Private Limitation of Action Provision Enforceable

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The Hanover Insurance Company, Inc. (“Hanover”) and Sportsinsurance.com, Inc. (“Sportsinsurance”) each appealed from the District Court’s order granting in part and denying in part Hanover’s motion to dismiss Sportsinsurance’s complaint because it failed to sue within two years after learning of the fact that it was the victim of an embezzlement.

In Sportsinsurance.com, Inc. v. The Hanover Insurance Company, Inc., Nos. 21-1967-cv (L), 21-2063-cv (XAP), United States Court of Appeals, Second Circuit (November 4, 2022) Sportsinsurance discovered that Kenza El Baroudi (“Baroudi”), its Chief Financial Officer, was embezzling from the company. Sportsinsurance believed Baroudi’s embezzlement constituted a loss under an insurance policy (“Policy”) it held with Hanover, and it accordingly submitted a claim under the Policy.

Hanover denied the claim. Sportsinsurance did not immediately sue Hanover under the Policy. Instead, Sportsinsurance pursued a legal action against Baroudi in Quebec, Canada. In July 2019, the Canadian court found that Baroudi had “wrongfully misappropriated” money from Sportsinsurance. Armed with this judgment Sportsinsurance submitted a second claim to Hanover. Hanover once again denied it. At that point, in March 2020, Sportsinsurance sued Hanover. Sportsinsurance alleged that Hanover breached both the express terms of the Policy and the implied covenant of good faith and fair dealing.

The District Court dismissed Sportsinsurance’s breach of contract claim as time-barred by the Policy’s contractual limitations provision (“Limitations Provision”), which required Sportsinsurance to bring any action “involving loss” within two years “from the date . . . [it] ‘discovered’ the loss.” The District Court found that, among other things, the implied covenant claim was not subject to the Limitations Provision because it did not “involve loss.”

THE ISSUES

Concluding it has jurisdiction to review the breach of contract claim the Second Circuit found the question became whether it would exercise its discretion to do so and concluded that addressing Sportsinsurance’s cross-appeal will promote judicial and litigant efficiency without prejudicing either party.

Next issue, the question of whether the breach of contract claim is time-barred and thus subject to dismissal. Because an agreement which modifies the Statute of Limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable. Language in an insurance policy’s contractual limitations period is construed as starting the clock not at the time of the accident itself but only once ‘the right to bring an action exists. That default rule gives way if a policy contains “exceptionally clear language” that, for example, “fixes the limitations period to the date of the accident.”

Importantly, and in relevant part, the Policy defines “discovered” as “the time when [Sportsinsurance] first become[s] aware of facts which would cause a reasonable person to assume that a loss of a type covered by this policy has been or will be incurred.” That specific definition fixes the Limitations Provision’s commencement to when Sportsinsurance reasonably knew it had or would suffer a loss. This is the type of “especially clear language” which displaces the default rule. Therefore, the contractual limitations period commenced in January 2016 when Sportsinsurance “discovered” Baroudi’s “frauds and thefts.”

The Second Circuit concluded that this Limitations Provision is not unreasonable nor is there is nothing inherently unreasonable about a two-year period of limitation.

Sportsinsurance argued that the Limitations Provision here is unreasonable because it requires that Sportsinsurance (1) “compl[y] with the terms” of the Policy and (2) not bring suit until “90 days after it filed its proof of loss,” which it had to file within 120 days of discovering the loss. These requirements did not prevent Sportsinsurance from timely suing. Sportsinsurance “discovered” the loss in January 2016. By January 2017, Hanover had investigated and “denied” Sportsinsurance’s claim. Sportsinsurance had a full year to bring a legal action against Hanover. It did not.  Since the Limitations Provision is fair and reasonable it is enforceable.

In a final effort to evade the Limitations Provision, Sportsinsurance argued that Hanover is either estopped from enforcing or waived the Limitations Provision.  The bare allegation that Hanover stated it was open to additional information cannot carry Sportsinsurance’s estoppel or waiver arguments to forestall affirmance of the District Court’s order dismissing the breach of contract claim.

The first two breaches “involve” Baroudi’s embezzlement because the embezzlement is the basis for the claim under the Policy. The implied covenant claim is thus time-barred. The Second Circuit accordingly reversed and dismissed the claim that Hanover breached the implied covenant of good faith and fair dealing.

The declaratory judgment action was dismissed as time-barred because it involves “loss” as Sportsinsurance defined that term.

ZALMA OPINION

Almost ever policy of insurance contains a private limitation of action provision requiring suit to be filed against the insurer within one or two years of discovering the claim. Some states, like California, by court opinion and regulation require that the private limitation of suit provision start running when the claim is denied rather than when it is discovered. In this case, it didn’t matter which, since the plaintiff Sportsinsurance waited more than two years from the denial to file suit proving that he who sits on his rights will lose.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected] and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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