Panorama Village Condominium Owners Ass'n Board of Directors v. Allstate Insurance

Sanders, J.

— This appeal presents two issues: (1) In a case of progressive “hidden decay” which risks direct physical loss involving the collapse of an insured building, at what point is an insured’s suit against an insurer barred by a policy provision which limits such suits to those commenced “within one year after a loss occurs,” and (2) When a plaintiff is entitled to an award of reasonable attorney fees pursuant to Olympic Steamship,¹ are costs limited to those expenses enumerated in the cost recovery statute?

We construe this insurance contract to mean exactly what it says. Where a policy protects against risk of direct physical loss from hidden decay and requires the insured to bring suit within one year after a loss occurs, the date of loss is the earlier of either (1) the date of actual collapse or (2) the date when the decay which poses the risk of collapse is no longer obscured from view. We also conclude an award of reasonable attorney fees made pursuant to Olympic Steamship necessarily includes all expenses incurred to establish coverage under an insurance policy and is not limited to those expenses enumerated as recoverable statutory costs in RCW 4.84.010. We therefore reverse the Court of Appeals and reinstate the trial court’s judgment in favor of Panorama Village.

Facts

Panorama Village is a four building condominium complex consisting of 54 units located in Redmond, Washington. The buildings were all constructed at the same time during the late 1970s. Throughout its existence the property has demonstrated a history of maintenance problems. During late 1995 and early 1996 Panorama experienced an increase in maintenance problem reports.

In May 1996 a team of investigators headed by architect Norman Sandler conducted a walk-through investigation at the Panorama Village complex. Sandler was unable to determine on the basis of the walk-through the presence of hidden decay. Consequently he recommended a program of selective demolition be conducted later that summer.

This selective demolition required the team to remove exterior siding from the complex. With the siding removed, Sandler was able to examine the structural support of the building which he had been unable to see during the walk-through investigation. Sandler then determined the complex was at risk of collapse due to dry rot.

On July 3,1996, Panorama submitted a claim to Allstate Insurance Company for coverage under its policy. Allstate did not pay the claim. Relevant provisions of the Allstate policy provide as follows:

Collapse — Parts One and Two

We will pay for risk of direct physical loss involving collapse of a covered building or any part of a covered building caused only by one or more of the following:

....

b. hidden decay;

Clerk’s Papers (CP) at 821.

Losses Covered Under Coverage A.

This policy insures your covered property for loss or damage resulting from direct physical loss, except for those Losses We Do Not Cover listed below.

CP at 825.

12. Legal Action Against Us

Persons insured agree not to take any legal action against us in connection with your policy unless you have first complied with all of its terms. Persons insured also agree to bring any action against us that relates to Coverage A within one year after a loss occurs.

CP at 855.

Panorama filed suit on August 5,1996, one month after it reported its loss to Allstate. Allstate defended on a number of grounds, raising the one-year limitation of suit clause as an affirmative defense.

The trial court rendered declaratory judgment that:

1. Plaintiff’s property is at risk of direct physical loss involving collapse.

2. The predominant cause of the risk of collapse at plaintiff’s property is decay.

3. The decay that is the predominant cause of the risk of collapse at plaintiff’s property is, as a matter of law, “hidden.”

This relief disposes of Allstate’s Second, Third, and Fifth Affirmative defenses as they relate to the risk of collapse claim. Those defenses are therefore dismissed as to plaintiff’s risk of collapse claim.

CP at 1944-45 (footnotes omitted). Allstate’s 10th affirmative defense, the one-year suit limitation clause, was also dismissed by Judge Richard D. Eadie on summary judgment.

The parties then reached a partial settlement. The stipulation reflects an agreement that the only matters left to be resolved at trial involved the scope of repair, relocation costs, and attorney fees.

A bench trial proceeded on these issues. The court ruled in favor of Panorama and ordered Allstate to fund the repair of Panorama’s property. The court also awarded reasonable attorney fees including expert witness fees to Panorama pursuant to Olympic Steamship.

On appeal Allstate challenged the summary judgment orders and the award of reasonable attorney fees, specifically referencing inclusion of expert witness fees. By published opinion Division One of the Court of Appeals reversed and remanded. Panorama Vill. Condo. Owners Ass’n v. Allstate Ins. Co., 99 Wn. App. 271, 992 P.2d 1047 (2000).

