By Chris McKibbin and Devra Charney

On November 4, 2022, the Second Circuit Court of Appeals released its decision in Sportsinsurance.com, Inc. v. The Hanover Insurance Company, Inc.  The Court applied a commercial crime policy’s suit limitation period in finding that an insured’s coverage action was not timely.  Critically, the Court also rejected the insured’s waiver and estoppel arguments which were premised on alleged communications by the insurer.

The Facts

In January 2016, Sportsinsurance.com, Inc. (“Sportsinsurance”) discovered that its Chief Financial Officer, Baroudi, was embezzling from the company.  Sportsinsurance believed that Baroudi’s embezzlement constituted a loss under the commercial crime policy that it held with Hanover and submitted a claim under the policy.  In January 2017, Hanover determined that the claim was not covered.  Sportsinsurance did not sue Hanover under the policy.  Instead, Sportsinsurance pursued a legal action against Baroudi in the Province of Québec.  In July 2019, the Québec court found that Baroudi had wrongfully misappropriated money from Sportsinsurance (El Baroudi c. Di Pernon, 2019 QCCS 3190).  With that judgment in hand, Sportsinsurance submitted a second claim to Hanover in October 2019.  Hanover again concluded that the claim was not covered.  In March 2020, Sportsinsurance sued Hanover.

The Suit Limitation Provision

Hanover moved to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted (analogous to a rule 21.01(1)(b) motion in Ontario).  In Hanover’s view, Sportsinsurance had failed to comply with the suit limitation provision in the policy, which provided that:

You may not bring any legal action against us involving loss:

(1)       Unless you have complied with all the terms of this policy;

(2)       Until 90 days after you have filed proof of loss with us; and

(3)       Unless brought within 2 years from the date you ‘discovered’ the loss.

The Policy defined “discovered” as “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 suit limitation provision has been a standard element in crime and fidelity coverages for decades and has been repeatedly enforced in both the United States and Canada.  In Guarantee Co. of North America v. Gordon Capital Corp., a 1999 decision of the Supreme Court of Canada, the Court enforced a 24-month suit limitation period which was triggered by the insured’s discovery of “facts which would cause a reasonable person to assume that a loss of a type covered by this bond has been or will be incurred”.

The Decision

Relying on Second Circuit precedent, the Court observed that the language of the Hanover suit limitation period was exactly the type of “especially clear language” which displaces the ordinary rule in other types of insurance that a suit limitation period is only triggered once a right to bring suit exists.

With that in mind, the Second Circuit had no difficulty concluding that “[t]he contractual limitations period commenced in January 2016 when Sportsinsurance ‘discovered’ Baroudi’s frauds and thefts.”  The suit limitation period expired in January 2018, over two years prior to the commencement of the action.

Sportsinsurance had one final argument.  It alleged that Hanover had communicated during the claim investigation that it “remained available to consider any additional information should new information come to light”.  This is a standard communication which is generally intended to evince an insurer’s good-faith willingness to be receptive to new evidence.  However, Sportsinsurance sought to twist this alleged statement into a waiver of, or estoppel of reliance on, the suit limitation period.

The Second Circuit rejected this, holding that:

In a final effort to evade the Limitations Provision, Sportsinsurance argues that Hanover is either estopped from enforcing or waived the Limitations Provision.  The only supporting allegation Sportsinsurance offers is that “[t]hroughout its investigation, Hanover claimed that it remained available to consider any additional information should new information come to light.”  This is not the kind of “clear manifestation of intent by [Hanover] to relinquish the protection of the contractual limitations period” necessary to invoke the principle of waiver.  It is also not the type of “conduct [that] lulled [Sportsinsurance] into sleeping on its rights under the insurance contract” and thus make it possible for Sportsinsurance to invoke estoppel.  The bare allegation that Hanover stated it was open to additional information cannot carry Sportsinsurance’s estoppel or waiver arguments to forestall affirmance of the District Court’s order dismissing the breach of contract claim. 

The Second Circuit affirmed the dismissal of Sportsinsurance’s coverage action.

Conclusion

Sportsinsurance.com provides another example of a Court applying the suit limitation period in accordance with its terms.  In addition to the myriad other reasons why accurately establishing the date of discovery is critical to a claim investigation, fidelity claims professionals should be mindful of the suit limitation period once the date of discovery is determined.  In Sportsinsurance.com, as in Gordon Capital, the provision afforded a complete defence to the insurer.

In our view, the Second Circuit also correctly rejected the waiver and estoppel arguments.  While those arguments were rightfully considered spurious on the facts of the case, the Court’s reasoning has broader implications, insofar as insurers should be encouraged to convey to their insureds that they are receptive to new evidence and information.  Insurers should not have the disincentive of possible adverse future findings hanging over them resulting from comments which are intended to convey the insurer’s receptiveness to new evidence.

Sportsinsurance.com, Inc. v. The Hanover Insurance Company, Inc., 2022 WL 16706941 (2d Cir.)