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March 8, 2023

Second Circuit Dismisses Bad Faith Claim as Time-Barred "Loss" Under Property Insurance Policy

Property insurance policies generally include a suit limitations provision, which shortens the time in which an insured can bring a lawsuit against the insurer for a claim under the policy. Typically, these provisions shorten the period to one or two years, running from the date of the loss at issue.

In, Inc. v. The Hanover Insurance Company, Inc., a coverage dispute arising from an embezzlement loss, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a breach of contract claim as time-barred under a two-year suit limitations provision in the subject insurance policy. Notably, in a reversal, the court also dismissed the insured’s accompanying bad faith claim as time-barred because it involved the same “loss” as defined in the policy.

In January 2016, the insured discovered that one of its employees was embezzling from the company and submitted a claim to its property insurer. In January 2017, the insurer denied the claim on the basis that it was not a covered loss and because the insured misrepresented a number of material facts and did not cooperate with the investigation of the claim. Instead of suing the insurer, the insured initially pursued legal action against the employee in a Canadian court. In July 2019, the Canadian court determined the employee had “wrongfully misappropriated” money from the insured. With that ruling in hand, the insured submitted a second claim to the insurer in October 2019. The insurer once again denied the claim on the same grounds. Thereafter, the insured sued the insurer, alleging the insurer breached the terms of the policy and the implied covenant of good faith and fair dealing. 

The US District Court for the Northern District of New York dismissed the breach of contract claim as time-barred by the policy’s suit limitations provision, which required the insured to bring any action “involving loss” within two years “from the date . . . [it] ‘discovered’ the loss.” The district court, however, denied the insurer’s motion to dismiss the bad faith claim, holding that it was not subject to the limitations period because it did not “involve loss” (as defined in the policy).

On appeal, the Second Circuit affirmed the dismissal of the breach of contract claim (consistent with legal precedent) but reversed and also dismissed the bad faith claim as time-barred. The Second Circuit concluded that the two-year limitations provision in the policy was triggered when the insured “became aware” of the potential loss, which was in 2016. In reversing and dismissing the bad faith claim, the Second Circuit explained that it was time-barred because it also “involves loss.” Thus, the insured’s two-year period to sue expired in 2018. 

This decision is a reminder to litigants involved in insurance coverage disputes to fully review the applicable insurance policy and be aware of any applicable suit limitations provisions. Depending on the definition of “loss” in a particular policy, these provisions could bar a claim against the insurer, regardless of the legal theory being asserted, such as bad faith.

If you have any questions regarding the content of this alert, please contact Nick Constantino, associate, at; Tony Piazza, Insurance Coverage & Regulation Practice Area chair, at; or another member of the firm’s Insurance Coverage & Regulation Practice Area.


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