Mold may be getting all the attention at the moment as a major threat to insurers, at least in Texas and California, but another problem has wreaked havoc for homeowners, carriers, and contractors nationwide for several years, now: damages stemming from exterior insulation and finishing systems (EIFS), often referred to as fake or synthetic stucco.
EIFS (pronounced “eefis”) is an exterior cladding system used on both commercial and residential structures. Typically, EIFS consist of an exterior finish, a reinforcing mesh, an insulator such as polystyrene, an adhesive to bind the insulator to the building, and foam board attached to the building itself. These systems have been touted as energy-efficient and flexible enough to accommodate myriad building and home designs.
Problems arise, however, when moisture is retained between the sheathing of a house and the foam board component of the finish system. Over time, the house’s sheathing may rot, and attract termites. And where there’s moisture, there’s always the potential for mold to develop.
According to EIFSFACTS.ORG, a consumer advocacy Web site, about 30 manufacturers in the U.S. make EIFS, including Acrocrete, Dryvit Systems, Omega Products International, Sto, and TEIFS Wall Systems. The EIFS Industry Members Association (EIMA) claims that EIFS make up only two percent of the residential construction market, but notes that sales have been increasing between 12 and 18 percent per year.
EIFS have been in use for quite some time: Developed in Europe to repair buildings after World War II, the finishing system was first used in the U.S. by Dryvit in 1969, for commercial structures. In the 1980s, the residential construction industry began using EIFS, and since its introduction, homeowners from North and South Carolina to Alabama to California and Washington have reported property damage due to moisture. Homeowners in states with humid climates have been most prone to EIFS-related damages. Jeff Albright, executive vice president for the Independent Insurance Agents of Louisiana, explained the situation in his and other states first by pointing out the differences between true and synthetic stucco systems: “The difference between the two is that for true stucco, (the builder) will nail a wire mesh to the side of a building. First, they put down some type of water-repellant interior material, like tar paper or some type of synthetic material. Then they nail on the wire mesh. True stucco is just the concrete-stucco mixture right down on the building, and it’s basically solid concrete.”
Albright continued, “What they do with the stucco systems is, they put some type of material behind it to minimize the amount of real stucco material that you’re using. Typically, it’s a styrofoam-type of material. The problem is that the styrofoam-type material does not breathe, and it it’s not properly installed—and that’s the critical issue: Is it properly installed? And some people would challenge that even if it is properly installed, just the design of the systems itself inherently causes moisture in a moist climate, which obviously we have in Louisiana, and in a good part of Texas, too.”
Albright pointed out that the styrofoam layer “causes it to sweat, and for moisture to condense behind the exterior concrete stucco surface. Over a period of time, moisture builds up, causing two different problems.
“One is the deterioration of the materials—rot, that type of thing,” Albright continued. “The other thing, which is getting more and more press these days, is the mildew and mold issue.”
According to Judge Kevin Midlam, formerly on the San Diego Superior Court and an expert on EIFS-related arbitration and settlement issues, the situation in the western U.S. varies from state to state. “The impact has not been as heavy, at least here in southern California,” he said. “There were some condo projects that used (EIFS), and some high rise buildings had it … Now I do know that in the Northwest, particularly in Oregon, unfortunately they used it on residential units. When you’re in a state that can generate winds of up to 70 miles an hour and drop up to 80 inches of rain a year, you can imagine the nightmare they’re having with it up there.”
Albright said insurers offering commercial general liability (CGL) coverage reacted as the EIFS problem became more and more apparent.
“Traditionally … there have been various exclusions in general liability policies—for certain types of workmanship issues. In recent years … insurers have used those exclusions more and more narrowly, and found more and more construction defect or warranty-type claims under contract or CGL policies.
There’s been a flurry of these around the country in different areas. As a result, the insurers that have traditionally provided general liability coverage for residential contractors are getting out of that market, and don’t want to write that coverage. There is a crisis in Louisiana and a number of other states, including Colorado … There are only a very few insurers willing to write the general liability coverage, and they’re very, very picky about who they write it for.”
Midlam explained, “Years ago … the companies were taking broader looks at this stuff … because the generation of premium dollars wasn’t hanging on their exclusions as strongly.
“Nowadays, you’re seeing more and more reliance on exclusions,” Midlam continued. “We’re seeing the development of manuscripted-type policies now. As the ISO has kind of fallen by the wayside, many companies are now going back to what is fundamentally a manuscript-type policy—with specific exclusions.”
Property damage related to EIFS has proved a highly litigious issue: The first class action suit against EIFS manufacturers was brought in North Carolina in 1995 (six of the nine defendants settled). And disputes concerning CGL insurance coverage have emerged. Midlam explained, “What we’re seeing happening out here is, the traditional construction defect (CD) lawyers—many of them don’t want anything to do with what is basically a personal injury claim. So we’re seeing these things being litigated a couple of times. You’ll go through the traditional CD litigation, followed by a complaint by 20 or 30 homeowners’ families based upon the mold problems.”
In a white paper entitled “Coverage for EIFS Claims Under the Standard CGL Policy,” T. Eugene Allen III, a partner in the Nexsen, Pruet, Jacobs & Pollard law firm, listed the most common allegations contractors, manufacturers, builders, and sellers face in EIFS-related lawsuits. He also explained how courts usually determine whether CGL policies cover each of those allegations.
Complaints of negligence are usually covered where damages to building components are concerned, but damage to the EIFS itself is not covered. Property depreciation may or may not be covered, depending on the jurisdiction. Strict liability for damages to a building other than the EIFS is also usually covered. CGL policies do not usually cover breach of warranty allegations, and unfair trade practices resulting in deception of consumers are not covered because they involve intentional conduct on the part of the defendant.