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What is the Statute of Limitations for a Reinsurance Claim under New York Law and When does it Begin to Run?

October 6th, 2014 Choice-of-Law Provisions, Claims Handling, Contract Interpretation, New York Court of Appeals, New York State Courts, Nuts & Bolts: Reinsurance, Reinsurance Arbitration, Reinsurance Claims, Retrospectively-Rated Premium Contracts, State Courts, Statute of Limitations Comments Off on What is the Statute of Limitations for a Reinsurance Claim under New York Law and When does it Begin to Run? By Philip J. Loree Jr.

 Part IV.B

 Why is Hahn Automotive v. American Zurich Ins. Co. Important?

Introduction

Now that we’ve taken a closer look at Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765 (2012), let’s step back a bit and consider what it means both in general and in the reinsurance-claim-statute-of-limitations scheme of things.

As will be explained in this Part VI.B, Part VI.C, and Part VI.D, Hahn:

  1. Creates a new general rule, which effectively extends to a larger universe of contracts a statute of limitations accrual principle that it had applied only to certain specific types of contracts, including contracts of indemnity;
  2. Demonstrates that, outside the limited context of express conditions, breach-of-contract statute-of-limitations accrual is not exclusively a matter of party intent;
  3. Suggests that the New York Court of Appeals, if faced with an accrual question where the obligee’s demand is an express condition to the obligor’s liability, would probably not permit accrual to be delayed for more than a relatively brief period measured from the date on which the obligee was legally entitled to demand payment;
  4. All but forecloses an argument that a court may justify a delay in the statute of limitations by deeming a demand requirement to be an implied condition;
  5. Creates an analytic framework for determining breach-of-contract statute-of-limitations accrual questions that is at least as well-suited to excess-of-loss reinsurance contracts as it is to retrospective premium contracts;
  6.  Will likely be applied to reinsurance contract statute-of-limitations questions, that cedents or reinsurers may in the past have assumed would be governed by Continental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996); and
  7. If so applied to a situation where, as in Stronghold: (a) the reinsurance contract does not unambiguously condition the reinsurers’ liability on claims presentation; and (b) the cedent settled the underlying insurance claims more than six-years before commencing their action, will, all else equal, likely require a finding that the cedent’s claims are time-barred.

Hahn therefore has some important claims management implications for both cedents and reinsurers, which we’ll discuss in Part IV.E.

But there is, as no doubt many readers have discerned, a proverbial “elephant in the room:” arbitration. Arbitration agreements are exceedingly common in reinsurance contracts, particularly in treaties. In Part V., we’ll discuss the profound effect that the choice between judicial and arbitral resolution of a controversy can have on statute of limitations questions, and how that choice bears on cedent and reinsurer time-bar strategy.

Finally, there is another very important—and all too frequently overlooked— consideration that we would arguably be remiss not to discuss: choice-of-law. Reinsurance disputes, like so many of their other commercial counterparts, frequently cross state and national borders, raising horizontal choice-of-law issues. But in many (indeed, probably most U.S.) jurisdictions, including New York, choice-of-law rules that determine what substantive rules of decision apply (i.e., what rules of decision apply to merits-related issues) do not determine what statute-of-limitations rules apply, and that may be true (as it ordinarily is in New York) even where parties agree that the law of State X governs their agreement.

In New York, that issue is ordinarily determined by New York’s borrowing statute, New York Civ. Prac. L. § 202, many other states have similar (although not necessarily identical) borrowing statutes and at least a few other states may either simply follow the traditional rule that forum law governs statute of limitations or apply substantive choice-of-law rules to determine the applicable statute of limitations. Part VI will thus address choice-of-law questions pertinent to the statute of limitations, focusing on New York’s borrowing statute, and discuss how choice-of-law issues affect time-bar strategy.

