Property insurance policies typically include a clause limiting the time (one to two years) after a loss within which the insured may sue the insurer. Generally, those clauses are enforced by the courts, and lawsuits commenced by insureds after the limitations period expires are dismissed. New York’s highest court, however, recently refused to enforce a contractual statute of limitations where the insured was unable to commence suit before the two-year limitation period expired. See Executive Plaza, LLC v. Pierless Insurance Company, (Feb. 13, 2014).
In addition to the two-year limitation period, the insurance policy in Executive Plaza also contained a clause that allowed for the recovery of “replacement cost,” but only after the damaged property is actually repaired or replaced. A fire destroyed the insured’s building, and it could not be reasonably replaced within two years. The insurer denied coverage based on the two-year limitation period.
Although New York courts had previously enforced even shorter limitations periods, the Executive Plaza Court refused to enforce the two-year limitations period because the insured was not able to commence suit before the limitations period expired. “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.”
This case serves as an important reminder that insurance policies (and, indeed, all contracts) must be interpreted and applied in a reasonable manner. Insurance policy provisions, even if clear and unambiguous, should not be enforced if it will render coverage valueless.