‘Synthetic stucco’ still difficult insurance market for contractors despite changes
The use of the exterior insulation finishing system (EIFS), also referred to as “synthetic stucco,” in construction is nothing new to commercial or residential builders.
EIFS, a multi-layered exterior structure initially introduced in Europe during the post World War II era, made its way over to the United States in the 1960s. The system began gaining popularity in the United States in the early ’70s. Contractors and architects alike saw a number of advantages in using EIFS — it was waterproof, incredibly malleable, energy efficient and inexpensive.
EIFS was initially used for commercial structures only, and, today, this is where the majority of EIFS applications can be found. Eventually, synthetic stucco made its way into the residential market and in the 1990s a number of construction defect related issues began to emerge.
The construction defect issues relating to EIFS have been significantly more prevalent in residential structures, said Bob Marshburn, founder and principal of www.certifiedriskmanagers.com.
EIFS is a “waterproof” system, meaning that the outer shell does not allow water to penetrate the surface. But if water does seep behind the EIFS surface through cracks or fractures in the structure, the moisture cannot escape. Over time that moisture retention led to issues such as mold, rot and rust.
In response to the rise in construction defect claims in 2000 involving EIFS, most insurers implemented broad EIFS exclusions on contractors’ general liability insurance policies. The EIFS industry took quick action to address the problem of reengineering their product but today the effects of those defects can still be felt in residential construction insurance coverage.
According to Marshburn, the application of EIFS in Europe is incredibly different than its application in the United States, which is one reason construction defect issues have emerged. Overseas, the system is affixed to porous and well-ventilated areas, such as permeable mortar. In the United States, for residential construction in particular, EIFS is being used on materials that trap moisture, such as wood and tightly sealed walls, he said.
Controversy has arisen surrounding the question of whom or what is to blame for the construction defect issues relating to EIFS. Is it faulty material? Perhaps poor workmanship or lack of regulation? Maybe it’s all of the above? noted Marshburn.
“If the [material] is so persnickety that it has that high of a degree of people who cannot apply it properly, that is a problem,” he said
In commercial construction the level of supervision and regulation is notably greater and liabilities associated with EIFS have also been notably less. In addition, EIFS is installed over different types of materials, such as steel and concrete, that do not soak up and retain moisture. Those building material differences, combined with higher quality materials used for windows, door openings, etc., make commercial structures much less amenable to the potential negative affects of EIFS.
Marshburn also noted that in commercial construction, EIFS is generally not being used as a complete system, therefore there is a lot less exposure, there is less risk, and the potential for a lawsuit is considerably smaller.
He noted in terms of residential structures, there is far less regulation when it comes to construction. Also, the majority of homes have wood framing, which makes the negative side-effects of EIFS much more likely. The structures themselves, in particular the roofs, are far more complex that what is found on commercial buildings.
The incidence of EIFS-related issues came to the forefront in the late ’90s in North Carolina. In 1999, Dateline ABC did a report on three North Carolina homes that had used EIFS. All three homes had areas where moisture had been trapped behind the system. This report, combined with the class action lawsuit, Ruff, et al v Parex, et al, led a number of homeowners to examine their own residences. Thousands of residential property owners found that they had damage as well.
Most requests for class action lawsuits have been denied as the cases involved too many parties, making them far too complex. Cases were taken on an individual basis and have led to settlements from tens to hundreds of thousands of dollars. As a result of these lawsuits, some banks have refused mortgage extensions and realtors have repudiated the showing of homes utilizing EIFS.
“A number of attorneys make a good living litigating EIFS,” Marshburn remarked.
Reengineering the Design
A number of the issues associated with EIFS, or synthetic stucco, have since been remedied, says Matthew J. Pateidl, vice president of environmental risk at Lockton Cos. One of the ways that the issue has been tackled is through reengineering the product itself, Pateidl said. The EIFS industry installed “weep holes” in the system, making the material more drainable, similar to concrete stucco.
Pateidl also said a number of EIFS installers and inspectors are undergoing training and certification programs. This is definitely a step in the right direction, he said, but there has been some debate as to whether or not these certification programs are really all that effective. “At this point, there is very little that is being done to hold those that have been certified accountable for the jobs they do,” he noted.
Stephan Klamke, executive director, EIFS Industry Members Association (EIMA), says certification programs have been very effective in reducing construction defect issues. EIMA is a national non-profit technical trade association comprised of more than 400 leading manufacturers, suppliers, distributors and applicators involved in the exterior insulation and finish systems industry.
Klamke also noted that litigation over EIFS hasn’t been a problem for EIMA members for a number of years. “It’s almost a non-issue,” he said. “Past litigation has been specific to residential.” In today’s construction market, EIFS with drainage on wood frame construction is mandated by the building code (International Residential Code) and has been since 2000, he said.
Lockton’s Pateidl indicated that there is a softening in the offering of insurance coverage for EIFS installers in the commercial realm. But as far as residential coverage is concerned, coverage is incredibly difficult to place due to the high degree of risk and the possibility of litigation.
The ISO endorsement on most policies issued for all types of contractors today (CG 21 86) does not include coverage for the “design, manufacture, construction, fabrication, preparation, distribution and sale, installation, application, maintenance or repair, including remodeling, service, correction or replacement, of any ‘exterior insulation and finish system'” or any product or work “with respect to any exterior component, fixture or feature of any structure” in an exterior insulation and finish system.
Marshburn said the endorsement not only excludes the system itself, but also any component involved, be it primers, caulking, insulation board. Whatever is affixed to the EIFS is no longer covered under products liability, he said, and the exclusion becomes much broader.
“In my opinion, the insurance world does not understand the difference between the system we use today and the system that was causing problems in the late ’90s,” EIMA’s Klamke argued. He says while coverage for contractors on the residential side doing EIFS work is available it’s more expensive. “They are in fact getting insurance for residential, however it has some constraints or limitations,” he said.
Pateidl noted that in order for residential properties with EIFS to be covered in the future, there need to be markedly fewer claims. Home builders need to restore their reputations, he said. Currently, Pateidl feels that underwriters are potentially revisiting coverage issues.
Marshburn, believes that the chance of change is slim, “but with some improvement, and if or when EIFS can prove they don’t have problems, some limited coverage may be offered by insurance companies.” He does not believe this will happen anywhere in the near future.
Marshburn also warns brokers and agents about the possible errors and omissions implications involved in writing coverage for buildings with EIFS. He offers this advice, “When a client insists on using EIFS … the broker/agent needs to get a signed acknowledgement that they understand that they have no/limited coverage.” No one wants to get blind-sided, he said.
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