Hahn’s “Legally-Entitled-to-Demand-Payment” Rule Extends to a Larger Set of Contracts a Statute-of-Limitations Accrual Principle Previously Applied Only to Certain Types of Contracts

Prior to Hahn, the “legally-entitled-to-demand-payment” rule, had been adopted by at least three of New York’s Appellate Divisions and applied to contracts for the payment of a sum of money. See Hahn, at 18 N.Y.3d at 770-71 (citing Second and Third Department cases and affirming Fourth Department determination); Yeshiva University Development Foundation, Inc. v. Consultants & Designers, Inc., 60 A.D.2d 525, 526-27 (1st Dep’t 1977) (lease); but cf. Verizon New York, Inc. v. Sprint PCS, 43 A.D.3d 686, 686-87, 687-89 (1st Dep’t 2007) (compare majority opinion to McGuire, J.’s dissent) (construction contract). Hahn made it a general rule of New York law applicable to contracts for the payment of a sum or sums of money in which the obligor is not expected to pay until the obligee demands or requests payment, but the obligor’s liability is not unambiguously conditioned on such a demand or request.

It applies to a very broad category of commercial and non-commercial contracts, including long-term, complex contracts, like the retrospective premium agreements at issue in Hahn, including contracts  contemplating multiple transactions (and thus multiple demands or requests for payment) where the sum or sums due are not fixed at the inception of the contract, individually or in the aggregate. Most commercial and non-commercial contracts contemplate the payment of money, and generally contracts that unambiguously conditions the duty to pay on the making of a demand or request are the exception, not the rule. (See Part II.)

At first glance the rule may seem strange because it allows the statute of limitations to commence on a breach of contract claim before a contract is breached. In Stronghold, for example, nobody thinks (or at least should think) that the London Reinsurers “breached” the reinsurance contract by not paying claims that had not yet been presented to them. They breached the contract, if at all, once they were billed for the claims (apparently many years after they were settled), and a reasonably brief period had elapsed without the reinsurers paying or agreeing to pay the claims.

But the principle that the statute of limitations may commence before the obligor’s breach is not novel; it has applied in New York to certain specific types of contracts for some time, including contracts of indemnity. See, e.g., Phoenix Acquisition Corp. v. Campcore, Inc., 81 N.Y.2d 138, 143 (1993) (“[L]iability.  .  .[under guaranty of payment] attaches and a cause of action accrues against the guarantor as soon as there is a default by the debtor in the payment of the obligation[;]” “[t]he Statute of Limitations on a note payable on demand, without doubt, begins to run from the date of its execution.”) (citing General Phoenix Corp. v. Cabot, 300 N.Y. 87 (1949) and McMullen v. Rafferty, 89 N.Y. 456, 459 (1882)); Steen v. Niagara Fire Ins. Co., 89 N.Y. 315, 322 (1882) (generally, the statute of limitations “begin[s] to run upon a contract of indemnity from the time at which the plaintiff is actually damaged[,]” thus, but for conditions precedent requiring proofs of loss and time for insurer to investigate, “suit would have lain upon the instant of the happening of the fire, or within a reasonable time thereafter[]”); Grunblatt v. First Unum Life Ins. Co.19 A.D.3d 449, 449-50 (2d Dep’t 2005) (cause of action on life insurance contract accrues upon death of insured); Varo, Inc. v. Alvis PLC, 261 A.D.2d 262, 264 (1st Dep’t 1999), leave to appeal denied sub nom., IMO Indus., Inc. v. Alvis PLC, 95 N.Y.2d 767 (2000) (“[I]t is well settled that a cause of action based upon a contract of indemnification does not arise until liability is incurred by way of actual payment” (citations and quotation omitted)); Travelers Indemnity Co. v. LLJV Dev. Corp., 227 A.D.2d 151, 154 (1st Dep’t 1996) (same).