Chief Judge Susan R. Agid of the Court of Appeals found the suit limitation provision of the contract began to run when Panorama knew or reasonably should have known that the loss was occurring and remanded for fact finding. Panorama Vill., 99 Wn. App. at 280-81. The court also held the trial court had erred when it determined the term “ ‘hidden’ ” meant “ ‘out of sight’ ” or “ ‘concealed’ ” rather than “ ‘known.’ ” Id. at 281 (quoting Webster’s Third New International Dictionary 1065 (1966)). Finally the court held while Panorama was properly awarded attorney fees it was error for the trial court to include additional expenses not enumerated in RCW 4.84.010. Id. at 286. Panorama sought, and we granted, review.

Analysis

Issue I — One-year suit limitation clause

The first issue turns on the language of the insurance contract. We recently reiterated the criteria for interpreting an insurance contract in Weyerhaeuser Co. v. Commercial Union Insurance Co.:

“In Washington, insurance polices are construed as contracts. An insurance policy is construed as a whole, with the policy being given a ‘fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.’ If the language is clear and unambiguous, the court must enforce it as written and may not modify it or create ambiguity where none exists. If the clause is ambiguous, however, extrinsic evidence of intent of the parties may be relied upon to resolve the ambiguity. Any ambiguities remaining after examining applicable extrinsic evidence are resolved agaiiistthe drafter-insurer and in favor of the insured. A clause is ambiguous when, on its face, it is fairly susceptible to two different interpretations, both of which arereasonable.”

142 Wn.2d 654, 665-66, 15 P.3d 115 (2000) (quoting Am. Nat’l Fire Ins. Co. v. B&L Trucking & Constr. Co., 134 Wn.2d 413, 427-28, 951 P.2d 250 (1998)).

We recognize we must be guarded in our interpretation of an insurance contract as “[i]t is elementary law, universally accepted, that the courts do not have the power, under the guise of interpretation, to rewrite contracts which the parties have deliberately made for themselves.” Chaffee v. Chaffee, 19 Wn.2d 607, 625, 145 P.2d 244 (1943) (citing 12 Am. Jur. Contracts § 228, at 749).

Panorama asserts the Court of Appeals improperly, in effect, added language to the contract when it applied a “discovery rule” to the suit limitation provision. The suit limitation provision of the policy simply requires the insured to bring suit within one year “after a loss occurs” without reference to discovery or knowledge. The Court of Appeals opinion concludes the policy provisions which limit suit to those commenced within “one year after a loss occurs” mean up to one year after the insured first “knew or should have known of a ‘risk of direct physical loss involving collapse’ caused by hidden decay in a specific part of the complex.” Panorama Vill., 99 Wn. App. at 280 (quoting policy). Finding this to be a fact issue inappropriately resolved by summary judgment the Court of Appeals remanded for fact finding.

As previously noted, however, our construction of an insurance contract must be a “ ‘fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.’ ” Weyerhaeuser Co., 142 Wn.2d at 666 (quoting B&L Trucking & Constr. Co., 134 Wn.2d at 427-28). “ ‘[T]he proper inquiry is not whether a learned judge or scholar can, with study, comprehend the meaning of an insurance contract’ but instead ‘whether the insurance policy contract would be meaningful to the layman ...'." Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wn.2d 869, 881, 784 P.2d 507 (1990) (quoting Dairyland Ins. Co. v. Ward, 83 Wn.2d 353, 358, 517 P.2d 966 (1974)).

Panorama argues a layperson would not read “after a loss occurs” to mean “during a loss” or “after the beginning of a loss” and therefore the provision permits an insured to pursue coverage rights within one year after a loss is over rather than merely within one year after a loss begins. The Court of Appeals rejected Panorama’s argument holding public policy, common sense, and case law all require imposition of a discovery rule.

