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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?

September 19th, 2014 Claims Handling, Contract Interpretation, Insurance Contracts, Late Notice, New York Court of Appeals, New York State Courts, Nuts & Bolts: Reinsurance, Practice and Procedure, Reinsurance Claims, Retrospectively-Rated Premium Contracts, 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 IV.A

Hahn Automotive v. American Zurich Ins. Co., 18 N.Y.3d 765 (2012): Unless Parties Unambiguously Condition Obligor’s Duty to Perform on Demand for Payment, Statute of Limitations Begins to Run as Soon as Obligee is Legally Entitled to Demand Payment

If you’ve been following this multi-part post from inception, then you know that we think the New York Court of Appeals’ 2012 decision in Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765 (2012) strongly suggests that, if faced today with facts materially identical to those in Continental Cas. Co. v. Stronghold Ins. Co., 77 F.3d 16 (2d Cir. 1996), New York’s highest court would hold that the cedent’s claims were time-barred because: (a) the notice provisions in the reinsurance contracts did not unambiguously condition the reinsurers’ obligation to pay on presentation of claims and demands for payment; and (b) the cedent was legally entitled to present and demand payment for each of its reinsurance claims more than six years before the cedent commenced its action. This Part IV.A discusses what transpired in Hahn, and Part IV.B will analyze Hahn’s likely effect on excess-of-loss reinsurance-claim statute-of-limitations accrual.

Hahn Facts and Procedural History

Hahn was a dispute between an auto parts distributor (the “Insured”), and its two insurers, both members of the Zurich Insurance Group (the “Insurers”).

During each annual period between September 1992 and September 2003, the Insurers provided general liability, auto liability and workers’ compensation coverage to the Insured. The insurance was priced using three types of alternative-risk-finance rating plans embodied in: (a) retrospective premium agreements (the “Retro Premium Agreements”); (b) adjustable deductible policies (the “Adjustable Deductible Policies”); and (c) deductible policies (the “Deductible Policies”). The Insurers also entered into certain claims services contracts (the “Claims Services Contracts”) under which the Insurers provided claims-handling services on a fixed-fee-per-claimant basis.

The Retro Premium Agreements

Under the Retro Premium Agreements, the Insurers were required to recalculate the Insured’s initial premiums 18 months after policy inception and annually thereafter until settlement of all claims. Adjustments were made based on actual claims experience. If the adjusted premium exceeded the original premium, then the Insurers were to bill the Insured for the difference; if adjusted premium was less than the original premium, then the Insurers were to refund the Insured for the difference.

The Retro Premium Agreements required the Insured to pay amounts owed for premium adjustments “within ten (10) days of receipt of [the Insurers’] demand” for payment.

The Adjustable Deductible Policies

The Adjustable Deductible Policies, like the Retro Premium Agreements, also provided that the Insurers would annually adjust premium based on actual claims experience, beginning 18 months after inception. The Policies also required the Insured to pay the Insurers losses and expenses falling within the deductible on a quarterly or monthly basis during the period 42 months from inception. Thereafter the Insurers would bill the Insured for such losses and expenses on an annual basis and at that same time that the Insurers made premium adjustments.

The Deductible Policies

The Deductible Policies likewise provided for initial premium adjustments 18 months after inception, followed by annual adjustment. They required the Insurers to pay claims on behalf of the Insured and, in turn, required the Insured to pay the Insurers each month the amounts that were below a deductible, and to reimburse the Insurers for allocated loss adjustment expenses (“ALAE”) and other fees.  The Deductible Policies stated that the Insured “shall pay” the Insurers “within twenty (20) days of its demand.”

 The Claims Services Contracts

The Claims Services Contracts provided that the Insurers would handle the Insured’s automobile physical damage claims on a fixed-fee-per-claimant basis. They required Hahn to pay estimated fees during the term of each contract, subject to a reconciliation the Insurers were to perform 12 months after expiration of each contract.

The Underlying Dispute

In 2005, as a result of an internal audit, the Insurers discovered that they had not billed the Insured for deductibles or ALAE under two of the Deductible Policies, both of which were effective in the 1995-96 policy year. These unbilled amounts related to ten years of claims experience.

The Insurers sent an invoice to Hahn in April 2005, which requested payment of $1,123,874. Hahn did not pay.

In March 2006, the Insurers sent Hahn two other invoices:  (a) one for $751,514, which consisted of annual adjustments the Insurers contended were due under the Retro Premium Agreements and the Adjustable Deductible Policies over the period 1995 through 2005; and (b) $71,615, consisting of previously-unbilled fees the Insurers contended they incurred during the period 1997 through 2005.

