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. If these figures indicate a growing trend, then they could just as well indicate a growing problem.
Humid climes beware
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, but made no engineering changes to address differences between commercial structures consisting of stone and steel and residential homes, made of wood.
According to Judge Kevin Midlam, formerly on the San Diego Superior Court and an expert on EIFS-relat-ed 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 Calif-ornia,” 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.”
Jeff Albright, executive vice president for the Independent Insurance Agents of Louisiana, 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, that moisture will build up, and it will cause 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, and the purported toxic mold, which then creates all kinds of potential problems.”
Since EIFS’ introduction, homeowners from North and South Carolina to Alabama, 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 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.”
CGL carriers excluding more
Albright went on to explain how insurers offering commercial general liability (CGL) coverage have reacted as the EIFS problem became more and more apparent.
“Traditionally, insurance policies have excluded—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, and what kind of limits … It’s very, very difficult.”
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 looking carefully at the policy,” 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.”
EIFS litigation: thorns aplenty
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).
More recently, the Houston Chronicle reported that a group of homeowners in and around Houston have filed suit against EIFS manufacturers, alleging the synthetic stucco systems used on their houses are defective products. Manufactur-ers, on the other hand, contend their EIFS were not properly installed—an argument they usually employ in cases where plaintiffs allege defective products. A state district judge denies plaintiffs’ request for class-action status to their suit.
In 2000, a Tennessee court preliminarily approved a nationwide class action settlement for most of Dryvit’s 780 single family residential EIFS cases pending in Alabama and the Carolinas. The settlement has yet to receive final court approval, however.
Disputes concerning CGL insurance coverage invariably arise in such a litigious environment. 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.”
T. Eugene Allen III, a partner in the Nexsen, Pruet, Jacobs & Pollard law firm specializing in tort defense, insurance coverage, and commercial litigation, laid out what is and what is not covered under the Insurance Services Office’s (ISO) CGL policy.
In a white paper entitled “Coverage for EIFS Claims Under the Standard CGL Policy,” Allen noted that generally, insurers are not liable for clients’ faulty workmanship—a crucial distinction in cases where defective installation rather than defective product is alleged.
Allen listed the most common allegations contractors, manufacturers, builders, and sellers most often face in EIFS-related lawsuits, and how courts usually determine whether CGL policies cover each of those allegations.
Allegations 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, however. Furthermore, unfair trade practices resulting in deception of consumers are not covered because they involve intentional conduct on the part of the defendant.
An end to EIFS?
A current retraction of the CGL market, however, will actually help alleviate what could have otherwise been a long-term problem, as Albright pointed out: “(The EIFS crisis) has been here for a couple of years, and will continue for a couple more years until contractors stop using EIFS-type systems … because insurers refuse to insure them if they use them.
“At some point in the future, the problem is going to go away because people are going to stop using the construction methods that created (the situation). But there are some serious claims out there right now … It’s a significant issue.”
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