Contracts of indemnity obligate one party to compensate another for, and/or hold it harmless from, contingent loss or liability. Reinsurance contracts—and for that matter, most insurance contracts (life insurance contracts are different)—are contracts of indemnity. See, e.g., Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd’s, 96 N.Y.2d 583, 586 (2001); Matter of Midland Ins. Co., 79 N.Y.2d 253, 258 (1992). And the statute of limitations purposes, the statute of limitations may begin to run when the indemnitee sustains or incurs the indemnified loss or liability. See, e.g., Steen, 89 N.Y. at 322.

The long-standing general statute-of-limitations accrual rule applicable to contracts of indemnity—under which the statute of limitations accrues when the indemnitee sustains or incurs an indemnified loss or liability— is fully consistent with Hahn. In the absence of notice or a demand, an indemnitor is not necessarily be expected to know that its obligation has accrued, but once the indemnified loss or liability has been sustained or incurred, the indemnitee has the legal right to demand payment, and the statute of limitations begins to run even though the indemnitor may be unaware that its obligation to pay has accrued and, in any event, has not breached the contract of indemnity.

Where a contract of indemnity expressly conditions the indemnitor’s obligation to indemnify on the indemnitee notifying the indemnitor of an indemnified loss or claim, then the statute of limitations ordinarily does not begin to run until the condition is satisfied. See Steen, 89 N.Y. at 322-23. That rule, too, is consistent with Hahn, as the Court acknowledged that rule would have governed had the insurer’s contracts expressly conditioned the insured’s payment obligations on the insurer’s presentation of invoices, but they did not. See Hahn, 18 N.Y.3d at 770, 771-72.   

Hahn Demonstrates that Statute of Limitations Accrual is not Exclusively Governed by Party Intent

Hahn demonstrates that statute of limitations accrual is not exclusively governed by the parties’ express or implied intent. The Hahn parties entered into an elaborate (although not particularly unusual) contractual scheme that expressly set forth not only when the Insurers were entitled to invoice the Insured for retrospective premium adjustments, but also a period of days by which the Insured was expected to pay invoices. The contracts likewise contemplated that: (a) many years could (and likely would) elapse before a final balance for any given policy might be agreed and settled; and (b) during any period during which the parties contemplated the Insurer making an initial or annual adjustment, the adjustment might be in the form of a credit rather than a debit.

Judge Read’s dissent made a good point in that “the insurance contracts in this case essentially created a running tally of debits and credits, which remained open until such time as all claims or expenses for a particular policy year were resolved — or, in the words of [a provision in the Retro Premium Agreements], until [the Insurer] ‘designate[d] an adjustment as being final.’” As Judge Read saw it, “it was only at this point, when the final amount of a retrospective premium could be calculated, that a claim would accrue under these policies in the absence of a demand for payment.” Hahn, 18 N.Y.3d at 774 (Read, J., dissenting). Equally pertinent was her observation that the Insurers were “not in a position under the contracts to demand payment until [they] determined that [the Insured] owed additional moneys[,]” and that “determination” had to be made “based on computations” “in conformity with the complex claims adjustment formulae specified in the contracts.” 18 N.Y.3d at 773-74 (Read, J., dissenting). In view of the structure and words of the contracts, she—quite reasonably and convincingly—argued that the majority’s conclusion “creates an illogical situation whereby a claim for breach of contract accrues before the insured knows whether it owes the insurer any money at all, much less how much[]”—that is, “the claim for breach accrues before any breach can possibly occur.” 18 N.Y.3d at 773 (Read, J., dissenting).

Hahn does not, of course, render party intent irrelevant to the breach-of-contract accrual-date calculus. Party intent is important for at least three reasons.

First, party intent determines whether the contract is one that contemplates payment of a sum of money on demand. Not all contracts, of course, fit that bill. A confidentiality agreement (to name but one of many possible examples) is self-executing because it is breached, and the statute-of-limitations begins to run, the moment the party violates the agreement. And that is so even if the party has no actual or constructive notice of the breach. See Ely-Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402, 403 (1993).