The Court of Appeals imposed the discovery rule based on its concern that “[a]ny other approach would either penalize unaware insureds or allow those who are aware of the condition to delay in repairing it until the insured property literally collapses.” Panorama Vill., 99 Wn. App. at 279. However this case does not involve an unaware policyholder or a policy provision which might lend itself to that problem. As we recently said in Schwindt v. Commonwealth Insurance Co., 140 Wn.2d 348, 358, 997 P.2d 353 (2000), “[although public policy supports the fair treatment of insurers, this concern is secondary to the protection of insureds and innocent third parties.” Moreover, in Boeing v. Aetna we observed, “Washington courts rarely invoke public policy to override express terms of an insurance policy.” Boeing, 113 Wn.2d at 876 n.1 (citing State Farm Gen. Ins. Co. v. Emerson, 102 Wn.2d 477, 481-83, 687 P.2d 1139 (1984); Progressive Cas. Ins. Co. v. Cameron, 45 Wn. App. 272, 282, 724 P.2d 1096 (1986)).

Here the express terms of the contract require the policyholder to bring an action within one year “after a loss occurs.” The language of the contract must be afforded “ ‘fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.’ ” Weyerhaeuser Co., 142 Wn.2d at 666 (quoting B&L Trucking & Constr. Co., 134 Wn.2d at 427-28). “Undefined terms in an insurance contract must be given their ‘plain, ordinary, and popular’ meaning”; and “To determine the ordinary meaning of an undefined term, our courts look to standard English language dictionaries.” Boeing, 113 Wn.2d at 877.

Webster’s Third New International Dictionary 38 (1981) defines “after,” “adj. ... 1 : NEXT: later in time : SUBSEQUENT, SUCCEEDING.” A plain, ordinary reading of the contract suggests the policyholder must bring an action for coverage within one year subsequent to or succeeding the loss. This must be distinguished from a contract which requires a policyholder to bring a coverage action within 12 months after the inception of a loss. “Inception” is defined as “an act, process, or instance of beginning.” Id. at 1141. An “after inception” suit limitation provision requires the policyholder to bring an action for coverage within a time certain subsequent to the beginning of the loss.

Of the two types of suit limitation provisions the latter clearly provides greater protection to the insurance company where a progressive loss is concerned. But this coverage does not have such a provision. Nor does this coverage expressly impose a discovery rule for purposes of determining when the suit limitation provision begins to run.² The policy simply states the suit must be brought within one year “after a loss occurs.” CP at 855. Under the appellate court’s analysis the claim must be brought within one year after Panorama knew or reasonably should have known of the loss. This approach is inconsistent with policy text.

The Court of Appeals relies heavily on a case from the California appellate courts, Magnolia Square Homeowners Ass’n v. Safeco Insurance Co. of America, 221 Cal. App. 3d 1049, 271 Cal. Rptr. 1 (1990). In Magnolia Square the court observed that the insurance policy in question actually used the words'" ‘-loss occurs’ ” rather than the term “ ‘inception of the loss’ ” as requiredainder California law. Id. at 6 n.3. The court ultimately determinedThe difference was trivial. Id.

Here, the Court of Appeals erroneously attributed importance to Magnolia Square’s characterization of the discrepancy as trivial. The Court of Appeals ignores that California law requires suit limitation provisions to use the “after inception of the loss” language. Cal. Ins. Code § 2071, at 63 (West 1993). However the situation in Washington is quite different. We have no statutorily imposed suit limitation clause for insurance contracts. Thus while Magnolia Square had the luxury of characterizing the difference in the terms used as trivial, we do not.

Here the plain language of the clause at issue provides coverage “for risk of direct physical loss involving collapse of a covered building” by “hidden decay.” CP at 821. Therefore the peril insured against continues to exist until at least the earlier of either (a) actual collapse or (b) the end of “hidden decay.”

“Hidden” is not, however, defined by the policy.

Panorama argues the term means “out of sight” or “concealed.” Allstate argues decay is not “hidden” if Panorama knew or reasonably should have known that the decay existed. The Court of Appeals correctly noted since the term was not defined in the contract, courts “must interpret the plain meaning of the term as ‘it would be understood by the average [person], rather than in a technical sense.’” Panorama Vill., 99 Wn. App. at 281 (quoting Dairyland Ins. Co., 83 Wn.2d at 358) (alterationin original).

The Court of Appeals then properly looked to a standard English language dictionary to determine the plain meaning of the term “hidden.” Upon examination of Webster’s Third New International Dictionary the court found Panorama’s definition (“out of sight”) was the first listed. Id. at 281. Notwithstanding, the court summarily dismissed Panorama’s proposed definition, opining the only reasonable interpretation of the term “hidden” is “ ‘undisclosed’ or ‘unknown.’ ” Id.

