When an insurance policy includes terms that would otherwise be reasonable but which when applied to the facts of a given claim make their application unreasonable, what is a court to do? The 2nd Circuit Court of Appeals recently turned to New York’s highest court for an answer to this question.
In Executive Plaza, LLC v. Peerless Insurance, the insured sustained a fire loss to an office building on February 23, 2007. The $1,000,000 insurance policy gave the insured a choice between ACV or replacement cost. The policy also mandated that the carrier would not pay replacement cost until the damaged property is repaired or replaced. But, the policy also mandated that no insured may bring an action unless “the action is brought within 2 years after the date on which the direct physical loss … occurred.”
Over the course of two years, the insured received $757,812.50 of the $1,000,000 policy limit for ongoing repairs. However, the repairs were not complete after two years, and the balance of the policy limit was in jeopardy. Thus, on the eve of the two year limitation period, Executive Plaza, filed suit. The court agreed with Peerless that the suit was premature given that repairs were ongoing and, hence, a condition precedent was unmet. When the repairs were completed, Executive Plaza re-filed suit. Peerless defended once again and sought dismissal on the basis of expiration of the two year limitation clause. The district court agreed with Peerless and dismissed the case. Whereupon the 2nd Circuit was called upon to consider the merits of the summary judgment granted. Given the unique facts, the Circuit Court certified the question to New York’s highest court.
The New York Court of Appeals first noted that nothing is inherently unreasonable about a 2 year limitation period for the insured to bring suit. (In fact, six-month limitation periods have been found to be reasonable.) However, the limitation was not reasonable given a condition precedent that could not reasonably be accomplished within that period.
The Court noted, “It is true that nothing required defendant to insure plaintiff for replacement cost in excess of actual cash value, but having chosen to do so defendant may not insist on a “limitation period” that renders the coverage valueless when the repairs are time-consuming.” Thus, in this circumstance, the court found that the limitation period was more of a nullification of coverage altogether and advised the Circuit Court of Appeals that the limitations term was unreasonable and unenforceable.
Property insurers should note that the lapse a two year limitation from accrual date to suit may no longer bar a DJ action, if repairs are still incomplete. It will be interesting to see if this holding applies to similar claims with a Loss of Use element, wherein an insured “drags out” replacement/repair of property damage, all the while increasing the restoration period and potential value of a Loss of Use claim. We will keep potential application of Executive Plaza in mind in the coming months, and in particular, in October 2014, once Hurricane Sandy claims are two years removed from the date of loss.
Thanks to Brian Gibbons for his contribution.