Many contracts to pay a sum of money are self-executing in the sense that no demand is necessary if one expects the other to perform. Suppose X agrees to pay Y a sum of money within 30 days. Once the 30 day period elapses without payment, the obligor is in breach and the statutue of limitations has accrued.

Second, party intent determines when a party is legally entitled to demand payment. Hahn is a good example.

Third, party intent determines if a demand for payment is an express condition, in which case the “legally entitled to demand payment” rule may not apply. If the parties unambiguously agree to condition the obligation to pay on the obligee’s demand, or on a demand and a period within which to perform, then generally the statute of limitations does not begin to run until the condition is fulfilled, subject to the rather loosely applied rule that the demand be made within a “reasonable” time. (See Part I.)

But Hahn teaches that, to some extent, statute-of-limitations policy trumps party intent. Statutes of limitations are designed to encourage parties to assert claims promptly. The limitation period is a legislative judgment that balances general considerations of fairness to claimants, and, as respects contracts, the economic utility of enforcing contracts, against countervailing policy considerations, including:

  1.  Protecting putative defendants from burdens, surprise, proof-problems and unfairness associated with having to defend stale claims;
  2. Protecting the court system (and thus the public fisc) from the burdens, expense and other problems associated with not only having to deal with a greater volume of potential claims, but also with claims likely to be fraught with proof-related problems arising from documentary or testimonial evidence that is no longer available, or unreliable, questionable or incomplete because of faded memories, document destruction or loss, or the like; and
  3. The economic utility of extinguishing long-term liabilities after a certain period. 

See, generally, Duffy v. Horton Mem. Hosp., 66 N.Y.2d 473, 476-77 (1985)

Statutes of limitation cannot serve their purposes and objectives unless parties can ascertain when they begin to run, or at least the earliest date by which they may begin to run. Legislatures do not always establish accrual rules for statutes of limitations, leaving that task for the judiciary. Article 2 of New York’s Civil Practice Law and Rules contains a number of provisions regarding accrual of statute of limitations (see, e.g., N.Y. Civ. Prac. L. & R. §§ 203, 206), but the application of those rules to particular cases falls to the courts.

The “legally entitled to demand payment” rule makes it fairly easy for the parties to determine when the six-year period begins to run. The earliest time by which a party is legally entitled to make a demand for payment can usually be determined by applying general principles of basic contract law to the contract terms. Presumably most parties, without the benefit of a law degree, can readily ascertain the date on which they became legally entitled to make a demand, even though they might not have made, or been able to make, a demand on that date.

By decreasing uncertainty, the rule promotes not only fairness, but judicial economy and, from the standpoint of the parties, litigation-expense economy. Statute of limitations accrual rules that turn on circumstantial or commercial reasonableness require more extensive fact finding and frequently the resolution of conflicting expert testimony. Resolution of a threshold question of statute of limitations would thus often require a pre-trial evidentiary hearing or deferral pending a trial on the merits. But in many or most cases, the accrual date under the Hahn rule should be readily susceptible to determination as a matter of law on a motion to dismiss or for summary judgment.

The rule also promotes judicial and litigation-expense economy to the extent it should, at least over time, reduce the total number of breach of contract suits. Claimants are more likely to sue on claims that may be, but are not necessarily, time barred than on ones that are clearly, or at least almost certainly, time barred.

It is also a fair rule, because it places both parties on notice of when the statute of limitations commences, even in a case as complex from a contractual standpoint as Hahn. While it provides for an accrual date prior to breach, there are at least two offsetting considerations that reduce the probability of unfair results.

First, six years is a long time, and certainly one that amply ensures most claimants time to discover and correct billing or accounting mistakes that might otherwise cause of statute of limitations problems. Suppose a cedent, under a vintage reinsurance contract governed by the Hahn rule, and not containing an arbitration agreement, settles a long-tail claim and three months later, bills what it thinks are all of its reinsurers. Four years later, after analyzing the results of a forensic examination of its historical reinsurance program, the cedent discovers its predecessor had entered into an excess of loss reinsurance contract that provided additional protection for net loss it thought it had retained for its own account. Three months later, the cedent, after reviewing several years of prior reinsurance claim history, discovers that it should have billed a portion of the net loss to this newly discovered reinsurance contract. Three months after that discovery, it bills the new reinsurer for its share of the claim, and the reinsurer does not pay.

