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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?

November 5th, 2014 Claims Handling, Contract Interpretation, Insurance Contracts, Late Notice, New York Court of Appeals, New York State Courts, Nuts & Bolts, Nuts & Bolts: Reinsurance, Practice and Procedure, Reinsurance Claims, Retrospectively-Rated Premium Contracts, 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.C.1

Why Hahn Automotive v. American Zurich Ins. Co. is an Important Statute-of-Limitations Accrual Case




Part IV of our New York reinsurance statute-of-limitations feature started out by taking a closer look at Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765 (2012). (See Part IV.A.) Part IV.B enumerated the seven reasons Hahn is a very significant development in New York statute-of-limitations law, and discussed the first two reasons,  namely that Hahn:

  1. Creates a new general rule, which effectively extends to a larger universe of contracts a statute of limitations accrual principle that the New York Court of Appeals had applied only to certain specific types of contracts, including contracts of indemnity; and
  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.

Part IV.B. also set the stage for discussing the third reason, that is, Hahn suggests the New York Court of Appeals—if faced with an accrual question where the obligor’s obligation to perform is conditioned on the obligee’s demand for payment—may deem the statute of limitations to accrue: (a) once the obligee is legally entitled to demand payment; or (b) the earlier of (i) the date the obligee demands payment or (ii) the expiration of a commercially reasonable period measured from the date the obligee became legally entitled to demand payment.

This Part IV.C.1 wraps up our discussion about Hahn’s likely influence on how courts applying New York law will decide cases where—unlike Hahna demand for payment is an express condition of the obligor’s duty to perform, but—like Hahn—the obligee has, for whatever reason, delayed making a demand. The focus of the wrap-up is on why we think that courts will probably permit accrual to be delayed for no more than a brief, commercially reasonable period, and may simply conclude that the Hahn legally-entitled-to-demand-payment rule should govern such cases because the performance of the condition is within the obligee’s control,  the benefits of the Hahn rule far exceed its costs and the costs of a “commercially reasonable time” rule exceed its benefits.

Will the New York Court of Appeals Apply the Hahn Legally Entitled to Demand Payment Statute of Limitations Rule in a Case where the Demand Requirement is an Express Condition?



If not, what Statute of Limitations Accrual Rule will the Court Likely Apply where an Obligee does not Demand Payment upon Acquiring the Right to do so?    

As discussed in Part IV.B, Hahn does not purport to change the general rule that the contract statute of limitations does not begin to run until all express conditions to the obligor’s liability have occurred. But prudent practitioners and their clients should not assume that courts faithfully following Hahn are likely to allow accrual to be delayed for any significant period simply because the parties expressly conditioned the obligor’s duty to perform on the obligee’s demand. for payment.

Where a demand is the relevant condition for statute of limitations purposes, performance of the condition is generally within the obligee’s sole control. Absent contractual intent to the contrary, parties presumably contemplate the obligee making a demand for payment as expeditiously as reasonably practical, or at least within a commercially reasonable period.

Given that the obligee controls whether the demand condition is satisfied—and thus when the statute of limitations begins to run—courts have held that once a party becomes legally entitled to make a demand, the demand must be made within a “reasonable time.” Once a reasonable period elapses without the obligee making a demand, then the statute of limitations begins to run. (See Part I.)

That rule is designed to prevent the obligee from indefinitely delaying accrual of the statute of limitations period by intentionally or negligently postponing its demand. See, e.g., U.S. v. Gordon, 78 F.3d 781, 785 (2d Cir. 1996) (“We acknowledge the force of the Gordons’ argument that the government should not be able to postpone the running of the statute of limitations indefinitely by deferring the demand”) (federal law); Guggenheim Found. v. Lubell, 77 N.Y.2d 311, 319-20 (1991) (replevin of stolen property from good faith purchaser for value, which imposes demand and refusal as a substantive element of the cause of action); Reid v. Board of Super. of Albany Co., 128 N.Y. 364, 372-73 (1891) (substantive condition precedent to statutory right); cf. Snyder v. Town Insulation, Inc., 81 N.Y.2d 429, 435 (1993) (under accrual rule rejected by New York Court of Appeals, “a plaintiff would have the power to put off the running of the Statute of Limitations indefinitely”).

Hahn was not a case where the parties conditioned the obligee’s liability on the making of a demand, and the Court obviously had no occasion to address what the result would have been had all else been the same except that the demand for payment (i.e., invoicing) requirement had been made an express condition of each of the contracts. Had Hahn been such a case, then the Court of Appeals would have had a number of options to consider.

