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U.S. District Court Holds Two Year Limitations Period in Policy Accrued when Insurer Denied Claim and not on Date of Accident

Blogs, Insurance Coverage

The United States District Court for the Southern District of New York recently held that the definition of loss in an art insurance policy was ambiguous and therefore, the insured timely filed its breach of contract action against the insurer. No Hero Enterprises B.V. v. Loretta Howard Gallery Inc., 13 Civ. 8464 GHW (S.D.N.Y. May 7, 2014).

In June 2011, AXA Art Insurance Corporation (“AXA”) issued an art insurance policy to Loretta Howard Gallery Inc. (“Gallery”) whereby AXA agreed to insure certain property in the Gallery’s possession. The policy included a suit limitation provision which prohibited Gallery from commencing suit against AXA “unless the action is brought within two years after the Gallery first has knowledge of the loss.” The policy defined loss as “accidental loss or damage.” 

In or about September 2011, No Hero Enterprises (“No Hero”) consigned a painting to the Gallery. On September 6, 2011, the painting was badly damaged in transport from the Gallery to another vendor. The Gallery filed a claim with AXA. AXA denied the claim on February 16, 2012 stating that there was no coverage under the policy because of the “inherently dangerous and unlawful method in which [the painting] was transported.” 

In November 2013, No Hero sued the Gallery and AXA in connection with the damage to the painting. On January 10, 2014, the Gallery answered the complaint and also asserted a breach of contract cross-claim against AXA. No Hero subsequently withdrew its claims against AXA and filed an amended complaint. The Gallery then filed a third-party complaint against AXA.

AXA moved to dismiss the third-party complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. In its motion, AXA argued that the Gallery’s claim was time-barred under the policy’s two-year suit limitation provision. It contended that the two-year period began to run when the Gallery first had knowledge of the loss on September 6, 2011. The Gallery argued that the policy’s definition of loss was not sufficiently specific to override the default rule in New York which provides a suit limitation period begins to run when a cause of action accrues and therefore, the limitation period did not begin to run until AXA denied the insurance claim on February 16, 2014.

The District Court denied AXA’s motion holding that the policy’s reference to the date of “loss or damage,” without more, referred to the date of accrual of the cause of action and not the date on which the physical damage occurred. In support of its holding, the Court explained that under New York law, when a policy uses generic language to set a contractual limitation period, the default rule is that the limitation period does not begin at the time of the accident but when the right to bring an action exists. The Court noted that parties can contract out of the default rule by using “exceptionally clear or highly specific language.” Here, the Court found the policy’s definition of loss as “accidental loss or damage” was not a sufficiently clear and unambiguous reference to the accident. Thus, the two-year limitation period in the policy accrued when AXA denied the insurance claim, not when the painting was damaged.

No appeal has been filed the period for filing an appeal expires on June 6, 2014. 

To read more on No Hero Enterprises B.V. v. Loretta Howard Gallery Inc. click here