Summary: The following pages summarize the history of EIFS and EIFS-related claims under the CGL policy.
Topics covered:
Introduction
EIFS were developed in the 1950s in Europe to repair buildings after World War II, and were first used in the U.S. in 1969 for commercial structures; the residential construction industry began using EIFS in the 1980s. EIFS are used for better insulation, more durability, and as a less expensive alternative to traditional stucco. In addition, unlike other wall cladding products such as siding or brick, the EIFS system is actually created on site and combined with other materials. EIFS products are typically marketed as systems by different manufacturers.
Exterior insulation and finish systems ("EIFS," sometimes known as synthetic, fake or artificial stucco) are multilayered exterior wall systems which are typically comprised of five component layers: an exterior finish, a reinforcing mesh to protect the system, an insulator (normally expanded polystyrene), an adhesive substance binding the insulator to the building and a substrate to which the insulator is attached. The function of EIFS is to act as a barrier between the outside elements and the remainder of the structure.
Problems with EIFS began to receive significant attention in 1995 in Wilmington, North Carolina (a city often referred to as "Ground Zero" of the EIFS-litigation phenomenon), when an unusually high number of complaints led to costly repairs and highly publicized litigation. Since then, EIFS have been at the forefront of construction defect allegations regarding water intrusion, property damage, and mold growth. Homeowners in states with humid climates have been most prone to EIFS-related damages and, as in other construction defect cases, the problems may not appear until many years after the installation.
Defendants in EIFS cases may include the EIFS installer, seller, distributor or manufacturer, or the general contractor. Manufacturers tend to point to poor installation and maintenance, while developers, architects, and builders frequently look to the inherent negative properties of the product. Termite infestation sometimes is alleged as an additional problem caused by the defective installation of EIFS, and, in those cases, a pest control company may also be included as a defendant.
A typical complaint will allege that the defective installation of EIFS has caused moisture intrusion, damaging structural members, flooring, and other parts of the building. Typically, it is claimed that EIFS installers failed to put a base coat at the termination of the EIFS system, failed to install sealant, and failed to install flashing. It is also usually alleged that the installer failed to backwrap entrances and windows and did not use proper caulking techniques where the EIFS terminated. Further, byproducts of moisture, such as mold and mildew, are usually alleged. Generally, it is claimed that the only way to fix the problem is to reclad the entire structure.
Often building owners claim that the EIFS product was defectively manufactured or sold as a defective product. It is also frequently claimed that the local seller had a duty to verify the ability of the installer or that the general contractor had overall responsibility and, in particular, failed to supervise the EIFS installer or verify the installer's ability to properly install the system.
Much of the recent EIFS-related case law has focused on three major topics: (1) what constitutes an occurrence under the CGL form; (2) whether the property damage caused by defective or faulty workmanship is subject to business risk or property damage exclusions; and (3) when coverage is triggered.
The CGL policy requires an "occurrence" to trigger coverage. "Occurrence" is defined as an accident, including continuous exposure to conditions. In EIFS cases, the portion of the definition of occurrence relating to continuous exposure to conditions is usually the situation alleged to have caused the damages in question.
Courts across the country are considerably divided over the issue of whether unintentional construction defects are an occurrence under liability insurance policies. For example, in a recent Texas appellate court decision, Lennar Corporation v. Great American Insurance Company, 200 S.W.3d 651 (Tex.App.-Hous. (14 Dist.) 2006), the court held that an unintentional construction defect is an accident and, therefore, an occurrence under a contractor's CGL policy. In Lennar, the insured Lennar Corporation and its subsidiaries built more than 400 homes using EIFS. Following local publicity about problems with EIFS, Lennar started receiving complaints from homeowners. Eventually, Lennar concluded EIFS were defective because they trapped water behind them and did not allow the water to drain. Lennar settled homeowner complaints by removing and replacing the EIFS with real stucco.
The insurers' policies obligated the insurers to pay sums Lennar became legally obligated to pay "as damages because of…'property damage'" caused by an "occurrence" and defined "occurrence" as "an accident."
After noting a split among appellate courts in Texas and other jurisdictions over whether defective construction is an accident, the court determined that Lennar's defective work was accidental because Lennar did not intentionally build the homes with a defective product and did not intend or expect the resulting damage. The court observed that contrary decisions often confused the issue of occurrence with the issue of whether coverage was excluded under the business risk exclusions customarily included in commercial general liability insurance policies, e.g., damage to the insureds own work exclusion.
