing suit is unenforceable, where the policy requires replacement before payment but the property could not be replaced within two years.  The court answered in the affirmative.  Executive Plaza, LLC v. Peerless Ins. Co., 22 N.Y.3d 511 (N.Y. , Feb. 13, 2014).  The holding in Executive Plaza  is significant because it represents a departure from a large body of law upholding contractual suit limitations according to their terms, and instead shifts focus to the circumstances of each particular case.

Factual Background.  In the instant case, the insured brought a state court action against the property insurer, seeking recovery of the replacement cost for a building destroyed by fire. Under the policy the insured was given a choice between the payment of “actual cash value” and “replacement cost.” The policy provided, however, that the insured would not pay on lost or damaged property until it was actually repaired or replaced, and only if the repairs or replacements were made as soon as “reasonably possible” after loss or damage. The policy also contained a suit limitations period stating that no one was permitted to bring legal action against the insurer unless the action was brought within two years after the date on which the direct physical loss or damage occurred.

The insured notified the insurer that it would be making a replacement cost claim, and the insurer replied that in order to collect the insured would have to provide documentation verifying the completion of the repairs. The insured alleged that it acted reasonably to replace the damaged building, but was not able to do so before the second anniversary of the fire. After the replacement building was completed, but over three years after the date of the fire, the insured sued the insurer seeking declaratory judgment that the insurer was liable for the replacement costs of the damaged building. The insurer successfully moved to dismiss on the ground that the policy unambiguously barred any and all suits commenced more than two years after the date of damage or loss.

Discussion.  On appeal the insured argued that the two-year limitation period in the policy was unreasonable because the insured property could not reasonably be replaced within two years of the damage. The court agreed and reversed the lower court’s decision holding that while contractual suit limitations are not inherently unreasonable, a two-year suit limitations period was not reasonable under the facts presented in this case. The court opined that the problem with the limitation in the instant case was not its duration, but its accrual date, and that it was neither fair nor reasonable to require suit within two years of loss, while imposing a condition precedent to instituting a suit that could not be met within the period. Further, the court addressed limitations periods and noted that the contractual period of time within which an action must be brought should be fair and reasonable in the view of the circumstance of each particular case, not the length of the period exclusively provided in the policy terms and conditions.

Conclusion.  As a result of Executive Plaza, New York courts reject a bright line rule when enforcing contractual suit limitations provisions.  Rather, New York courts will look to the relevant facts and circumstances of each particular case when deciding whether the suit limitations period is enforceable as written.