Commercial Property and Business Interruption insurance policies customarily include suit limitations clauses to protect the insurer against lawsuits. These clauses may be found buried amid general conditions in the property form or in an endorsement. Their sole purpose is to shorten the otherwise longer statute of limitations and hinder your organization’s ability to challenge your insurance company’s decision not to fully pay your organization’s insured loss. Savvy risk managers, lawyers, and insurance professionals should keep these hidden, sometimes tricky, exclusions top of mind over the summer months as it is the two-year anniversary of the destructive 2017 hurricane season.
1. Suit Limitations Clauses Are Generally Enforceable in Texas, but Puerto Rico and Florida Offer Better Protection for Policyholders
While each U.S. state and territory may apply different rules regarding enforceability of suit limitations clauses, it sometimes comes as an unpleasant surprise to policyholders that most jurisdictions uphold suit limitations clauses. For example, in Texas, suit limitation clauses are enforceable as long as the limitation is not less than two years. If the suit limitations clause is less than two years, the provision is void as a matter of law. Then and only then will a Texas court apply either the longer statutory limitations period for breach of contract (four years from the date of breach) or a two-year contractual limitations clause if the policy contains a “savings clause.”
In Florida, suit limitations clauses are prohibited by statute, however, even if your damaged location was in Florida, you should not assume that Florida law will necessarily apply. Counsel can be helpful in working with your risk management department to determine (i) the correct deadline and (ii) what state’s law will control. Your insurer may argue that Florida law does not apply so that it can attempt to enforce a suit limitations clause. There are still potential risks posed by a suit limitations clause in your insurance policy.
Until recently in Puerto Rico, suit limitations clauses as short as one year were enforced by courts. However, in late 2018, the Puerto Rican legislature retroactively amended the insurance code to allow the informal, extra-judicial tolling of the applicable limitations period through the submission of a written claim. The same law also allowed for appraisal of property losses, which were previously prohibited under Puerto Rican law. The Supreme Court of Puerto Rico recently confirmed that this amendment was retroactively applicable to property damage and business interruption claims from Hurricanes Irma and Maria. Similar to Florida, however, insurers may attempt to circumnavigate favorable Puerto Rican law by seeking to apply the law of a different jurisdiction.
So, while there are potential exceptions, you should treat the suit limitations clause in your insurance policy as an absolute bar to avoid any potential disputes down the line.
2. Calendar the Earliest Possible Suit Limitations Date
While specific policy language can vary significantly depending on your specific policy language, let’s assume your organization’s policy runs two years from the date of loss:
- Hurricane Harvey – August 26, 2019 (Texas and Louisiana)
- Hurricane Irma – September 9, 2019 (Barbuda, Saint Martin, and Virgin Gorda); September 10, 2019 (Florida, Georgia and South Carolina)
- Hurricane Maria – September 19, 2019 (Windward Islands, Dominicana and Guadeloupe); September 20, 2019 (Virgin Island, Puerto Rico, and the Dominican Republic); September 26, 2019 (North Carolina)
3. Use a Tolling Agreement to Protect Your Rights
While suit limitations clauses can be a potential bar, filing a lawsuit in advance of a pending limitations deadline is typically unnecessary. In many jurisdictions, including those affected by Harvey, Irma and Maria, by agreement of both parties they may contractually agree to “toll,” or pause, the applicable limitations period to allow for further negotiations and adjustment.
That said, there are multiple factors to consider before entering into a tolling agreement: (1) length of tolling period; (2) renewal process for extending tolling period; (3) process for terminating tolling agreement if negotiations fail; and (4) which claims will be subject to the tolling agreement (i.e., breach of contract claims only or bad faith claims as well). Additionally, depending on where your organization is located, counsel can be engaged to assist with the analysis of specific laws or procedures that impact the terms and conditions of your tolling agreement. Finally, even in cases where you believe that a suit limitations clause is not an issue, either because the provision may be unenforceable or because of an informal tolling process, seeking a written tolling agreement is preferable to mitigate the risk that a court will apply the law of a different, less favorable jurisdiction.
Suit limitations clauses are a trap for the unwary to limit or bar your organization’s insurance recovery, but by being aware of applicable laws, calendaring pending limitations dates, and protecting your organization’s rights through tolling agreements, policyholders can mitigate the impact of these potentially troublesome provisions.