The court also held, however, that Lennar's costs for replacement of the EIFS was not covered property damage because it was done to prevent future damage rather than to repair physical damage to the EIFS itself. Further, there was no evidence the EIFS had to be removed to repair the water damage to the homes.
Another Texas case, Pine Oak Builders v. Great American Lloyds, Ins. Co., 2006 WL 1892669 (Tex. App. –Hous. (14 Dist.)), arose out of a series of five suits filed against Pine Oak Builders for damages related to EIFS. Great American insured Pine Oak from 1993 to 2001, while Mid-Continent insured Pine Oak from 2001 to 2003. The policy issued after 1999 contained an EIFS exclusion. The insurers denied defense and indemnity, Pine Oak brought suit, and the trial court granted the insurers' motion for summary judgment. On appeal, the court affirmed in part and reversed and remanded in part.
In deciding whether the two insurers had a duty to defend, the court first considered the extent to which CGL policies cover construction defects, concluding "negligent or inadvertent defective construction that results in damage to the insured's own work and the result of which is unintended and unexpected constitutes an accident or occurrence under the policy. The court also reaffirmed that the business risk doctrine is incorporated not through the insuring agreement and definition of occurrence, but through exclusions in the policy. Further, the exception to the "your work" exclusion for work performed by subcontractors would be rendered meaningless if defective construction were never an occurrence. Four of the five lawsuits against Pine Oaks contained explicit allegations of faulty construction and thus fell within the subcontractor exception.
Another recent decision in which the court dealt with the "occurrence" question was French v. Assurance Co. of America, 448 F.3d. 693 (4th Cir. 2006), a case in which homeowners sued their contractor for moisture and water damage to the structure of their home that resulted from defective EIFS applied by a subcontractor. The parties settled the case pursuant to an agreement whereby the contractor assigned its rights under GCL policies created from industry standard forms published by ISO. The homeowners, as the contractor's assignees, then filed suit against the two insurers that had not consented to the settlement agreement, and the district court, deciding the case under Maryland law, ultimately granted the insurers' motions for summary judgment, finding that there was no coverage under the policies, which specifically excluded "property damage expected or intended from the standpoint of the insured."
The Fourth Circuit affirmed the lower court decision in part, noting in its decision that the 1986 version of the ISO GCL policy had been revised specifically to provide coverage if "work out of which the damage arises was performed on [the insured contractor's] behalf by a subcontractor;" but the court nevertheless found that the definition in the policy of an occurrence as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions" precluded coverage for the defective stucco. Because the obligation to repair the faulty workmanship of a subcontractor was not unexpected or unforeseeable under the contract with the homeowner, it could not constitute an accident or occurrence under the policy. On the other hand, the moisture and water damage resulting to the underlying non-defective structure was not subjectively expected or intended by the contractor, and, therefore, it constituted an occurrence under the policy.
Also examining what is an occurrence was the court in Owners Insurance Company v. Salmonsen, 366 S.C. 336 (S.C., 2005). This was a products liability class action regarding defective synthetic stucco distributed by the defendant, which allegedly caused water intrusion that resulted in damage to a class member's property.
The defendant was insured under a CGL policy by the plaintiff, who sought judgment that the policy did not provide coverage for the class action. While the district court ruled in favor of coverage, the South Carolina Supreme Court considered the meaning of the term "occurrence" and if distribution of the stucco was to be considered one occurrence or each sale of the stucco was an occurrence. The Court held that the distribution of inherently defective goods constitutes one "occurrence," and, as a result of the holding, the insurer in Owners was liable only for one per-occurrence limit payment, rather than the aggregate limit for multiple occurrences.
And, in Owners Ins. Co. v. James, 295 F.Supp.2d 1354 (N.D.Ga., 2003), the court held that, under Georgia law, the CGL policy would provide coverage for injury resulting from accidental acts, but not for injury accidentally caused by intentional acts. Thus, it did not cover damage flowing from the insured installer and materialman's alleged improper use of EIFS on the residence, as the installation was intentional.
In construction defect claims which are found to be within the insuring agreement of the CGL policy, coverage disputes concerning those claims often focus on the policy exclusions, which limit the coverage granted in the insuring agreement.
