Court of Appeals Rules That Two-Year Statute of Limitations In Insurance Policy Is Unenforceable Where Contractual Condition Precedent To Suit Could Not Be Accomplished Within Two Years

The Court of Appeals issued a decision today in Executive Plaza, LLC v. Peerless Insurance Company, Docket No. 2, addressing, on a certified question from the Second Circuit, the interplay of two provisions of a fire insurance policy--one requiring the insured to bring claims under the policy within two years of the fire, and a second providing that the insured could not recover the cost of replacing damaged property until the repairs are complete. Since the repairs the Plaintiff needed to perform took more than two years to complete, a strict application of both provisions placed the insured in a paradoxical situation where its claim for replacement costs was "time-barred before it [came] into existence."

The Court of Appeals noted that, in general, agreements providing "a shorter, but reasonable" limitations period are enforceable, and the Court has upheld limitations periods as short as one year. As applied in this case, however, the Court found that the two-year limitations period was "unreasonable and unenforceable":

The problem with the limitation period in this case is not its duration, but its accrual date. It is neither fair nor reasonable to require a suit within two years from the date of the loss, while imposing a condition precedent to the suit -- in this case, completion of replacement of the property -- that cannot be met within that two-year period. 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. 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.

This decision demonstrates that although contractual limitations periods are generally enforced as written, such provisions must be reasonable, and courts will not enforce a limitations period that effectively nullifies the contract.