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?"

According to the state court, there is nothing inherently unfair about two years as a limitations period. Provisions in policies setting one-year or even six-month limitations periods have been upheld by courts, Smith noted.

"The problem with the limitation period in this case is not its duration, but its accrual date," he said.

Nothing compelled Peerless to insure Executive Plaza for the replacement costs of the building, Smith noted. But once the insurer did, it "may not insist on a 'limitation period' that renders the coverage valueless when the repairs are time-consuming" and the two-year time limit is missed.

"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," he said.

Chief Judge Jonathan Lippman (See Profile) and Judges Victoria Graffeo (See Profile), Susan Phillips Read (See Profile), Eugene Pigott Jr. (See Profile), Jenny Rivera (See Profile) and Sheila Abdus-Salaam (See Profile) joined in the ruling.

David Jaroslawicz of Jaroslawicz & Jaros in Manhattan argued for Executive Plaza.

John Love of Robins, Kaplan, Miller & Ciresi in Boston represented Peerless.

In an amicus curiae brief, the New York Public Adjusters Association urged the court to reject Peerless' position.

The group, which advocates for policyholders, said that if the Peerless position was affirmed, "plaintiff and other policyholders across this state will have purchased purely illusory coverage resulting in no opportunity to obtain the benefit of the bargain that they paid for."

"By offering replacement cost coverage and then reneging, Peerless acts like a confidence man, patting you on the back with one hand and picking your pocket with the other," Mark Friedman of Wilkofsky, Friedman, Karel & Cummins wrote on behalf of the adjusters' group. "The insuring public of this State deserve more."

Employer Protections

Also Thursday, the Court of Appeals decided in New York Hospital Medical Center of Queens v. Microtech Contracting Corp., 1, that an employer's protections against a suit filed by two of its injured workers are not affected by their status as Ecuadorian citizens who were illegally employed when they were hurt.

The two brothers sued their employer, Microtech, for the injuries they suffered when a metal chimney or flue broke off and struck them as they were working on a demolition job at the New York Hospital Medical Center in Flushing in March 2008.

The Court of Appeals agreed unanimously with lower courts that the suits must be dismissed. Under the 1996 changes to the Workers Compensation system, employers exposure to third-party liability was limited to situations where workers were killed or suffered "grave" injuries.

In this case, the court noted, the injuries suffered by brothers Gerardo and Luis Lema did not qualify as "grave" under the §11 of the Workers' Compensation Law and Microtech is entitled to "safe harbor" from a third-party suit filed by the hospital.

In addition, the court said in a decision written by Read, the hospital did not claim that the employer's protections against the suit were affected by the workers' non-citizen status.

Lippman, Graffeo, Smith, Pigott, Rivera and Abdus-Salaam joined in the ruling.

Timothy O'Shaughnessy of Mauro Lilling Naparty in Woodbury represented New York Hospital. Dennis Wade of Wade Clark Mulcahy in Manhattan argued for Microtech.

Pro Se Competency

In another ruling, the judges decided 6-0 that defendant Alias Stone was not deprived of a fair trial because he was allowed to represent himself at his trial for burglary for stealing the possessions of workers at a midtown Manhattan hotel in 2008.

The judges rejected Stone's argument in People v. Stone, 5, that the U.S. Supreme Court's ruling in Indiana v. Edwards, 554 U.S. 164 (2008), imposed on courts the obligation to not only determine if defendants were mentally competent to stand trial, but also if they met a "heightened" competency standard necessary for self-representation.

Stone was convicted of both burglary counts and eventually sentenced to seven years in prison after representing himself. But he displayed a deep distrust of lawyers, prosecutors and judges before and during the trial, which his appellate lawyers said should have triggered a more thorough inquiry of his mental state before being allowed to represent himself.

Following his conviction, Stone was diagnosed as a paranoid schizophrenic and hospitalized.

Graffeo wrote for the court that Edwards did not impose a new obligation on judges to perform a special inquiry into the mental competency of people who seek to represent themselves at trial.

"We do not view Edwards as imposing such a requirement—and our interpretation is in accord with the federal appellate courts that have addressed the issue," Graffeo wrote, citing United States v. Bernard, 708 F.3d 583 (4th Cir. 2013), and United States v. Berry, 565 F.3d 385 (7th Cir. 2009).

Graffeo wrote that the fact that Stone sometimes "engaged in obstreperous conduct or emotional outbursts" was not in itself proof that he was incompetent to serve as his own counsel.

Lippman, Read, Pigott, Graffeo and Rivera joined in the ruling. Abdus-Salaam took no part.

Assistant Manhattan District Attorney Sheila O'Shea argued for the prosecution. Leah Friedman of Freshfields Bruckhouse Deringer in Manhattan represented Stone.

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