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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?

March 4th, 2014 Claims Handling, Contract Interpretation, Internal Controls, New York Court of Appeals, New York State Courts, Nuts & Bolts, Nuts & Bolts: Reinsurance, Practice and Procedure, Reinsurance Arbitration, Reinsurance Claims, Statute of Limitations, United States Court of Appeals for the Second Circuit 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 II

In Part I (here) we determined the probable success of Reinsurer R’s motion to dismiss turns on whether the reinsurance contract expressly makes Cedent C’s presentation of claims a condition precedent to R’s obligation to pay them.  This Part II discusses in some detail New York law pertinent to contract statute-of-limitations accrual as it existed both before and after the Second Circuit’s 1996 decision in Continental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2nd Cir. 1996), and before the New York Court of Appeals decided Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765, 771 (2012).

Parts III and IV will discuss Stronghold and Hahn in some detail, and explain why we believe Stronghold misapplied New York law by concluding that the reinsurance contract before it expressly conditioned the reinsurers’ obligation to pay on the cedent presenting claims for payment. This Part II provides readers with the background required to understand better why we think that is so.

Accrual of Breach of Contract Claims under New York Law

Under New York law, “[t]he time within which  an  action  must  be  commenced,  except  as  otherwise expressly prescribed, shall be computed from the time the cause of action  accrued  to the time the claim is interposed.”[1] A cause of action for breach of contract generally “accrues” for statute of limitations purposes when the contract is breached, and a contract is generally breached at the earliest point plaintiff can allege: (a) the existence of a contract; (b) the occurrence or performance of all conditions precedent to the other party’s duty to perform; and (c) non-performance by the party allegedly in breach.[2]

Promises versus Conditions

There are two types of contract provisions that are pertinent to whether and, if so, when, a party has a cause of action for breach of contract: promises and express conditions.  A promise defines and delineates an undertaking to perform a duty and evidences the assumption of that duty by one or both of the parties. A condition (sometimes interchangeably referred to as a “condition precedent”) is “an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises.”[3]

Conditions make the duty to perform promises contingent on the occurrence of the specified event or act. Whether or not it occurs may be outside the control of the parties, within the total or partial control of one or, at least to some degree, within that of both.

Conditions may be express or implied. An express condition is one “agreed to and imposed by the parties.  .  .  .”[4] An implied condition is one “imposed by law to do justice.”[5] We are concerned here with express conditions only, because implying a condition for the sole purpose of delaying the already lengthy six-year breach-of-contract limitations period would not “do justice,” and would, in any event, create an exception that could easily swallow the rule that the statute of limitations generally begins to run as soon as a party has the right to demand payment (a rule we discuss below).

One key difference between express conditions and promises concerns the parties’ rights and remedies where: (a) a party fails to satisfy an express condition over which it has control versus (b) a party’s failure to perform a promise. If a party fails to perform a promise, the other party’s duty to perform its end of the bargain is not discharged unless the failure to perform causes economic prejudice or  is a material breach of contract—that is, a breach that, for all intents and purposes, defeats the purpose of the contract.[6]

But material or prejudicial breaches are generally the exception, not the rule. Suppose A and B have assumed mutual obligations to one another, neither of which is conditioned on the other. Each breaches the contract, but the breaches are not material or prejudicial to either party. If A sues B, B will be held liable for the damages, if any, A suffered as a result of B’s breach, and, if B asserts a counterclaim for breach against A, then A can be held liable to B for any damages A’s breach caused B.[7] But neither party is relieved of any of the contractual obligations it assumed.

What Happens when a Party’s Obligation to Perform is Subject to an Express Condition?

Suppose Cedent C and Reinsurer R enter into a reinsurance contract that obligates R to indemnify C for losses paid under a certain kind and class of insurance policies. The reinsurance contract also provides that C shall promptly notify R of any claim that may reasonably be expected to result in C making a claim under the reinsurance contract.

On date X, one of C’s insureds makes a claim against C under one of the reinsured policies. On date X plus 1 year, C, who has in place reasonable controls to assure the notification of its reinsurers of claims made by C’s insureds, belatedly notifies R of the claim. R informs C that it has breached its obligation to provide timely notice of claim. On date X plus 2 years, C pays the claim and presents to R a reinsurance claim seeking R’s respective share of the settlement.

