New York law generally enforces a contractual suit limitation that specifies a “reasonable” period of time (usually shorter than the applicable statute of limitations) within which an action must be commenced. The contractual suit limitation needs to be fair and reasonable, given the circumstances of each particular case. The New York Court of Appeals recently examined this precedent in the context of an insurance policy enforcing an insurance contract’s two-year suit limitation period in Farage v. Associated Insurance Management Corp., 2024 N.Y. Slip Op. 05875 (Nov. 26, 2024).
In Farage, a Staten Island multi-unit apartment building was damaged in a fire. The plaintiff owner filed its full repair claim for damages with its insurer six years after the fire and four years after the expiration of the contractual limitation period. The insurer denied the claim. The plaintiff filed suit for breach of contract and breach of the covenant of good faith fair dealing. The insurer moved to dismiss the action based on the two-year limitation provision in the insurance contract.
The insurance policy provided that an insured “may not bring a legal action” under the policy unless: “(a) There has been full compliance with all of the terms of this insurance; and (b) The action is brought within 2 years after the date on which the direct physical loss or damage occurred.” The policy further provided that the “[Insurer] will not pay on a replacement cost basis for any loss or damage: (i) Until the lost or damaged property is actually repaired or replaced; and (ii) Unless the repairs or replacement are made as soon as reasonably possible after the loss or damage.”
The lower court granted the insurer’s motion to dismiss the complaint in its entirety, and the Court of Appeals affirmed. While the owner relied on an earlier New York precedent, Executive Plaza, LLC v. Peerless Ins. Co., 22 N.Y.3d 511 (2014), which allowed the nullification of a suit limitation provision if a plaintiff demonstrates the damaged property could not be replaced within the limitation period, that authority was distinguished because the owner ultimately failed to allege that it reasonably attempted to repair the property within the two-year limitations period but was unable to do so. Without allegations of specific remedial actions to restore the property within the limitation period showing that such provision was unreasonable under the circumstances, a suit limitation provision will be enforced.
Typically, at least one party to a construction contract will benefit from a suit limitation provision. The statute of limitations for contract actions in New York is six years. Reducing this statutory period down to two years by agreement, which should be fair and reasonable for most construction contracts (other than design contracts), limits uncertainty and potential stale claims long after a project is completed. Such a provision should be relatively easy to enforce in court as well.
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