Note: To assure payment for providing claim services for self-insured automobile physical damage claims, Hahn Automotive Warehouse, Inc. (Supplier), an auto parts supplier, obtained a standby LC in the amount of US$400,000 in favor of American Zurich Insurance Co. and Zurich American Insurance Co. (Servicing Companies). The insurance policies stated that Supplier would pay in advance the estimated cost of each policy, and at the expiration of each policy term Servicing Companies would retrospectively adjust the policy cost and demand payment. Servicing Companies failed to regularly adjust Supplier's past policies and demand payment, but six years after the expiration of Supplier's policies, Servicing Companies demanded payment of US$1.6 million. When Supplier refused to pay, Servicing Companies drew on the standby and was paid.

Supplier/Applicant sued, seeking a determination that retrospectively-adjusted policy demands were time-barred by the statute of limitations, and thus, Applicant had no duty to pay those bills. The trial court, Fisher, J., granted Applicant's motion for summary judgment, ruling that the recovery of the debts were time-barred, but also granted Beneficiaries' motion determining that Beneficiaries were entitled to satisfy Supplier/Applicant's debts from the standby, notwithstanding the limitation. On appeal, the Supreme Court of New York, Appellate Division, Smith, J.P., Carni, Sconiers, and Gorski, JJ., affirmed.

The appellate justices found that although Supplier/Applicant's debts were time-barred by the statute of limitations, this fact only suspended Beneficiaries' legal remedy but not their underlying right to recover the Servicing Companies' debts. Therefore, the judges concluded that Servicing Companies/Beneficiaries were entitled to satisfy Supplier/Applicant's debts from the standby. Peradotto, J., dissented, urging that the recovery of the debts was not time-barred because the statute of limitations did not begin running until Servicing Companies demanded payment of the retrospectively-adjusted policies.


Williams Serv. Group, LLC v. Nat'l Union Fire Ins. Co., 2011 U.S. Dist. LEXIS 65828 (N.D. Ga. June 20, 2011) [U.S.A.], noted at 2012 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW AND PRACTICE, at 550) involved a similar factual situation and the beneficiary cited Hahn for the proposition that it should not be barred on the letter of credit even if barred by the statute of limitations on the insurance claim. The Williams Judge rejected this analogy, distinguishing Hahn on the basis that the LC permitted drawing for "any debts".

This attempted distinction is not persuasive since the only debt on which the LC claim was based in Williams was that barred by the statute of limitations.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.