When Hahn likewise did not pay the 2006 invoices, the Insurers drew down on a $400,000.00 letter of credit (the “LC”) Hahn had deposited with the Insurers. The Insurers applied the drawn-down amount to the oldest of the outstanding balances. Hahn objected.

The DJ Action

In May 2006 Hahn commenced an action for declaratory relief and damages. It sought a declaration that the Insurers’ invoices for debts that were incurred more than six-years prior to commencement of the action were barred by the statute of limitations. The damage claims related to the Insurers’ allegedly improper LC draw down. The Insurers counterclaimed, seeking a judgment in their favor for all invoiced outstanding balances, and the parties cross-moved for summary judgment.

The trial court granted Hahn’s motion for summary judgment on its claim for declaratory relief relating to the statute of limitations, holding that “the statute of limitations has run as to all claims for which Zurich had the right to demand payment more than six years prior to the commencement of this action.” The court also concluded that the Insurers properly drew down on the $400,000.00 LC, but did not grant summary judgment on Hahn’s damage claims arising out of the draw down.

On appeal to the Appellate Division, Fourth Department, the court modified the trial court decision by dismissing Hahn’s LC-related damage claims, but otherwise affirmed the trial court. One Justice dissented.

The dissenting Justice contended that the Insurers’ claims were timely, reasoning that the statute of limitations did not accrue until the Insurers invoiced the Insured and the Insured refused to pay. The Appellate Division granted the Insurers leave to appeal to the New York Court of Appeals. The Insured did not cross-appeal the LC-related damage claim ruling.

The New York Court of Appeals Decision

On appeal to New York’s highest court, the Insurer contended that the statute of limitations did not begin to run until the Insured refused to pay the 2005 and 2006 invoices. The Court of Appeals, in an opinion written by Associate Judge Victoria A. Graffeo, disagreed and affirmed the Appellate Division’s judgment.

The Court of Appeals acknowledged the general rules that: (a) a cause of action accrues for statute-of-limitations purposes “‘when all of the facts necessary to the cause of action have occurred so that the party would be entitled to obtain relief in court[,]’” Hahn, 18 N.Y.3d at 770 (quoting Aetna Life & Cas. Co. v Nelson, 67 N.Y. 2d 169, 175 (1986)); (b) a breach of contract claims “generally accrues at the time of the breach[,]” 18 N.Y.3d at 770 (citing Ely-Cruikshank Co. v Bank of Montreal, 81 N.Y.2d 399, 402 (1993)); and (c) “‘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[,]” 18 N.Y.3d at 770 (citing John J. Kassner & Co. v City of New York, 46 N.Y.2d 544, 550 (1979)).

If those general rules controlled the outcome, then one could reasonably conclude that the Insurers were correct, for generally a contract is not breached until the party allegedly in breach refuses to perform, and here the Insured did not (and could not) refuse to perform until it received and refused to pay the 2005 and 2006 invoices. But the Court introduced a new general rule, and it was on that rule that the outcome turned.

Noting that “[a] consistent line of Appellate Division precedent holds that, where ‘the claim is for payment of a sum of money allegedly owed pursuant to a contract, the cause of action accrues when the [claimant] possesses a legal right to demand payment[,]” 18 N.Y.3d at 770-71 (quoting Minskoff Grant Realty & Mgt. Corp. v 211 Mgr. Corp., 71 AD3d 843, 845 (2d Dep’t 2010)) (other citations omitted), the Court held that “it is reasonable to apply this accrual principle to the insurance contracts at issue here[,]” and that, accordingly, New York’s six-year statute of limitations for breach of contract “began to run when [the Insurers] acquired the right to demand payment of the various amounts owed under the policies.” 18 N.Y.3d at 771.

The Court explained that the Insurers had “acknowledge[d] that [they] had the right under [their] contracts to bill [Insured] years earlier for many of the sums reflected in the April 2005, March 2, 2006 and March 27, 2006 invoices — in some instances more than a decade earlier — but failed to do so through inadvertence.” 18 N.Y.3d at 771.  To allow the Insurers to bring suit on debts incurred more than six years prior to commencement of the action, and for which the Insurers had the right to demand payment more than six years prior to commencement of the action, “‘would allow [the Insurers] to extend the statute of limitations indefinitely `by simply failing to make a demand.’” Id. (quoting Town of Brookhaven v MIC Prop. & Cos. Ins. Corp., 245 A.D.2d 365, 365 (2d Dep’t 1997), leave to appeal den., 92 N.Y.2d 806 (1998) (other citation omitted).