The Hyde Rule: Statute of Limitations Postponed until Demand Actually Made

The Court, at least in theory, might hold that the statute of limitations never begins to run until the obligee satisfies the condition by making the requisite demand. That rule would be easy to apply, but adopting it would, for no discernible reason, confer on an express condition the talismanic ability to transform a contract subject to a  “Dr. Jekyll” legally-entitled-to-demand-payment rule (the “Dr. Jekyll Rule”) into one governed by a “Mr. Hyde” “obligee-entitled-to-decide-when-to-demand-payment” one (the “Hyde Rule”).

The Hahn Court’s choice of Jekyll over Hyde was prompted by the concern that the  Insurers could “indefinitely” “extend the statute of limitations” “by simply not making a demand,” pointing out that the debts were incurred, and the Insurer had the legal  right to demand payment, many years before the Insurers demanded payment, in some cases more than ten years before the demand. See Hahn, 18 N.Y.3d at 771 (quotations and citation omitted). But that concern would be still be present had the Hahn contracts expressly conditioned obligor performance on demand for payment.

It seems doubtful that the Court would be inclined to adopt a rule that would allow indefinite postponement of the accrual date simply because the parties decided to use the “unmistakable language of condition” in their contracts. See 18 N.Y.3d at 771-72 (Citing and quoting MHR Capital Partners LP v Presstek, Inc., 12 N.Y.3d 640, 645 (2009), for proposition that “if,” “unless” and “until” constitute “unmistakable language of condition.”).

Another reason that the Court would likely not choose the Hyde Rule is that doing so might undermine enforcement of other terms in a contract that might have been intended to work in concert with the demand condition, and may thus bear on the parties’ expectations about timing of demands. On that score, Hahn aptly noted: “the contracts contain specific references to the applicable time periods when [the Insurers were] entitled to calculate adjustments and bill [the Insured] for the amounts owed.” “Such provisions[,]” said the Court, “contradict the open-ended arrangement now proposed by [the Insurers] [i.e., the Hyde Rule]. 18 N.Y.3d at 772.

In any event, Court of Appeals precedent in other contexts suggests that a rule permitting indefinite delay would not likely garner much judicial support. Although the Court does not appear to have addressed the issue of how long a contract’s express-demand-for-payment condition may be postponed, the Court has indicated in other contexts that a person may not indefinitely delay the accrual of the statute of limitations by not satisfying a substantive condition precedent to a cause of action. See, e.g., Guggenheim Found., 77 N.Y.2d at 319-20; Reid, 128 N.Y. at 372-73.

Two for the Price of One: Statute of Limitations Postponed for a “Reasonable Time” Limited to one Statute of Limitations Period

There is a general common-law rule—which we’ll dub “Two-for-the-Price-of-One”—that the length of a “reasonable time” is measured by the statute-of-limitations period. See, e.g., Gordon, 78 F.3d at 786. Two-for-the-Price-of-One has been principally applied to loan and guaranty agreements for purposes of determining the amount of time that a lender may delay making a demand for payment in the event of a default. See, e.g., id.; U.S. v. First City Capital Corp., 53 F.3d 112, 115-16 (5th Cir. 1995) (Wisdom, J.).

Under Two-for-the-Price-of-One, if the statute of limitations is six years, then the obligee must make its demand on the debtor or guarantor within six-years of the debtor’s default, but as long as the obligee makes the demand within that six-year period, it will have an additional six-years measured from the date of the demand within which to commence an action. So if an obligee waits until the last day of the six-year statute of limitations to make a demand, then it will have six-years from that date in which to file suit. Hence the Two-for-the-Price-of-One moniker.

The advantage of Two-for-the-Price-of-One is that it is easy to apply, and provides clear notice to putative litigants about the accrual date of the statute of limitations. But it provides a poor surrogate for what should be presumed a “reasonable” delay in satisfying a demand condition, particularly where the six-year statute-of-limitations applies, and the contract contemplates the obligee making one or more demands during the ordinary course of the legal relationship created by the contract.

Generally when such contracts are silent on the time for performance of conditions, it is fair to say that the parties expected such performance to occur as soon as practicable and, in any event, within a commercially reasonable period. That is consistent with the general rule of contract construction under which courts imply a reasonable time for performance when the parties do not specify when performance is due. See City of New York v. New York Central R.R.Co., 275 N.Y. 287, 292-93  (1937) (“Even though a contract fixes no time for performance, if not void for uncertainty, an agreement is implied that the act shall be done within a reasonable time.”); cf. ADC Orange, Inc. v. Coyote Acres, Inc., 7 N.Y.3d 484, 489 (2006) (even if parties specify a time by which performance must occur, contract is not materially breached if obligor tenders performance within a reasonable time after date, unless contract expressly makes time of  the essence or unless obligee gives obligor “clear, unequivocal notice” of intent to make time of the essence and gives obligor a reasonable time within which to perform).

