An unresolved question on New York insurance law has been sent to the New York Court of Appeals.

Puzzling over the interplay of two clauses common to insurance contracts for the recovery of replacement costs for a damaged building, the U.S. Court of Appeals for the Second Circuit certified a question for decision to the state’s highest court.

The issue arose in Executive Plaza v. Peerless Insurance, 12-1470-cv, an Eastern District lawsuit over insurance coverage brought after Peerless Insurance Company refused to pay the replacement costs of a building on Austin Boulevard in Island Park, Nassau County, that was destroyed by fire on Feb. 23, 2007.

The $1 million insurance contract between the parties had two requirements at issue in the suit—one stating that any lawsuit for replacement costs be brought within two years and another stating that Executive Plaza LLC, when seeking replacement costs, had to replace the damaged property before bringing suit and complete the replacement work "as soon as reasonably possible."

Within days of the fire, Executive Plaza hired an architect and contractor to rebuild from scratch. By July 2007, Peerless had paid Executive the cash value of the property, $757,813, less certain adjustments.

Executive’s problem was that the zoning laws had changed, and it needed a variance and other consent forms from local government. A final building permit was not granted until November 2008, 17 months later.

Executive filed suit in Nassau County Supreme Court on Feb. 23, 2009, just inside the two-year window, seeking the remaining $242,087 left on the policy.

The case was removed to Eastern District court, but because Executive had not completed the rebuilding, Judge Leonard Wexler (See Profile) dismissed the case as unripe.

Executive did not "substantially replace" the building until October 2010. It then filed suit again in Nassau County and the case was again removed to federal court.

But this time, Judge Joanna Seybert (See Profile) dismissed the suit for being brought after the two-year limitations period.

Complaining that it was between a rock and a hard place, Executive appealed to the Second Circuit, where Judges Ralph Winter (See Profile), Denny Chin (See Profile) and Christopher Droney (See Profile) heard oral arguments on Feb. 20, 2013.

"What happens to an insured property that cannot be reasonably replaced within two years?" Chin asked in the panel’s opinion.

Chin said the New York Court of Appeals has addressed the issue of the limitations period alone "but never the replacement cost provision."

He added, "More importantly, however, no controlling precedent interprets the suit limitations clause in light of the replacement cost provision" and "the cases available provide little predictive value as to how the Court of Appeals would resolve this issue."

Chin said the questions certified also implicated important matters of state law.

"Moreover, the policy here insures against fire-related losses, and the legislature’s codification of a standard fire insurance policy—creating a floor for fire insurance coverage throughout New York State—underscores its concern for coverage in this field," he said.

So, if an insurance policy contains those two clauses, the circuit asks the state high court, "is an insured covered for replacement costs if the insured property cannot reasonably be replaced within two years?"

Not including this case, the New York Court of Appeals has accepted questions in four cases from the Second Circuit this year. It accepted four last year.

David Tolchin of Jaroslawicz & Jaros argued for Executive Plaza.

David Jaroslawicz said the language in the contract as interpreted by the insurance company was "Kafkaesque."

"These are relatively common clauses," Jaroslawicz said. "But they’re not part of the Old Testament or the New Testament—they could be written in a much more plain language if they want to make it simple for people."

He added, "If you bring suit within two years but before you can replace the building, they say you’re too early—if it takes longer than two years because of zoning permits they say you’re too late," he said. "The insurance is illusory. It ought to be made clearer so maybe you get a different policy."

Scott Storm of Mura & Storm in Buffalo argued for Peerless Insurance.