How is a policyholder supposed to obtain coverage under a policy that requires the insured to bring its claim within two years of the loss and also imposes preconditions on bringing a claim that cannot reasonably be satisfied within two years?  Recognizing the fundamental unfairness of such inconsistent policy provisions, the New York Court of Appeals has now made clear in Executive Plaza, LLC v. Peerless Insurance Company that insurers cannot enforce contractual limitations periods when other provisions of their own policy language make it impossible for the insured to reasonably comply with the stated limitation period.

Executive Plaza purchased a fire insurance policy from Peerless which contained a “contractual limitation period,” providing that suits for coverage must be brought within two years from the date of the fire.  However, the policy also provided that the insured could recover the “replacement costs” of property damaged in the fire only after the damaged property had actually been replaced.

After an office building owned by Executive Plaza was severely damaged by a fire, Executive Plaza notified Peerless that it would be seeking the replacement cost of the building, rather than the “actual cash value” of the building, which Peerless had agreed to pay.  Peerless refused to provide coverage for replacement costs, contending that such costs were not available until after Executive Plaza replaced the building.

Faced with the imminent expiration of the two-year limitation period, and not yet having fully replaced its damaged property, Executive Plaza sued Peerless, asking for a judicial declaration that Peerless was obligated to indemnify it for the replacement cost of its damaged property.  The federal trial court dismissed the action as premature because Executive Plaza had not yet replaced the damaged property.  Executive Plaza replaced its damaged property and then filed a new action against Peerless demanding indemnification.  The federal trial court, however, again dismissed Executive Plaza’s case, this time on the grounds that the suit had been brought after the contractual limitation period expired.

On appeal, the Second Circuit asked the New York Court of Appeals to decide whether an insured holding a policy that includes both a (1) two-year contractual limitation period and (2) a condition precedent that property be replaced before indemnification can be sought “is . . . covered for replacement costs if the insured property cannot be reasonably replaced within two years.”  New York’s highest court answered this question with a resounding “yes.”

The Court acknowledged that contractual limitations periods, which are aimed at shortening the time a policyholder has under the law to sue for coverage, are generally enforceable.  But the contractual limitation cannot fairly be enforced, the Court held, when the insurer has imposed a prerequisite to coverage that cannot reasonably be met within that limitation period.  “A ‘limitation period’ that expires before suit can be brought is not really a limitation period at all, but rather simply a nullification of the claim.”

This decision provides a reminder to insurance companies that New York’s high court will view with great skepticism arguments that, if accepted, would render coverage illusory.  It may be reasonable to require that suits for coverage be brought within a certain timeframe, but not when the insurer contractually impedes its policyholder’s ability to do so.