Second Circuit Rules that Crime Policy’s Suit Limitation Provision Bars Breach of Implied Covenant Claim

In Sportsinsurance.com, Inc. v. The Hanover Insurance Company, Inc., 2022 WL16706941 (2d Cir. Nov. 4, 2022) the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) held that a crime policy’s suit limitation clause barred not only the insured’s breach of contract claim, but also its claims for breach of the implied covenant of good faith and declaratory judgment.

Sportsinsurance.com, Inc. (“Sportsinsurance”) sued its crime insurer, Hanover Insurance Company (“Hanover”), for, among other claims, breach of contract, breach of the implied covenant and declaratory judgment. Hanover allegedly improperly denied coverage for an embezzlement by Sportsinsurance’s former Chief Financial Officer (“CFO”). Hanover filed a motion to dismiss based on the policy’s suit limitation provision, which required Sportsinsurance to bring “any legal action involving loss” within two years “from the date … [it] ‘discovered’ the loss” (the “Suit Limitation Provision”). The complaint alleged that Sportsinsurance discovered the purported loss in January 2016, but failed to file suit against Hanover until more than four years later in March 2020.

The District Court dismissed the breach of contract claim as time-barred, but denied Hanover’s motion to dismiss with respect to the breach of implied covenant and declaratory judgment claims, finding that the Suit Limitation Provision did not apply to those claims. The Second Circuit accepted Hanover’s inter locutory appeal regarding the denial of its motion to dismiss.  

On November 4, 2022, the Second Circuit affirmed the District Court’s dismissal of the breach of contract claim, and reversed the ruling that the Suit Limitation Provision did not bar the breach of implied covenant and declaratory judgment claims. Under New York law, contractual limitation provisions that specify a shorter period to commence a lawsuit than the applicable statute of limitation are enforceable so long as they are reasonable. Courts may construe “generic” language in a limitation clause as “starting the clock” when the right to bring an action accrues, rather than at the time of the occurrence or accident. This “default rule”, however, does not apply where a policy contains “’exceptionally clear language’ that, for example, ‘fixes the limitations period to the date of the accident.’”

Here, the Suit Limitation Provision specified that an action must be brought within two years from the date the insured “discovered” the loss. The policy defined “discovered” to mean “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.” The Second Circuit found that “[t]his is the type of ‘especially clear language’ which displaces the default rule.” Therefore, the policy’s two year contractual limitation period commenced when Sportsinsurance “discovered” the alleged embezzlement in January 2016.

Also, the Second Circuit noted that there is nothing inherently unreasonable about a two year period of limitation. Although “courts have found limitation periods unreasonable if the policy made it effectively impossible for the insured to timely sue”, neither the policy’s other terms nor Hanover’s investigation prevented Sportsinsurance from filing an action within the two year limitation period. Sportsinsurance had a full year after the denial of coverage to bring a legal action against Hanover before the two year limitation period expired, but failed to do so. Therefore, the Suit Limitation Provision was “fair and reasonable and thus enforceable.” 

Next, the Second Circuit examined whether the implied covenant and declaratory judgment claims “involved loss” and were therefore subject to the Suit Limitation Clause. Even accepting Sportsinsurance’s proffered meaning of “loss”, the Second Circuit found that the implied covenant claim would still be time barred. Each of the alleged breaches of the implied covenant, including that Hanover mishandled the claim, delayed payment, and claimed without basis that Sportsinsurance intentionally misrepresented and concealed material facts, “involved” the CFO’s embezzlement, the occurrence for which Sportsinsurance sought coverage. Therefore, the Suit Limitation Provision applied to the breach of contract claim, as well as the implied covenant and declaratory judgment claims, as they all involved the alleged embezzlement and resulting loss. 

Further, the Second Circuit rejected Sportsinsurance’s final effort to evade dismissal by arguing that Hanover waived or was estopped from enforcing the Suit Limitation Provision. Hanover consistently reserved its rights throughout its investigation, and its statement during its investigation that it remained open to consider new information “is not the kind of ‘clear manifestation of intent by [Hanover] to relinquish the protection of the [Suit Limitation Provision]’ necessary to invoke the principle of waiver”, or the “type of ‘conduct [that] lulled [Sportsinsurance] into sleeping on its rights under the insurance contract’” that would support estoppel.   

The Second Circuit’s decision in Sportsinsurance confirms that reasonable contractual limitation provisions in insurance policies are enforceable under New York law. The decision also corrected the District Court’s erroneous ruling that the Suit Limitation Provision applied to the breach of contract claim, but not the breach of the implied covenant of good faith and declaratory judgment claims. 

Edward (Ned) Kirk and Scott Schwartz of the New York office of Clyde & Co US LLP represented Hanover in the coverage action and appeal before the Second Circuit.