Moreover the appellate court asserted the term was not ambiguous and therefore need not be construed in Panorama’s favor. But even Allstate concedes “ ‘hidden’ can mean out of sight, just as it can mean concealed.” Appellant’s Br. at 41-42. As previously noted, a clause is ambiguous if it is subject to two reasonable interpretations. Weyerhaeuser Co., 142 Wn.2d at 666. Panorama’s interpretation is reasonable because it encompasses the plain meaning of the word “hidden” as defined by Webster’s Third New International Dictionary.

While the Court of Appeals correctly articulated the proper rule of contract interpretation it failed to apply it.

“The industry knows how to protect itself and it knows how to write exclusions and conditions.” Boeing, 113 Wn.2d at 887. If Allstate intends “hidden” to mean “unknown,” it must say so. Further, to the extent the term is ambiguous, it must be construed against the insurer. “It is Hornbook law that where a clause in an insurance policy is ambiguous, the meaning and construction most favorable to the insured must be applied .. . .” Dairyland Ins. Co., 83 Wn.2d at 358. See also Hayden v. Mut. of Enumclaw Ins. Co., 141 Wn.2d 55, 64, 1 P.3d 1167 (2000) (“Policy ambiguities, particularly with respect to exclusions, are to be strictly construed against the insurer.”).

Issue II — Expert witness fees as part of reasonable attorney fees

The Court of Appeals found the trial court abused its discretion by awarding necessary expenses of litigation as part of a reasonable attorney fee. Panorama asserts these expenses, which included Westlaw charges and expert witness fees, were necessary to establish coverage. Conversely, Allstate asserts the insured may not recover any “cost” not expressly set out in RCW 4.84.010.

It must be noted that there is a difference between an entitlement to collect “reasonable attorney fees” and an entitlement to collect those statutory “costs” enumerated in RCW 4.84.010. “Costs have historically been very narrowly defined, and RCW 4.84.010 limits cost recovery to a narrow range of expenses such as filing fees, witness fees, and service of process expenses.” Hume v. Am. Disposal Co., 124 Wn.2d 656, 674, 880 P.2d 988 (1994) (citing Nordstrom, Inc. v. Tampourlos, 107 Wn.2d 735, 743, 733 P.2d 208 (1987)). However, the right to recover “reasonable attorney fees” is not so limited by statutory definition. For instance in Louisiana-Pacific Corp. v. Asarco Inc., 131 Wn.2d 587, 604, 934 P.2d 685 (1997) we held the right to recover “reasonable attorney fees and costs” pursuant to RCW 70.105D.080 includes expenses in addition to RCW 4.84.010 costs (“[T]he court is authorized to additionally award other reasonably necessary expenses of litigation based upon such equitable factors as the court determines are appropriate.”). Asarco Inc., 131 Wn.2d at 604. The phrase “reasonable attorney fees” in and of itself supports an award not limited by “costs” as described by RCW 4.84.010. Asarco Inc., 131 Wn.2d at 605 & n.81 (Sanders, J., concurring) (citing Missouri v. Jenkins, 491 U.S. 274, 285, 109 S. Ct. 2463, 105 L. Ed. 2d 229 (1989)) (“holding the term ‘reasonable attorney’s fee’ as used in 42 U.S.C. § 1988 ‘must take into account the work not only of attorneys, but also of secretaries, messengers, librarians, janitors, and others whose labor contributes to the work product for which an attorney bills her client; and it must also take account of other expenses and profit[]’ ” (alteration in original)). See Blair v. Wash. State Univ., 108 Wn.2d 558, 573-74, 740 P.2d 1379 (1987) (holding an award of reasonable attorney fees in civil rights actions is not limited to costs enumerated in RCW 4.84.010 (“The great weight of authority allows a prevailing civil rights plaintiff to recover reasonable expenses incurred.”) (citing Palmigiano v. Garrahy, 707 F.2d 636 (1st Cir. 1983) (reasonable and necessary costs include out-of-pocket expenses for transportation, lodging, parking, food, and telephone expenses))).

