Insurance Provisions Created Result Judges Call 'Unreasonable'

, New York Law Journal

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ALBANY - A two-year deadline for insurance policy holders to sue their insurer for the costs of replacing a damaged building, when coupled with another provision that makes it impossible to fix the damages in 24 months, is "unreasonable and unenforceable" in New York, the state's Court of Appeals determined Thursday.

"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," Judge Robert Smith (See Profile) wrote for the unanimous court in Executive Plaza v. Peerless Insurance Company, 2.

The court also decided Thursday that the non-citizen status of injured workers does not extinguish an employer's protections against third-party suits under 1996 changes to the Workers' Compensation Law, and that a judge is not obligated under a 2008 U.S. Supreme Court ruling to make a particular inquiry about a defendant's mental capacity to represent himself if he is deemed competent to stand trial.

In the insurance case, the Court of Appeals was deciding on the interplay between two provisions that are common to insurance policies in New York. One says that any lawsuit for replacement costs must be brought within two years. But the other stipulates that an insured—in this case Executive Plaza—has to replace the damaged property before bringing suit.

The state court was asked for a clarification of New York Insurance Law in a certified question from the U.S. Court of Appeals for the Second Circuit (NYLJ, May 28, 2013). The federal court is trying to sort out a dispute that arose after Peerless Insurance refused to cover the replacement cost of an Executive Plaza building that was destroyed in Island Park, Nassau County, by fire on Feb. 23, 2007.

Peerless maintained that since Executive Plaza failed to replace the damaged building by Feb. 23, 2009, the two-year period stipulated under the $1 million policy, it cannot sue for replacement costs now.

Executive Plaza collected $757,812 within months of the fire but said it is owed another $242,187, even though it could not secure a variance in time to finish reconstruction within two years.

Executive Plaza sued its insurer in federal court on Feb. 23, 2009, claiming that it had reasonably sought to have the structure replaced but ran out of time. Peerless should be compelled to pay the full coverage cost of the policy, the suit maintained.

The action was thrown out of the Eastern District of New York by Judge Leonard Wexler (See Profile) as premature. Executive Plaza followed up with another suit seeking to recover the full $1 million when the replacement building in Island Park was completed in October 2010.

The second suit was dismissed by Eastern District Judge Joanna Seybert (See Profile) because it was brought after the two-year limitations period, but the Second Circuit asked the state Court of Appeals to answer the question, "What happens to an insured property that cannot be reasonably replaced within two years?"

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