Whether or not a party has performed within a “reasonable time” generally presents a question of fact, see, e.g., Rahanian v. Ahdout, 258 A.D.2d 156, 159 (1st Dep’t 1999), and particularly in specialized commercial settings, expert testimony may be appropriate. While it is not inconceivable that under some types of contracts a “reasonable time” might exceed six-years, generally such a period would be expected to be measured in days, and at most, months, depending on the type and nature of the contract involved.

There are reasons why, in the special context of loan and guaranty agreements, permitting such a long accrual delay does not necessarily outweigh the simplicity of application and clear notice benefits of Two-for-the-Price-of-One. For example, there may be sound policy or economic reasons for not discouraging lender forbearance.  But those reasons are, for the most part, unique to lending and guaranty instruments.

In addition, there is a major structural difference between financial instruments and contracts that expressly contemplate the likelihood of demands being made during and even after the life of the contract (as do most insurance, reinsurance, retro premium agreements and many other contracts). The necessity of making a demand under a financial instrument is occasioned by a default, and a default is not considered to be an ordinary-course-of-business event under any contract.

By contrast, demands are expected to be made in the ordinary course of business during the life of the legal relationship created by insurance, reinsurance, retro premium or any number of other types of contracts. In that context one could, all else equal, reasonably assume the parties contemplated demands for payment to be made within a commercially reasonable period measured in days or, at most, months.

Deeming a “reasonable time” to be six-years in situations where the parties would ordinarily expect a demand to be made within days or months makes little sense. The simplicity of Two-for-the-Price-of-One comes at a high price to the courts and the public in the form of increased docket burdens, and to defendants in the form of doubling to 12 years an already lengthy six-year period during which they may be exposed to timely breach of contract claims.

But that same simplicity could be achieved without that added cost by applying the Hahn rule, and the only offsetting cost would be denying the obligee the benefit of a relatively brief accrual respite.

It thus does not seem likely that the Court of Appeals would conclude that non-performance of an express condition with the obligee’s control should be allowed to delay the accrual of a six-year-statute of limitations for as long as six-years in circumstances where such delays would be outside of normal business expectations.

That’s not to say the rule isn’t workable and fair where the limitations period is very short. New York Courts, for example, have applied Two-for-the-Price-of-One to proceedings for mandamus under Article 78 of the New York Civil Practice Law and Rules, where making a demand on a public official is a substantive condition precedent to obtaining such relief, and the four-month statute of limitations does not begin to run until a body or officer refuses a demand that he or she perform a duty. See, e.g., Re Blue v. Commissioner Of S.S., 306 A.D.2d 527, 528 (2d Dep’t 2003); New York Civ. Prac. L. & R. 217(1) (four-month statute of limitations for mandamus against body or officer accrues “after the respondent’s refusal, upon  the  demand of the petitioner or the person whom he represents, to perform its duty.  .  .  .”).

Hahn’s Dr. Jekyll: Statute of Limitations Accrual not Postponed at All

Yet another option the Court of Appeals would have would be to simply apply the Hahn “legally-entitled-to-demand-payment” rule to cases where a demand is an express condition under the sole control of the obligee. Like the other two options we’ve discussed, that rule is easy to apply and provides meaningful advance notice to prospective litigants concerning statute-of -limitations-accrual.

There are two drawbacks to that rule, but neither is as significant as the delay that would (or at least could) result from the first two options. First, it would represent at least a technical exception to New York’s general rule that the statute of limitations does not begin to run until there is a judicially enforceable legal duty running from the defendant to the plaintiff. See, e.g., Aetna Life & Cas Co v. Nelson, 67 N.Y.2d 169, 175 (1986) (“The Statute of Limitations begins to run once a cause of action accrues, that is, 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.”) (citations omitted). Thus, at least from a doctrinal standpoint, the rule would allow the statute of limitations to begin to run not only before the contract has been breached, but before a substantive condition precedent has been satisfied.

But to put too much stock in that concern is to arguably elevate form over substance where the occurrence of the condition is in the control of the plaintiff, demands are expected to be made from time-to-time in the ordinary course of business and the making of a demand is (or at least should be) something that the parties contemplate being able to accomplish very promptly once they are legally entitled to make the demand. That is all the more the case if the demand made by a complaint commencing an action would itself satisfy the condition were it made by invoice or letter.

Second, as we observed in Part IV.B, it is arguably unfair to let the defendant reap the substantive benefits of the statute of limitations without letting the plaintiff reap any of the procedural benefits that seem logically to follow. That may be so, but the concern is not a particularly weighty one since plaintiff controls whether the condition is satisfied. And if a demand requirement could be satisfied by filing a complaint, then the apparent unfairness is probably illusory at best. In any event, even if plaintiff is not particularly diligent about making a demand, then in all likelihood it will still have considerably more than five years within which to commence an action if the defendant does not perform.

