The Second Circuit recently certified an important question to the New York State Court of Appeals, which, while presented in a remarkably straightforward manner, will likely have anything but a straightforward answer:
If a fire insurance policy contains
(1) 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 appeal arises out of a building insured by Peerless Insurance that was destroyed by a fire in 2007. Within days of the fire, the insured retained an architect and construction company to begin work, and within five months Peerless had paid the undisputed actual cash value of the property. However, the insured was required to obtain a variance and other forms of consent from local government entities to begin repairs, and despite the fact that applications for review were filed the very same month of the loss, the final building permit was not granted until seventeen months later, and the insured did not “substantially replace” the property until over three years after the loss.
Mindful of the policy’s two-year suit limitation, the insured filed suit in 2009 to recover replacement costs under the policy, but because construction had not yet been completed, the district court dismissed the claim as not yet ripe. After the property was substantially replaced over three years after the loss, the insured sent a demand letter to Peerless for the remaining replacement cost permitted by the policy, which was rejected. The insured then filed suit and the district court dismissed the case on the grounds that the action was time-barred,. This appeal followed.
On appeal, Peerless argued that “full compliance” with the terms of the policy requires that the insured (1) rebuild the property “as soon as reasonably possible” but also (2) before the two-year limitations period for filing suit. The insured responded that it defied logic to interpret the policy in such a manner when rebuilding the property within two years is not, in fact, reasonably possible. The Second Circuit, concluded that “no controlling precedent interprets the suit limitations clause in light of the replacement cost provision – in fact, the court noted that there was a conflict amongst the New York appellate departments on the issue. Compare Bakos v. N.Y. Cent. Mut. Fire Ins. Co., 83 A.D.3d 1485, 920 N.Y.S.2d 552, 554 (4th Dep’t 2011) (mem.) (denying insurer’s motion to dismiss because replacement cost provision was not circumscribed by a temporal limitation), with Il Cambio, Inc. v. U.S. Fid. & Guar. Co., 82 A.D.3d 650, 920 N.Y.S.2d 305, 305-06 (1st Dep’t 2011) (insured barred from asserting a replacement cost claim when it had not rebuilt insured property and because complaint was barred by two-year limitations period). Concluding that the question was purely legal and involves important matters of state law, the Second Circuit certified the issue to the New York Court of Appeals.
Stay tuned to see how New York will resolve what may be an important issue in the coming years, particularly in light of delays in construction that may occur following Sandy.