Hillhaven Properties Ltd. v. Sellen Const. Co., Inc.

• Decision Date: 26 November 1997
• Docket Number: No. 64669-4
• Citation: Hillhaven Properties Ltd. v. Sellen Const. Co., Inc., 948 P.2d 796, 133 Wn.2d 751 (Wash. 1997)
• Court: Washington Supreme Court
• Parties: HILLHAVEN PROPERTIES LIMITED, Respondent, v. SELLEN CONSTRUCTION COMPANY, INCORPORATED, Defendant, Aetna Insurance Company, Petitioner.

Page 751

133 Wn.2d 751

948 P.2d 796

HILLHAVEN PROPERTIES LIMITED, Respondent, v. SELLEN CONSTRUCTION COMPANY, INCORPORATED, Defendant Aetna Insurance Company, Petitioner.

No. 64669-4.

Supreme Court of Washington En Banc.

Argued June 17, 1997.

Decided Nov. 26, 1997.

Peery, Hiscock, Pierson, Kingman & Peabody, Michael E. Ricketts, William E. Fitzharris, Jr., Seattle, amicus curiae on behalf of Insurance Environmental Litigation.

William B. Moore, Seattle, for Sellen Const. Co.

Bullivant, Houser, Bailey, Pendergrass & Hoffman, R. Daniel Lindahl, Portland, OR, for Petitioner.

Oles, Morrison & Rinker, Seth W. Morrison, Seattle, for Respondent.

SMITH, Justice.

Petitioner Aetna Insurance Company seeks review of a Court of Appeals decision which reversed summary judgment granted by the Pierce County Superior Court in Aetna's favor in an action by Hillhaven Properties, Limited for insurance coverage for water seepage and leakage damage around windows in the Narrows Glen retirement facility. We granted review. We affirm.

QUESTION PRESENTED

The question presented in this case is whether coverage is provided under an insurance policy acquired from a replacement insurer under a master policy after damage to a structure from known water seepage and leakage or whether policy coverage is precluded under the "known loss doctrine."

STATEMENT OF FACTS

The Narrows Glen retirement community, located at 8201 Sixth Avenue, Tacoma, Washington, ¹ was built for Hillhaven Properties Limited (Hillhaven) by Sellen Construction Company, Incorporated (Sellen). Narrows Glen is a three-story, wood frame structure. It consists of 130 apartments, 10 assisted living units and ancillary facilities. ² The administrative and common area is located in the center of the facility with residential wings radiating from it. ³ Narrows Glen was insured by Hartford Fire Insurance Company under a master policy for Hillhaven Properties from November 2, 1987 until June 1, 1989. ⁴ Aetna Insurance Company (Aetna) replaced Hartford as insurer on June 1, 1989. ⁵

Narrows Glen started renting its units in November 1987. ⁶ During the winter of 1987-88, water seepage and stains developed around some of the windows. This was attended to by in-house maintenance staff and Sellen staff. The Sellen staff caulked the outside of the windows. ⁷ Hillhaven was not particularly concerned about the water seepage because the staff reasoned that problems such as these are not unexpected in a new building. ⁸

The water seepage and window damage problem reoccurred in the winter of 1988-89 in five or six apartments along one wing of the facility. ⁹ The maintenance supervisor, Chris Higgins, at the request of the facility's executive director, wrote a letter to Sellen identifying the problem and requesting that it be corrected. ¹⁰ The letter stated in part:

This letter is to inform you of the present situation here at the Narrows Glen Retirement Community regarding the critical subject and immediate problem of interior water damage at many of the apartment windows here at the facility. Numerous resident complaints of water seepage and drippage accompanied by obvious related physical damage to window interior perimeters and ledges have presented a significant problem, one that requires an immediate thorough review resulting in a definitive course of corrective action.

After receipt of the letter, Sellen made additional repairs and the problem seemed to have been resolved. The Aetna policy went into effect on June 1, 1989, after those repairs had been completed.

There was more water seepage around the windows during the winter of 1989-90. Hillhaven then hired an independent contractor, W.G. Clark Construction, to investigate the problem. ¹¹ Clark Construction submitted its report to Hillhaven on November 30, 1989, in which it stated the vapor barrier had been improperly installed with the result that water was allowed to seep into the walls between the window frames and casements. This resulted in water saturation of the siding, wood framing and gypsum sheathing. Hillhaven notified Aetna Insurance Company and its predecessor, Hartford Fire Insurance Company, of this by letter dated December 15, 1989. ¹²

In the spring of 1990 Hillhaven implemented design corrections recommended by W.G. Clark for Narrows Glen. However, it was not successful in preventing additional water problems during the fall of 1990. A design company, Schemmer Associates, Inc., was then hired to perform additional tests. It concluded that the vapor barriers had become porous on installation and caused the leakage around the windows. ¹³ It became necessary the following summer of 1991 to rebuild a portion of Narrows Glen at a cost of over $1,000,000.00. ¹⁴

