Monday, April 12, 2010

Federal Appeals Court Holds that "Date of Loss" Does Not Mean the Date of Physical Loss But the Date When an Insured's Claim for Loss Accrues

Fabozzi v. Lexington Ins. Co.
(US Ct. Apps., 2nd Cir., decided 4/6/2010)

Insurance practitioners and property claims professionals in New York know that most property insurance policies issued in New York or covering New York risks contain a two-year suit limitations period, which requires that there be full compliance with all policy conditions and any suit against the insurer be brought within two years after the occurrence of the loss.

For nearly 100 years, the "Suit" condition of the 165-line New York standard fire policy, codified at New York Insurance Law § 3404(e), has provided:
157     Suit.               No suit or action on this policy for the recov-
158                           ery of any claim shall be sustainable in any
159     court of law or equity unless all the requirements of this policy
160     shall have been complied with, and unless commenced within
161     twenty-four months next after inception of the loss.
The modern homeowners policy, such as the October 2000 edition of  ISO's HO-3 form, sets forth the following two-year suit limitations period:
Suit Against Us

No action can be brought unless there has been full compliance with all the terms under Section I of this policy and the action is started within two years after the date of loss.
Modern New York courts have consistently ruled that absent evidence to support a finding of waiver or estoppel, an action commenced more than two years after the loss date is time-barred.  See, Snyder v. Allstate Ins. Co., 70 AD3d 670 (2d Dept. 2010); Dimmick v. New York Prop. Ins. Underwriting Assn., 57 AD3d 602 (2d Dept. 2008).  There never has been any question or dispute over what the "date of loss" is or means.  That is, until now. 

Paul and Annette Fabozzi had a homeowners insurance policy with Lexington Insurance Company, which covered their oceanside home on Staten Island, New York. When the house began to collapse as the result of structural damage, they filed a claim with Lexington.  Twenty-six months later, Lexington denied coverage and the Fabozzis subsequently sued.  Relying on a policy provision that required any suit to be commenced within two years "after the date of loss," Lexington contended that the Fabozzis had waited too long and the limitations period had expired. The federal district court agreed, granted Lexington's motion for summary judgment, and dismissed the suit.

The Fabozzis' appeal to the US Court of Appeals for the Second Circuit turned on the meaning of "date of loss" and whether, under New York law, the policy's limitations period was triggered when the underlying damage to their home occurred, or when all the conditions precedent to bringing suit had been met.  In selecting the latter, the Second Circuit concluded:
Because, under longstanding New York law, the limitations period did not begin to run until the Fabozzis' claim against Lexington accrued, rather the date of the accident, we conclude that the action must be remanded. Accordingly, the judgment of the district court is vacated.
The Fabozzis' homeowners policy with Lexington contained the following suit limitations period:
Suit Against Us.  No action can be brought unless the policy provisions have been complied with and the action is started within two years after the date of loss.  (Emphasis added.)
In vacating the district court's judgment and reinstating the Fabozzis' lawsuit, the United States Court of Appeals for the Second Circuit held that, for purposes of a homeowners insurance policy's two-year Suit Against Us limitations period, the "date of loss" mentioned in that condition is ambiguous and does not mean the date of physical loss or accident, but the date when the insured's claim accrues.

After surveying the historical evolution in the New York state courts of New York's one-, then two-year contractual suit limitations period -- citing and relying heavily on an 1882 New York Court of Appeals' decision for the proposition that "only by exceptionally clear language could an insurer insist that 'the time of the fire should be looked to as the event, from the happening of which the limitation should run'" -- the Second Circuit noted:
Other generic language, such as that in the Fabozzis' policy, does not carry this same meaning; instead, it ties the limitations period to the moment when a claim accrues.
The Second Circuit went on to scuttle 20th-century New York state court case law which has consistently held that modern "date of loss" suit limitation phrases refer to the date of the catastrophe insured against, and not to the accrual date of the insureds' claim against the insurer for failure to pay.  Then, citing only federal court case law in support, the Second Circuit pronounced:
The Fabozzis' policy provides that the limitations period would expire "two years after the date of loss," a threshold that New York courts have long regarded as signifying the date on which the claim accrues, not the date on which damage was incurred.
Long as is older, perhaps; not long as in continuously into the past.

With the issuance of this decision, New York homeowners insurers that use policies with "date of loss" in their suit limitations conditions, such as the Suit Against Us condition in the HO-3 policy form, will undoubtedly face challenges in New York state and federal courts on this issue of the deadline for commencing suits for policy benefits against the insurer. 

Of course, the potential impact of this decision can be "fixed", if New York property insurers wish to retain what had been a fairly a bright-line two-year suit limitations rule, by amending the policy language either to define "loss" or to substitute words such as "catastrophe or physical damage insured against" for "loss" in the Suit Against Us condition. But should that be necessary? The condition at issue in this case is standard to the standard ISO HO-3 policy. How many time-barred coverage declinations just revived? New York property insurers can expect a good deal of litigation in the New York state courts over this important issue.

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