In this scenario the only express condition on R’s duty to perform is C’s payment of a claim covered by the reinsurance contract. The obligation to notify R promptly of an insured’s claim is simply an obligation, albeit one that C breached. C’s breach is not material because it relates to only one transaction under a contract that contemplates many over time.

If R does not pay the claim, then C can sue R for breach and will likely prevail.  R has a breach of contract claim against C, but will be entitled to only nominal damages (e.g., one dollar) unless it can show that it suffered actual damages as a result of C’s breach.[8] In all likelihood R sustained no meaningful amount of actual damages, its breach of contract claim is effectively without value and R will not assert it.

But suppose our hypothetical reinsurance contract stated that R shall not be obligated to pay any claim made under the reinsurance contract unless C presents the claim to R within thirty days of settlement, and then only if C presents a proof of loss that establishes X, Y & Z. Were that the case, then C’s suit against R would, in all likelihood  be dismissed, because C did not satisfy the condition that its claim against R be presented within 30 days. And even assuming that C timely presented its claim, R would have no obligation to pay it unless C submitted the required proof of loss. And all that would remain so irrespective of whether R suffered any prejudice and even though C’s breach was not a material one.[9]

Express Conditions Must Be Clearly Stated

Because failure to comply with an express condition results in forfeiture, and the risk of forfeiture may be high, “a contractual duty ordinarily will not be construed as a condition precedent absent clear language showing that the parties intended to make it a condition.”[10] Put differently an express condition must be unambiguous, that is, susceptible to only one reasonable interpretation.[11] Typically, words or phrases such as “if,” “unless and until,” “provided,” “upon” or “in the event” are clearly indicative of the parties’ intent to make the occurrence of some act or event an express condition.[12]

The Effect of Express Conditions on Statute-of-Limitations Accrual

Because express conditions must ordinarily be satisfied before a party is obligated to perform, “as a general rule, when the right to final payment is subject to a condition, the obligation to pay arises and the cause of action accrues, only when the condition has been fulfilled.”[13]  Thus, for example, in direct insurance cases where a policy features an express condition to payment, or to bringing an action, a cause of action on the policy does not accrue until the condition is satisfied, unless the parties agree that the limitation period for bringing an action accrues at some other date.[14]

There are, of course, many contracts where the party having the duty to perform will not necessarily know when performance is due without notice or demand from the party seeking performance.  And in many (but not all) of those contracts, parties may insert a notice or demand requirement without making it an express condition.

Both before Stronghold, and after Stronghold but before Hahn, a number of New York Courts had held or recognized in various contexts that, when parties do not make a payment demand an express condition, a cause of action accrues, and the statute of limitations begins to run, as soon as the party seeking payment has the right to demand it. Appendix A to this post lists some of these cases.

The accrual-upon-the-right-to-demand-payment rule finds some indirect support in New York Civil Practice Law and Rules (“CPLR”) Section 206(a), which provides in pertinent part:

Computing periods of limitation in particular actions. (a) Where demand necessary. Except as provided in article 3 of the uniform commercial code, where a demand is necessary to entitle a person to commence an action, the time within which the action must be commenced shall be computed from the time when the right to make the demand is complete.  .  .  .

CPLR § 206(a).

Courts have interpreted this provision as applicable to “procedural” demands, but not “substantive” demands. A “substantive” demand is one that the plaintiff must make to establish the existence of a legal right which would not exist in the absence of the demand.  A “procedural demand” is one that is necessary to enforce in court a right that exists independently from the demand.[15]

Where the parties clearly agree that a demand for payment is a condition precedent, the demand is “substantive” because compliance with conditions precedent to performance is an essential element of a breach of contract claim.  But where the promise to provide notice or demand performance is not an express condition – and thus not required to “entitle a person to commence an action” – then CPLR 206(a) is technically irrelevant and unnecessary.  In fact, Hahn did not discuss CPLR 206(a), let alone rely on it, although the court below cited it.