The sequence of developments in this matter is summarized as follows:

November 2,    Hartford Fire Insurance Company became insurer for Hillhaven
                  1987           Properties.
                November/      Hillhaven Properties substantially completed construction for
                  December       Narrows Glen.
                  1987
                Winter         Water stains noticed at Narrows Glen, but considered only for
                  1987"88        "punch list" repair.
                Winter         Water stains reported in 5 or 6 apartments at Narrows Glen.
                  1988"89
                January 16,    Letter from Narrows Glen to Sellen Construction regarding
                  1989           problem.
                June 1, 1989   Aetna Insurance Company became insurer for Hillhaven Properties,
                                 replacing Hartford Fire Insurance Company.
                November 30,   W.G. Clark Construction Company reported result of its
                  1989           investigation.
                December 15,   Notification letter from Hillhaven to Hartford Insurance Company
                  1989           and Aetna Insurance Company.
                Spring 1990    Narrows Glen repaired window damage and implemented design
                                 correction.
                Fall 1990      Water seepage and window leakage problem became worse.
                May 9, 1991    Schemmer Associates, Inc. reported result of tests concerning
                                 problem and recommended solution.
                Summer 1991    Major repairs and rebuilding completed at Narrows Glen.
                

On October 31, 1991, Hillhaven brought action for damages in the Pierce County Superior Court against Sellen, E.I. DuPont de Nemours & Company, Incorporated, Acorn Building Components/West, Incorporated, Hoffman Partnership, Incorporated, Safeco Insurance Company of America as performance bond surety for Sellen, and Aetna. ¹⁵ Aetna denied coverage and moved for summary judgment which was granted by the trial court on July 23, 1993. ¹⁶ On June 9, 1994, Hillhaven settled with all parties except Aetna. ¹⁷

This case was decided on a motion for summary judgment by the trial court, the Honorable Terry D. Sebring. In July 1994, Hillhaven appealed to the Court of Appeals, Division II, which concluded that "[b]ased on their testimony, a fact finder could find that Hillhaven did not know of existing damage on June 1, 1989, [the effective date of the Aetna policy] and that Hillhaven did not know, or have reason to know, of the likelihood of future damage." ¹⁸ The Court of Appeals, taking the facts in the light most favorable to Hillhaven, reversed and remanded the case to the trial court after finding it "involve[d] issues of material fact, and ... the trial court erred in granting summary judgment." ¹⁹

Aetna filed a petition for review with this Court on October 16, 1996. We granted it on March 5, 1997.

DISCUSSION

STANDARD OF REVIEW

"[S]ummary judgment may not be granted unless there is no genuine issue as to material facts." ²⁰ "Where there are no relevant facts in dispute, the applicable standard of review is de novo review of lower court decisions regarding insurance coverage." ²¹ The Court must consider the facts and all reasonable inferences from those facts in the light most favorable to the nonmoving party. ²² The motion for summary judgment will only be granted if reasonable persons could reach only one conclusion from all the evidence. ²³

KNOWN LOSS DOCTRINE

Petitioner Aetna claims the Court of Appeals incorrectly applied the "known loss" doctrine. Aetna asserts the court erred by focusing on whether the property owner knew or expected there would be continued damage after Aetna's policy took effect. It asserts the dispositive issue should have been whether there was a loss prior to the effective date of the policy instead of whether the parties had expected future damage.

The "known loss" doctrine is also referred to as the "loss-in-progress" doctrine. ²⁴ We recognized the known loss doctrine in third party cases in Public Utility District 1 v. International Insurance Company. ²⁵ In that case this Court stated the "known risk defense is premised on the principle that an insured cannot collect on an insurance claim for a loss that the insured subjectively knew would occur at the time the insurance was purchased." ²⁶ The Court then stated, "[g]enerally, courts applying the known risk principle (also referred to as the known loss principle) must determine whether a particular occurrence was expected by the insured before the insurance coverage was obtained. This is a question of fact." ²⁷ In that case the Court found that the trial court did not commit error in allowing a jury instruction which stated the " 'known risk' principle only applies if you find that the insureds knew that there was a substantial probability that they would be sued...." ²⁸

Petitioner Aetna, however, notes this Court has never addressed the known loss doctrine in the context of first party property insurance, but has addressed it only in a third party context. Respondent Hillhaven argues that in Washington there is no difference because in PUD 1 this Court did not make a distinction between first party and third party insurance cases on the issue of expectancy.

Courts have noted the element of risk is fundamental to insurance coverage. ²⁹ In discussing the difference between first parties and third parties, this Court has stated "[a] third party...