Washington follows the American rule “that attorney fees are not recoverable by the prevailing party as costs of litigation unless the recovery of such fees is permitted by contract, statute, or some recognized ground in equity.” McGreevy v. Or. Mut. Ins. Co., 128 Wn.2d 26, 35 n.8, 904 P.2d 731 (1995) (citing Philip A. Talmadge, The Award of Attorneys’ Fees in Civil Litigation in Washington, 16 Gonz. L. Rev. 57 (1980)). Here the parties have no contract regarding the litigation expenses. Nor does Panorama seek to recover costs pursuant to RCW 4.84.010 or any other statute. However reasonable attorney fees and expenses might also be awarded pursuant to “some recognized ground in equity.” McGreevy, 128 Wn.2d at 35 n.8.

We recognized such a ground in Olympic Steamship Co. v. Centennial Insurance Co., 117 Wn.2d 37, 53, 811 P.2d 673 (1991). Olympic Steamship stands for the proposition that, “When insureds are forced to file suit to obtain the benefit of their insurance contract, they are entitled to attorneys’ fees.” Weyerhaeuser Co., 142 Wn.2d at 687 n.15 (quoting Olympic S.S. Co., 117 Wn.2d at 52-53).

The entitlement to necessary expenses as part of a reasonable attorney fee award also fulfills the rationale behind this equitable ground.

“When an insured purchases a contract of insurance, it seeks protection from expenses arising from litigation, not Vexatious, time-consuming, expensive litigation with his insurer.’ ” Olympic S.S. Co., 117 Wn.2d at 52 (quoting Hayseeds, Inc. v. State Farm Fire & Cas., 177 W. Va. 323, 352 S.E.2d 73, 79 (1986)). In light of this verity we have held “when an insurer unsuccessfully contests coverage, it has placed its interests above the insured”; and “[o]ur decision in Olympic Steamship remedies this inequity by requiring that the insured be made whole.” McGreevy, 128 Wn.2d at 39-40.

It is the purpose of the Olympic Steamship exception to make an insured whole when he is forced to bring a lawsuit to obtain the benefit of his bargain with an insurer. To make such plaintiffs whole, “reasonable attorney fees” must, by necessity, contemplate expenses other than merely the hours billed by an attorney. The insured must therefore be compensated for all of the expenses necessary to establish coverage as part of those attorney fees which are reasonable. “Failure to reimburse expenses would often eat up whatever benefits the litigation might produce and additionally impose a backbreaking burden upon the small, but justified, litigants.” Asarco Inc., 131 Wn.2d at 606 (Sanders, J., concurring).

To support its position that reasonable attorney fees should not include expert witness fees Allstate draws our attention to McGreevy, 90 Wn. App. 283. In McGreevy Division Three of the Court of Appeals determined it was proper for a trial judge to exclude expert witness fees when calculating costs. Id. at 296. Reaching its decision Division Three relied on this court’s unanimous decision in Wagner v. Foote, 128 Wn.2d 408, 416-17, 908 P.2d 884 (1996) where we held, “Expert witness fees are not included in the definition of costs or recoverable as costs under RCW 4.84.030, .080 or RCW 2.40.010.” (Footnotes omitted.) True enough, however, as can be seen Wagner sought recovery of statutory “costs,” not “reasonable attorney fees.” To the extent McGreevy can be read to exclude necessary expenses from an award of reasonable attorney fees it is disapproved.

Conclusion

The Court of Appeals erred when it held the suit limitation provision of this insurance policy barred recovery if suit were commenced more than one year after the insured knew of the condition but within one year of its concealment. Panorama timely commenced this suit against Allstate well within one year of the date the “hidden decay” was no longer “hidden,” i.e., concealed from view.

The Court of Appeals also erred when it disallowed expert witness fees and other expenses necessary to establish coverage as part of a reasonable attorney fee allowed by Olympic Steamship. The Court of Appeals is reversed and the trial court is affirmed. Panorama shall recover its costs and reasonable attorney fees on appeal.

Alexander, C.J., and Smith, Johnson, Ireland, Bridge, and Owens, JJ., concur.

1 Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 53, 811 P.2d 673 (1991).

2 Particularly injurious to Allstate’s argument is the fact that the portion of the policy which provides coverage for employee dishonesty DOES contain a discovery provision. CP at 832.