CPLR 206(a) is nevertheless instructive because it demonstrates the intent of the New York legislature that statute-of-limitations accrual not be delayed by a demand requirement that is not a substantive element of plaintiff’s cause of action, even if statutory or regulatory requirements impose a procedural requirement that must be satisfied before suit is brought (e.g., the statutory demand requirement for commencing a shareholder’s derivative suit[16]). And if the legislature thought that compliance with a “procedural” demand shouldn’t delay accrual for statute of limitations purposes, then surely the plaintiff’s own breach of a promise to demand payment shouldn’t delay accrual either, which, at least in part, may be why the Hahn lower court and a number of other pre-Hahn courts cited it in support of the accrual-upon-the-right-to-demand-payment rule.[17]

When would the Statute of Limitations Begin to Run in our Reinsurance Hypotheticals?

Recall that in our first reinsurance hypothetical, the contract did not condition the reinsurer’s obligation to perform on the presentation of a claim. The only condition was that Cedent C pay the claim because the parties stipulated that the reinsurer would indemnify the cedent for paid loss, which, under New York law as applied to a solvent cedent (i.e., the ordinary-course-of-business situation where an insolvency clause is not triggered), would mean the reinsurer’s obligation to perform arose when the cedent satisfied its obligation to the insured by paying the claim. Thus, the statute of limitations would begin to run upon the cedent’s payment of its insured’s claim, not when the cedent presented its reinsurance claim one year later, for once the cedent paid its insured, it had the right to make a reinsurance claim.

The result is different in the second hypothetical where the contract conditioned the reinsurer’s obligation to indemnify on the insured’s presentation of a proof of loss in a specified form within thirty days of settling (i.e., paying) the claim. Thus the statute of limitations would not begin to run any earlier than the last day on which the cedent could have satisfied the condition.

But the delayed accrual date doesn’t provide much solace to our hapless hypothetical cedent, for even assuming it brings suit within six years of failing to satisfy the condition, its defeat would be preordained under New York law. It is thus not surprising that cedents generally do not agree to include such strict time and form conditions on claims presentation, and brokers, who generally are agents for the cedent, would not be expected to include them in their contracts.

That’s not to say that reinsurance contracts never expressly condition reinsurer liability on the presentation of a claim. For example, the first paragraph of the Brokers and Reinsurance Markets Association (“BRMA”) Loss Settlements clause conditions the reinsurer’s obligation to pay a claim “upon [its] receipt of satisfactory proof of loss”:

All loss settlements made by the Company, under policies subject hereto, whether under policy terms and conditions or by way of compromise, shall be binding upon the Reinsurer, and, upon receipt of satisfactory proof of loss, the Reinsurer agrees to pay or allow, as the case may be, its share of each such settlement in accordance with this Contract.

.  .  .  .

BRMA 29 A, Loss Settlements. In a reinsurance contract containing a clause like this, the statute of limitations would begin to run upon the cedent’s delivery to the reinsurer, and the reinsurer’s receipt, of a proof of loss the cedent considered to be satisfactory.

But suppose the reinsurance contract said “All loss settlements made by the Company, under policies subject hereto, whether under policy terms and conditions or by way of compromise, shall be binding upon the Reinsurer,” and then simply stated: “The Company shall promptly submit to the Reinsurer satisfactory proof of loss.”  Were that the case, a New York Court would likely find that the proof of loss obligation was merely a promise, not a condition, and the statute of limitations would begin to run once the cedent settled the claim.

Links to Later Installments:

Part III.A

Part III.B

Part III.C

Part IV.A

Part IV.B

 

 

Appendix A

A Non-Exclusive List of Pre-Hahn New York State Court Cases Recognizing that the Statute of Limitations Begins to Run as Soon as the Demanding Party has the Right to Demand Payment[18]

