Perspectives: A warning to policyholders — contractual suit limitation provision traps

Commercial insurance policies often contain provisions limiting the period for filing suit against insurers to a specified amount of time after discovery of a loss. If a policy has a suit limitation provision, that period of time may be shorter than the applicable statute of limitations and may start to run before the applicable period would commence. An SLP, like a statute of limitations, can jeopardize a policyholder’s ability to enforce insurance rights in court, even for indisputably covered claims.

Because SLPs may allow insurers to evade their coverage obligations altogether, they may be incentivized to use them to their tactical advantage. Insurers may try to extend their claim-handling process beyond the limitation period by not issuing coverage determinations before the deadline or continuing to request additional information until or beyond it. When the limitation period passes, insurers surprise policyholders by advising them that they can no longer file a lawsuit or secure coverage, even when they acted throughout the claim process as if they planned to pay the claim.

Unfortunately, some courts in New York and elsewhere have condoned this behavior. In Minichello v. Northern Assurance Co. of America, 758 N.Y.S.2d 669 (N.Y. App. Div. 2003), for example, the court upheld the dismissal of the policyholder’s lawsuit filed after the insurance policy’s two-year suit limitation period. The court held that an insurer’s delay in completing its claim investigation alone is not sufficient to excuse the policyholder’s filing after the suit limitation period expired.

Under New York law, however, policyholders may avoid the enforcement of an SLP if: (1) the limitation period is “unreasonable” under the circumstances (Executive Plaza LLC v. Peerless Ins. Co., 22 N.Y.3d 511 (2014)); (2) the insurer waived its right to enforce the provision; or (3) the insurer is estopped from enforcing the provision (Gilbert Frank Corp. v. Federal Ins. Co., 70 N.Y.2d 966, 968 (1988)).

One policyholder’s recent experience in Interpublic Group of Companies Inc. v. National Union Fire Insurance Company of Pittsburgh, PA, No. 652651/2022 (N.Y. Supr. Ct., N.Y. Cnty. June 20, 2024), exemplifies the potential perils of a claim investigation extending beyond a suit limitation period. In Interpublic, the policyholder filed a large claim under its crime insurance for thefts committed by a former officer. The policyholder discovered the thefts in June 2020 and reported the claim to its primary and excess insurers in a timely manner. Simultaneously, it reported the thefts to law enforcement and subsequently cooperated in the government’s criminal investigation of the former officer.

The insurers’ claim-handling process extended for more than two years. In addition to claims data, the insurers identified several individuals for interviews, but they could not occur until after the government completed its criminal investigation. Up through the purported expiration of the policy’s two-year suit limitation period, and despite regular claims communications with their policyholder, the insurers conveyed nothing to the policyholder that suggested they would not ultimately pay the vast majority of the loss and, to the contrary, led the policyholder to believe their claim investigation would follow the government’s investigation timeline.

Shortly after meeting with the policyholder in June 2022 to discuss the loss, the primary and excess insurers sent letters asserting, among other things, that the insurance policies’ two-year suit limitation period provisions may now bar the claim because the policyholder had discovered the thefts more than two years earlier. Ultimately, the policyholder filed litigation against them in New York state court. Both insurers filed motions to dismiss based on the SLP in each policy, relying on New York cases that reject an insurer’s ongoing claim investigation as a basis for the policyholder to file a coverage lawsuit after the policy’s suit limitation period deadline.

The policyholder ended up settling with the primary insurer before the court ruled on its motion, but the litigation proceeded against the excess insurer. The trial court granted the excess insurer’s initial motion to dismiss as a matter of law but granted the policyholder leave to replead. The excess insurer renewed its motion to dismiss the policyholder’s amended complaint. The policyholder opposed on the ground that estoppel prevented the excess insurer from invoking the provision. New York courts have found estoppel applies in similar situations when an insurer “lulled” the policyholder “into sleeping on its rights under the insurance contract,” thereby not filing suit before the deadline (Gilbert Frank, 70 N.Y.2d at 968). The Second Circuit applied estoppel in North American Foreign Trading Corp. v. Mitsui Sumitomo Insurance USA Inc., 292 Fed. Appx. 73 (2d Cir. 2008), where the insurer denied one claim before the suit limitation period expired but waited until after the deadline to deny the second claim, which lulled the policyholder into believing the insurer intended to treat the second claim differently from the first by not denying them simultaneously. As a result, the Second Circuit found estoppel barred application of the SLP to the second claim.

Following that precedent, the trial court in Interpublic recently denied the excess insurer’s motion to dismiss, finding that the amended complaint stated a valid claim based on estoppel. The court relied on allegations that during the claim investigation, and prior to the expiration of the contractual suit limitation period, the excess insurer made critical representations to the policyholder. These included that the excess insurer would not respond to the claim until the primary insurer first made its coverage determination, which did not occur during the excess policy’s two-year suit limitation period; the excess policy had not yet been triggered; and the excess insurer wanted to be kept apprised of the primary insurer’s investigation so that, when it concluded, it could respond and complete an additional investigation if necessary. In other words, the court found that the amended complaint pled facts sufficient to deny the insurer’s SLP motion based on the policyholder’s alleged reliance on the excess insurer’s statements.

Policyholders can take a number of practical steps to avoid similar disputes with insurers. First, when submitting any claim to an insurer, a policyholder should review its insurance policies to ascertain whether they contain an SLP. Second, the policyholder should calendar the deadline, along with a reminder well in advance. Third, before the deadline expires, a policyholder should seek a written agreement with the insurer to extend the suit limitation period or be prepared to file a lawsuit. Otherwise, policyholders may waste time and money litigating whether the SLP applies and how they relied on the insurer’s claims-handling statements, rather than focusing on coverage.

David C. Kane, Steven Weisman and Gregory Horowitz are Newark, New Jersey-based partners at McCarter & English LLP. Mr. Kane can be reached at [email protected], Mr. Weisman can be reached at [email protected], and Mr. Horowitz can be reached at [email protected].