Most first-party property insurance policies contain a suit-limitation provision, which limits the amount of time an insured has to commence an action against its insurer. The time generally ranges from one to two years. Under New Jersey law, certain types of insurance policies are required by statute to contain suit-limitation provisions.
Courts have uniformly enforced suit limitation provisions. Consequently, when a loss occurs it is necessary to first determine whether the policy at issue contains such a provision. If it does, the period set forth in the suit-limitation provision and not the general six-year statute of limitations applicable to contracts will govern when an action has to be commenced.
It is important to distinguish between suit-limitation and late notice defenses. If an insured fails to give timely notice of a claim to its insurer, coverage for that claim may be precluded, but only if the insurer suffered appreciable prejudice as a result of the late notice. In connection with a suit-imitation defense, on the other hand, an insurer is not required to show appreciable prejudice in order to avoid coverage. A suit-limitation defense is similar to a statute of limitations defense in that respect.
Typically, the time to commence an action against an insured will start to run on the date of the loss. Thus, in most jurisdictions, an action seeking recovery under a first-party property insurance policy will have to be commenced within one or two years of the date of the loss depending on the particular language at issue.
New Jersey courts, however, have adopted a rule that tolls the running of the time to sue from the time notice of the loss is given to the insured until the claim is denied. See, e.g., Peloso v. Hartford Fire Ins. Co., 56 N.J. 514, 267 A.2d 498 (1970). The purpose of tolling the running of the time to sue is to give the insurer an opportunity to investigate the claim without having to worry about being sued if its investigation is not completed within a certain period of time.
Application of a suit-limitation provision was recently addressed by the New Jersey Appellate Division in Rihanna Corp. v. Certain Underwriters at Lloyd’s, No. A-2643-12T2, 2014 WL 4450422 (App. Div. April 30, 2014). The policy at issue in that case provided coverage for a restaurant owned and operated by Rihanna Restaurant, Inc. (“Rihanna”). The shares of Rihanna were owned by four individuals. Shortly after the restaurant opened the four owners had a “falling out.” One owner, Maher Moussa, subsequently agreed to purchase the interests of the other three owners. As part of the sale, the other three shareholders retained a security interest in the restaurant to guarantee payment for their shares.
Moussa defaulted on his payment obligations and an action was commenced against him by the three selling shareholders (“the shareholder litigation”). The prior owners were seeking reinstatement of their interests in the corporation and possession of the restaurant. On October 3, 2008, while the action was pending, a fire occurred at the restaurant. The fire was suspicious in nature.
Moussa gave notice of the fire to Rihanna’s insurer, Certain Underwriters at Lloyds of London (“Lloyd’s”). Although the restaurant open in June 2006, the insurance policy had been obtained approximately one month prior to the fire. After reporting the loss, Moussa met with the insurer’s adjuster at the restaurant on October 7, 2008, and signed a hand-written statement prepared by the adjuster.
On October 15, 2008 – just 12 days after the fire – an order was issued in the shareholder litigation awarding ownership of the restaurant and the right to possession to the prior shareholders. One day later, on October 16th, the “new” owners reported to the police that the restaurant had been vandalized. They indicated that they had a dispute with Moussa concerning the ownership of the restaurant after issuance of the court’s order.
Lloyd’s issued a reservation of rights letter in connection with the fire loss on January 7, 2009. On October 29, 2009 – a little over one year after the loss – Lloyd’s denied coverage for the loss.
On August 29, 2011 – almost three years after the fire and almost two years after the claim was denied – an action was commenced against Lloyd’s seeking recovery under the policy. The insureds later moved to amend the complaint to add a claim seeking recovery in connection with the vandalism loss.
Prior to a decision on the motion to amend, Lloyd’s moved for summary judgment based on the suit-limitation provision in the policy, which provided:
No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within twelve months next after inception of the loss.
Id. at *2.
The motion for summary judgment was granted by the trial court. On appeal, the insureds argued that the delay in commencing the action should be excused given the circumstances and the fact that the insurer did not sustain appreciable prejudice as a result of the late filing. The Appellate Division summarized the insured’s arguments as follows:
To support their position to excuse the delay in filing, plaintiffs argue that they changed counsel, and their efforts to obtain copies of the policy and the file were thwarted. Plaintiffs also argue that they had no knowledge of the policy’s terms and believed substituted counsel acted diligently, filing the action once the documentation was obtained. As to the lack of prejudice, plaintiffs point out defendant was immediately notified of the fire and plaintiffs fully cooperated with all aspects of defendant’s investigation, submitted to an examination under oath and supplied any requested documents. Finally, plaintiffs [contend] that the failure to file the lawsuit within the one- year time period was “a technical violation” and argue, as a matter of equity, defendant’s statute of limitations defense should not bar suit.
Id. at *3. The Appellate Division rejected each of those arguments.
The court began its analysis by noting that suit-limitation provisions are valid and enforceable under New Jersey law. Although noting – albeit incorrectly – “that consideration of whether the delay caused prejudice to the insurer is also required,” the court went on to note that “plaintiffs’ complaint was not initiated within one year after being informed coverage was disclaimed.” Id. at 4. The court further noted that “[p]laintiffs inexplicably waited nearly two years after the claim was rejected, which was nearly three years after the fire, to file [the] action.” Id. The court further found “no basis in the record justifying” the relaxation of the suit-limitation provision. Id.
The court noted:
Plaintiffs identify no action by defendant interfering with their filing. Rather, plaintiffs’ contentions focus on delay attributed to the attorney first engaged to represent them. Plaintiffs suggest counsel’s foot dragging when asked to surrender the file to substituted counsel precluded their filing. The file was made available on November 23, 2010 but not retrieved until surrendered in December 2010. Suit was not filed for another eight months. Thereafter, plaintiffs’ conduct is not compatible with diligence and these reasons do not justify application of equitable tolling.
Id. at *5. Finally, the court rejected plaintiffs’ argument that it was unaware of the suit-limitation provision, noting that “[t]he policy clause is not a special contractual clause specific to this policy; rather it is a standard clause mandated to be included in every New Jersey fire insurance policy by N.J.S.A. 17:36-5.20.” Id.
Although it correctly enforced the suit-limitation provision, the court seemed to get a number of things wrong. First, the court stated that “consideration of whether the delay caused prejudice to the insurer is also required.” Id. at *4. Most courts that have considered the issue have held that prejudice is not a consideration when it comes to the enforcement of a suit-limitation provision. Indeed, although the Rihanna court made reference to prejudice, it never considered whether the insurer was prejudiced by the delay. It merely concluded that there was no justification for the delay.
Second, the court stated that an insured has twelve months from the denial of a claim to commence an action. This is not correct. The suit-limitation period begins to run on the date of the loss and is tolled from the time notice is given until the claim is denied. Thus, if, for example, an insured waits two months to give notice of a loss to its insurer, it will only have ten months to commence an action against its insurer once the claim is denied. The running of the suit-limitation period is not tolled until notice is given. Similarly, if an insured waits more than one year to give notice of a claim to its insurer, the time to sue will have already passed and the giving of notice will not reinstate the twelve-month period.
Despite these apparent errors, the Rihanna decision is important in that it reaffirms the well-established rule that suit-limitation provisions are valid and enforceable under New Jersey law and an insured’s failure to timely commence an action may preclude coverage for an otherwise covered loss. In addition, ignorance on the part of the insured as to the existence of a suit-limitation provision is no excuse.
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