Irrespective of what other defenses it might (or not) have, the belatedly-billed reinsurer would not have a statute of limitations defense under New York law, provided it commenced suit within one year and three months of billing the newly discovered reinsurer. Indeed, the ceding company could negotiate with the reinsurer for six-months, and still have nine months within which to commence suit.

Second, in situations involving time bar caused by billing mistakes or other unintentional delays, the equities usually lie with the obligor. People make mistakes, but where it is the obligee’s responsibility to bill the obligor, the parties have impliedly allocated the risk of the obligee’s mistakes on the obligee, who is in the best position to avoid them, or at least mitigate their consequences.

Under Hahn the Need to Demand Payment will not Delay Accrual Unless the Obligor’s Performance is Expressly Conditioned on the Obligee’s Demand

 Hahn did not purport to change New York’s general rule that the statute of limitations generally does not accrue unless all express conditions precedent to the obligor’s liability have accrued. Thus, where parties unambiguously agree, for example, that an insurer has no obligation to pay a claim unless and until the insured submits a proof of loss and the insurer has an opportunity to investigate the claim and determine whether it is due and payable, then the statute of limitations will not begin to run until that condition is met. See, e.g., Steen, 89 N.Y. at 322-23.

There are some sensible reasons for the express-condition-delayed-accrual rule. If the obligee can successfully defeat a lawsuit on the ground that the obligee has not demonstrated that it has satisfied the conditions necessary to trigger the obligor’s duty to perform, or those conditions have not occurred, then it does not make sense, and may be unfair to the obligee, to deem the statute of limitations to run on a claim that does not yet exist.

An express condition generally has great value to an obligor. Express conditions favor obligors because, absent waiver, the obligor has no duty to perform unless and until they are satisfied, and they are ordinarily enforced according to their terms irrespective of how important or unimportant they may seem, and irrespective of whether the obligee’s nonperformance prejudiced the obligor. Literal, not merely substantial, performance is required. See MHR Capital v. Presstek, 12 N.Y.3d 640, 645-46  (2009); Unigard Sec. Ins. Co. v. North River Ins. Co., 79 N.Y.2d 576, 581 (1992). Principally for those reasons—which may result in forfeiture on seemingly technical grounds—courts require them to be expressed in “unmistakable language,” and “will interpret doubtful language as embodying a promise or constructive [i.e., implied] condition rather than an express condition.” See Oppenheimer & Co. v. Oppenheim, 86 N.Y.2d 685, 690-91 (1995) (quotation and citations omitted).

Rules that provide for delayed commencement of the contract statute of limitations are valuable to obligees, and the traditional, general rule is that the contract statute of limitations  accrues at the time of breach. The “legally-entitled-to-demand-payment” rule not only provides for commencement of the statute of limitations at the earliest date reasonably possible, but, as we’ve said, prior to the time that the contract was arguably breached by anyone other than perhaps the obligee.

All else equal, it would at least arguably be unfair to give the obligor the benefit of an express condition for purposes of determining when its contractual obligation arises (if at all), and at the same time impose on the claimant the “legally-entitled-to-demand payment” rule in circumstances where there has not only been no breach of contract, but before a duty to perform has even arisen. That consideration is more compelling where performance of the express condition is not solely in the control of the obligee, and most compelling where the obligee has no control over when the condition will be fulfilled.

*                                    *                                    *

In Part IV.C we’ll address how Hahn may in certain circumstances influence how the express-condition-delayed-accrual rule is applied  and how it may all but foreclose arguments for delayed-until-demand  accrual based on an implied- or constructive-condition theory.

 

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