Many property insurance policies contain suit limitation provisions limiting the time by which an insured may bring an action against the insurer under the policy.  In addition to a suit limitation provision, to recover the full replacement costs, as opposed to the actual cash value of the damage, many policies also require an insured to make the repairs as soon as reasonably possible after the loss.  Until recently, it had been unclear how New York courts would address a situation in which an insured could not reasonably complete the repairs within the suit limitation period, and would, theoretically, be without a remedy should a dispute arise concerning the payment of the full replacement cost.

The New York Court of Appeals was recently faced with just that situation in Executive Plaza, LLC v. Peerless Ins. Co., 2014 N.Y. LEXIS 165 (Feb. 13, 2014). Plaintiff insured’s office building was severely damaged in a 2007 fire.  The defendant insurer paid the actual cash value of the policy, and the insured undertook repairs that would enable it to recover the replacement cost of the building under the policy.  When the insured was unable to fully repair the building within two years of the loss, the insurer refused to pay the replacement cost, and the insured brought suit.  The Eastern District of New York granted the insurer’s motion to dismiss, pointing to the policy’s suit limitation provision, which required the insured to bring suit within two years of the loss.  On appeal, the Second Circuit certified the following question to the New York Court of Appeals”:

“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 New York Court of Appeals answered in the affirmative, finding that an insured could remain covered and bring suit despite being outside the suit limitation period.  The Court noted that an “agreement which modifies the Statute of Limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable,” (emphasis in opinion), and that “there is nothing inherently unreasonable about a two-year period of limitation.”  However, when applied to the facts of this case, the Court found that “the contractual period at issue here — two years from the date of ‘direct physical loss or damage’ (i.e., from the date of the fire) — is not reasonable if, as the Second Circuit’s question requires us to assume, the property cannot reasonably be replaced within two years.”  The Court noted that “[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 appeared to recognize that it was sailing in uncharted legal waters, noting that “[w]e have found no case in which we have squarely held that an otherwise reasonable limitation period may be rendered unreasonable by an inappropriate accrual date.”  It will be interesting to see how broadly future cases interpret the holding in Executive Plaza.