It seems particularly appropriate to apply the Hahn rule in a situation where, as in Hahn, the contract expressly contemplates the parties having the legal right to make a demand at a particular time, or within a brief commercially reasonable period, and the obligee has control over whether it is prepared to make a demand as soon as it is legally entitled to do so.

But there is a caveat. The Hahn rule would arguably work well in a case where a demand is an express condition to the obligor’s liability, provided that the parties have not agreed to a significantly shorter limitations period. When an agreed upon shortened statute of limitations period is very brief (for example, one-year or less), having a  pre-accrual  commercially reasonable period within which to satisfy expeditiously a demand condition may have a greater practical value than it would otherwise have under the six-year statute of limitation. That could change the fairness calculus in certain cases, making the Hahn rule less attractive.

The Rule of Factbound Reason: Statute of Limitations Postponed for a Commercially Reasonable Time

Perhaps the approach most closely aligned with party expectations would be to allow a brief, commercially reasonably period to elapse between the time the obligee is legally entitled  to make a demand and the accrual of the statute of limitations. But. except in cases where the delay is so modest or extreme as to be reasonable or unreasonable as a matter of law, applying it would frequently require time consuming and expensive fact finding. The rule also provides parties with little, if any, meaningful notice about when the limitations—period clock starts.

These shortcomings impair the purposes and objectives of statute-of-limitations law. (See Part IV.B.) The Court of Appeals has expressed an understandable preference for clear accrual rules that can be applied as a matter of law in most cases. In Tydings v. Greenfield, Stein & Senior, LLP, 11 N.Y.3d 195 (2008), a Surrogate’s Court in a related case had held that the “statute of limitations can begin to run on the beneficiary’s right to an accounting [against a trustee] only where the former fiduciary has failed to have accounted after a reasonable time to do so has passed.” 11 N.Y.3d at 202 (quotation omitted). But that, said the Court, “would leave the courts with the problem of deciding what a reasonable time is[,]” and “[w]e prefer the clearer and simpler rule that the time starts running when a successor trustee is put in place. This rule does not give [the beneficiary] less than six years to sue, for she could have sought to compel an accounting the day after [the trustee’s] resignation.” Id.

Dr. Jekyll or Factbound Reason?

As the preceding discussion suggests, the Court of Appeals would presumably choose which accrual rule to apply by analyzing and weighing the  costs and benefits of applying the Hahn legally entitled to demand payment rule versus the commercially reasonable time rule. While we believe a commercially-reasonable-period rule may be the one most likely to reflect the parties’ reasonable expectations, and the one that may best reflect the finer points of statute-of-imitations and contract law, judges on both the trial court and appellate levels, whether state or federal, can (and probably should) be expected to place more weight on statute-of-limitations and related judicial economy considerations than on the presumed  expectations of the parties and legal technicalities. That’s effectively what the court did in Hahn, although the three dissenting judges saw things differently.

The only difference between Hahn and a case raising the “reasonable time” issue is that the demand requirement would contain the “unmistakable language of condition,” words like “if,” “unless” and “until.” Those words can and should have great significance in the context of substantive liability questions, and there is good reason to give them significance in the statute-of-limitations context when occurrence or performance of the condition is outside plaintiff’s control. See, e.g., J.J. Kassner & Co. v. City of New York, 46 N.Y.2d 544 (1979) (because contract conditioned “plaintiff’s right to final payment and the city’s obligation to pay” on audit by comptroller “cause of action accrued” “once the audit was completed  and plaintiff was informed of the results”). But the rationale for that rule is much weaker when the plaintiff is  responsible for performance of the condition.

Hahn was driven by the concern that plaintiff should not be able to indefinitely and unilaterally delay the accrual of the statute of limitations, which is the same issue that arises when a demand requirement contains the unmistakable language of condition. Given the increased net costs associated with any of the alternative accrual theories the Court of Appeals might adopt to prevent such unilaterally imposed delay, all else equal it would not be surprising were the Court to hold that the Hahn rule applies even where demand for payment is made an express condition of the contract.

Whether or not the Court will hold that the Hahn rule governs cases where demand is an express condition remains to be seen, but if the Court of Appeals decides not to extend Hahn that far, it seems likely that it would hold that the statute of limitations will accrue no later than a brief, commercially reasonable period after plaintiff is legally entitled to demand payment.

Part IV.C.2, the next installment of our statute-of-limitations feature, shall discuss the fourth reason Hahn is an important case: it all but forecloses courts from using an implied condition theory to justify delay in statute-of-limitations accrual, at least in circumstances where the implied condition would serve no other purpose.


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