Article

Prior History: Hahn Automotive Warehouse, Inc. v. Am. Zurich Ins. Co., 916 N.Y.S.2d 678 (N.Y. App. Div. 2011) [USA], noted at 2012 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW AND PRACTICE 425.

Note: To obtain insurance, auto parts distributor Hahn Automotive Warehouse, Inc. (Insurer/Beneficiary) provided a USD 400,000 standby LC in favor of American Zurich Insurance Company and Zurich American Insurance Company (Insurer/Beneficiary). When an internal audit revealed that no bill had been sent for deductibles, loss adjustments, or retrospective premium adjustments on fees, Insurer/Beneficiary sent three invoices to Insurer/Beneficiary for a total of USD 1,947,003.

When Insurer/Beneficiary failed to pay, Insurer/Beneficiary drew on the standby and was paid. Insurer/Beneficiary then sued Insurer/Beneficiary for a declaratory judgment that the debts arising more than six years earlier were time barred by the limitations statute and for damages due to wrongful drawing. Insurer/Beneficiary counterclaimed for breach of contract and both parties moved for summary judgment.

The New York Supreme Court granted partial summary judgment to Insurer/Beneficiary on the limitation clause and ruled that Insurer/Beneficiary had properly applied the standby proceeds to the outstanding bills, but did not grant summary judgment on the motions to dismiss those claims. On appeal, the Appellate Decision modified the decision, agreeing that the standby was properly used and therefore dismissing the claims relating to improper use of the LC, but affirming the decision on the limitations issue. Insurer/Beneficiary appealed only on the limitations issue, claiming that the limitations period did not begin to run until the invoices were sent, making all the claims timely. The New York Court of Appeals (the Court) affirmed.

Insurer/Beneficiary argued that the limitations period did not begin to run until it demanded payment because the cause of action could not have accrued until Insurer/Beneficiary refused to pay, which could not occur until after payment was demanded. The Court noted that the limitations period begins when the cause of action accrues which occurred when Insurer/Beneficiary first had the right to demand payment, absent unambiguous language expressing a different starting time. Otherwise, Insurer/Beneficiary could postpone its demand for payment indefinitely, effectively nullifying the statute of limitations

Read, J., dissented, arguing that the position adopted by the majority results in "an illogical situation whereby a claim for breach of contract accrues before the insured knows whether it owes the insurer any money at all, much less how much. In other words, the claim for breach accrues before any breach can possibly occur." She believed that the nature of a complex insurance contract situation, wherein the payment due is continually adjusted over a time period and the insured is unable to know its liability until after being billed by the insurer, conditions payment upon demand. Further, she believes such a precedent "is unlikely to 'encourage parties who are owed money to refrain from sending out bills in the hope of prolonging the statute of limitations.'"

[JEB/dgs/mlm]

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