  1. 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));
  2. Steen v. Niagara Fire Ins. Co., 89 N.Y. 315, 325 (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”);
  3. Minskoff Grant Realty & Management Corp. v. 211 Manager Corp., 71 A.D.3d 843, 845 (2d Dep’t 2010);
  4. Swift v. New York Medical College, 25 A.D.3d 686, 687 (2d Dep’t 2006);
  5. 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);
  6. Albany Specialties, Inc. v. Shenendehowa School Dist., 307 A.D.2d 514, 516 (3rd Dep’t 2003); 
  7. 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));
  8. Gallo v. Savings Bank Life Ins. Fund, 257 A.D.2d 600, 601(2d Dep’t 1999) (cause of action on life insurance policy accrues on death of insured);
  9. Town of Brookhaven v. MIC Property & Cas. Co., 245 A.D.2d 365, 365 (2d Dep’t 1997), leave to appeal denied., 92 N.Y.2d 806 (1998) (“When the defendant.  .  .  , as principal, failed to complete the improvements within that year, the Town possessed the legal right to demand payment under the bonds and to enforce its demand in court.  Thus, the action accrued and the Statute of Limitations began to run one year after the execution of the bonds, and the Town may not extend the Statute of limitations by simply failing to make a demand.”) (citations omitted);
  10. Travelers Indemnity Co. v. LLJV Dev. Corp., 227 A.D.2d 151, 154 (1st Dep’t 1996) (“it 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”));
  11. Woodlaurel, Inc. v. Wittman, 199 A.D.2d 497, 497-98 (2d Dep’t  1993);
  12. Gower v. Weinberg, 184 A.D.2d 844, 845 (3rd  Dep’t 1992); and
  13. State v. Peerless Ins. Co., 117 A.D.2d 370, 373 (3rd Dep’t 1986) (“The liability of a surety who is a guarantor of payment accrues upon the default of the principal.  .  . [and] [t]he  Statute of Limitations generally begins to run when a plaintiff possesses the legal right to be paid and to enforce its right to payment in court.”) (citations omitted).


[1] N.Y. Civ. Prac. L & R. § 203.

[2] See Kassner & Co v. City of New York, 46 NY 2d 544, 550 (1979).

[4] 86 N.Y.2d at 690.

[5] 86 N.Y.2d at 690 (quotation and citation omitted).

[6] See Unigard Sec. Ins. Co., Inc. v. North River Ins. Co., 79 N.Y.2d 576, 581 (1992)  (It is an “established rule[] of contract law.  .  .   that ordinarily one seeking to escape the obligation to perform under a contract must demonstrate a material breach or prejudice.  .  .  .”) (citations omitted).

[7] See, generally, Phoenix Acquisition Corp. v. Campcore, Inc., 81 N.Y.2d 138, 144 (1993) (guarantee’s notice provision was not a condition precedent, but its breach “might mitigate a creditor’s claim by the amount of damages resulting from the alleged failure to notify”).

[8] See id.

[9] 79 N.Y.2d at 581.

[10] Id.

[11] See Oppenheimer, 86 N.Y.2d at 691; Federal Ins. Co. v. International Business Machines Corp., 18 N.Y.3d 642, 646 (2012) (reciting familiar contract interpretation rules applicable to determining whether contract language is unambiguous).

[12] See, e.g., id; MHR Capital Partners LP v. Presstek, Inc., 12 N.Y.3d 640, 645 (2009).

[13] Kassner, 46 N.Y.2d at 550.

[14] See, e.g., Medical Facilities, Inc. v. Pryke, 62 N.Y.2d 716, 717 (1984); Proc v. Home Ins. Co., 17 N.Y.2d 239, 242-45 (1966).

[15] See State of New York v. Seventh Regiment, 98 N.Y.2d 249, 260-61 & n.7 (2002).

[16] See N.Y. Business Corp. L. § 626(c).

[17] See, e.g., Gasparek v. Gasparek, 230 A.D.2d 710, 710 (2d Dep’t 1996) (CPLR 206(a) determined accrual date for breach of contract action); Parker v. Town of Clarkson, 217 A.D.2d 607, 608-09 (2d Dep’t 1995); Town of New Castle v. Meehan, 226 A.D.2d 702, 703 (2d Dep’t 1996); Woodlaurel, Inc. v. Wittman, 199 A.D.2d 497, 497-98 (2d Dep’t  1993); Yeshiva University Development Foundation, Inc. v. Consultants & Designers, Inc., 60 A.D.2d 525, 526-27 (1st Dep’t 1977).

[18]See also cases cited in note 17, supra.

 

         

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