The Court was “unpersuaded by [the Insurers’] assertion that, consistent with John J. Kassner & Co.,” the statute of limitations “could not have accrued until [the Insurers] sent the three invoices between April 2005 and March 2006 because [their] right to payment under the policies was subject to a condition precedent — [the Insurers’] issuance of a demand for payment.” 18 N.Y.3d at 771. While the Insurers’ policies and contracts required the Insurers to present invoices, indicated the dates by which the insurers were entitled to present invoices and required the insured to pay them within 10 days, neither those nor any other provisions of the contracts unambiguously conditioned the Insured’s obligation to pay on the Insurers’ demand for payment.

In Kassner, said the Court, “the plaintiff’s right to payment was expressly conditioned on an audit by a third party,” but here the Insurers could not “point to any contract language unambiguously conditioning its right to payment on its own demand.” Citing MHR Capital Partners LP v Presstek, Inc., 12 N.Y.3d 640, 645 (2009), the Court noted parenthetically that “the use of terms like ‘if,’ ‘unless’ and ‘until’ would constitute ‘umistakable language of condition.’” 18 N.Y.3d at 771-72. “Furthermore,” noted the Court, “the contracts contain specific references to the applicable time periods when [the Insurers were] entitled to calculate adjustments and bill Hahn for the amounts owed.” “Such provisions[,]” said the Court, “contradict the open-ended arrangement now proposed by [the Insurers].” 18 N.Y.3d at 772.

The Court distinguished Stronghold in a footnote, observing that “the Second Circuit held that the reinsured’s obligation to give notice to the reinsurers of the underlying claims was a condition precedent to payment, reasoning that such conditions are common in insurance contracts because they ‘allow[] the insurance company time to investigate and pay the claim.’” 18 N.Y.3d at 772 n.5 (quoting Stronghold, 77 F.3d at 20). But “[h]ere.  .  . the relevant policies contain no condition precedent and [the Insurer] did not need to give [the Insured] any time to investigate.” 18 N.Y.3d at 772 n.5.

The Court did not address, and there was no need for it to address, the issue of whether the Second Circuit correctly concluded that the notice provision in Stronghold qualified as an express condition. That issue was not before the Court, and in any event, the Court, as discussed above, explained that express conditions must contain the “unmistakable language of condition,” something which the Stronghold notice provision—unlike “common” insurance contract claim presentation provisions designed to “allow the insurance company time to investigate and pay the claim”—lacked. See 18 N.Y.3d at 771-72, 772 n.5. (See also Parts II, III.A, III.B & III.C of this multi-part post.)

Judge Read’s Dissent

Associate Judge Susan Phillips Read dissented in an opinion joined by Associate Judges Robert S. Smith and Eugene F. Pigott, Jr.  She argued that courts (principally federal district courts in and outside New York) had “uniformly concluded that claim[s] for unpaid premiums calculated on the basis of claims history do[] not accrue until the insured refuses payment after demand has been made by the insurer.” The majority’s conclusion, she argued, “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.” Put differently, “the claim for breach accrues before any breach can possibly occur.” 18 N.Y.3d at 773 (Read, J., dissenting).

Judge Read disagreed with the emphasis the majority placed on: (a) the absence of any unmistakable contract language conditioning the Insurer’s right to payment (or the Insured’s obligation to pay) on the Insurer’s demand; and (b) the presence of contract language specifying when the Insurer had the right to demand payment. She would have held that the “very nature and structure” of the contracts “conditioned payment on demand[,]” because the Insurer “was not in a position under the contracts to demand payment until it 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).

As respects the majority’s focus on the date by which the Insurer had the right to demand payment, Judge Read argued 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.” 18 N.Y.3d at 774 (Read, J., dissenting).

As respects the majority’s concern about plaintiffs postponing the statute of limitations, Judge Read noted that: (a) the Insurer “undertook an extensive audit of accounts, which uncovered the previously unbilled losses and expenses accounted for in the three invoices[;]” (b) the Insured’s “agent disputed, or at least said that he did not understand, some of the invoices that [the Insurer sent earlier and later withdrew];” (c) the Insured did “not claim to have been injured by [the] delay[] and “no longer questions the accuracy of the amounts computed[;]” and the Insured “was well aware that it owed [the Insurer] money, having been alerted by specific advice from its broker and his periodic reports, which compared paid loss billings to loss runs.” And she agreed with the Insurer’s assertion that “a ruling in its favor is unlikely to ‘encourage parties who are owed money to refrain from sending out bills in the hope of prolonging the statute of limitations.’” 18 N.Y.3d at 774-75 (citations omitted) (Read, J., dissenting).

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Our next segment will discuss why we think that, in light of Hahn, a court faithfully applying New York law to facts materially identical to those in Stronghold would have to conclude that the cedent’s claims were time barred.

Links to Previous Installments:

Part I

Part II

Part III.A

Part III.B

Part III.C

Links to Future Installments:

Part IV.B


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