Disputes often arise over how the policy excludes from coverage damages resulting from business risks. Standard liability policies include exclusions for property damage the insured causes to its own work. The reasoning behind these exclusions is to treat an insured's work as a business risk or commercial risk to be retained by those performing the work. Generally, a CGL policy is not intended to insure business risks, i.e., risks that are the normal, frequent, or predictable consequences of doing business and should be controlled or managed by the insured. A liability insurer is not obligated to pay for the faulty workmanship of its insured, and the risks insured under the CGL policy are distinct from the simple risk of doing business.
The Court of Appeal of Louisiana addressed the applicability of the business risk exclusions to a claim based on a subcontractor's defective work in McMath Construction Co., Inc. v. Dupuy, 897 So.2d 677 (Ct. La. App. 1st Circ., 2004). McMath involved a claim by a general contractor against a subcontractor hired to install EIFS on a condominium complex. The general contractor alleged that after the subcontractor had completed its work, the building leaked around the doors and the windows as a result of the subcontractor's failure to apply backer rod to nearly all of the openings around the windows and doors, and the general contractor was then required to repair the allegedly defective work. There was no damage to the condominium units as a result of the leaks, however, because the interiors were not finished until the repairs were completed.
The general contractor sought a ruling that the claim was covered under a liability insurance policy issued to the subcontractor. The policy included the standard business risk exclusions: exclusion j(5), which barred coverage for "that particular part of real property on which you or any…subcontractors working directly or indirectly on your behalf are performing operations; exclusion j(6), the "faulty workmanship" exclusion, which barred coverage for damage to property that must be restored, repaired, or replaced because of improper workmanship and also which also contained an exception for property damage included in the "products-completed operations hazard; exclusion k, which barred coverage for property damage to "your product," and exclusion l, the "your work" exclusion, which did not apply if the damaged work or the work out of which the damage arises was performed by a subcontractor.
As a threshold matter, the court concluded that the claim alleged an occurrence because the roof leaks constituted "continuous or repeated exposure to substantially the same general harmful conditions." The court then examined whether any of the business risk exclusions would bar coverage. Focusing on the words "are performing operations" in exclusion j(5), the court held that the exclusion was not applicable because the subcontractor's work was already complete when the damage occurred. Similarly, the court further held that exclusion j(6) was not applicable based on the exception for property damage included in the products-completed operations hazard coverage. The court concluded that the "your product" and "your work" exclusions applied because "the evidence in this case shows there was no physical damage to the condominium units, only to Dupuy's work or products."
The general contractor argued that the "your product" exclusion did not apply because the subcontractor's materials became incorporated into real property and, therefore, did not fall within the definition of "your product" as "goods or products other then real property…" The court rejected the argument, noting that if the exception to the exclusion were meant to remove materials incorporated into real property from the definition, it would have explicitly so stated. The general contractor also argued that the "your work" exclusion did not apply because the subcontractor had stated he had subcontracted the work, bringing the claim within the exception to the exclusion for work performed by a subcontractor. The trial court had made a factual finding, however, that the subcontractor had not used subcontractors, but rather had merely employed workers. Retreating from its initial conclusion that the "your work" exclusion barred coverage, the court explained that regardless of whether the lower court erred in applying exclusion l, it was not necessary for every exclusion to apply in order to find that the policy did not provide coverage. Thus, there was no coverage for the claim because the "your product" exclusion barred coverage.
Similarly, whether the faulty workmanship exclusion of a general contractor's CGL policy should bar coverage for the cost to repair the substrate and framing of a house that was damaged by a subcontractor's improper installation of EIFS was the issue in Century Indemnity Company v. Golden Hills Builders, Inc., 348 S.C. 559, (2002). In this case, the insured, a general construction contractor, began building a house in 1989 and substantially completed it in mid-1990. The insured completed construction in February 1991. Even though the homeowners did not notice problems associated with moisture intrusion until 1998, everyone agreed that the actual moisture damage began to occur before December 1990, and that damage had been continuous since that time. The December 1990 date was critical, because the contractor's insurance policy expired in December 1990. The homeowners sought damages incurred in replacing not only the stucco exterior cladding but also in repairing and replacing a significant amount of the interior substrate and framing.
The court determined that the "faulty workmanship" exclusion barred coverage. The homeowners argued that the exclusion should have been interpreted narrowly to only exclude the damages to the work that was incorrectly performed (i.e., installation of the stucco exterior) and not the damage to other parts of the property where the work was correctly performed (i.e., the interior framing and substrate). The court disagreed and ruled that the unambiguous language of the exclusion applied to exclude coverage for damage to any and all parts of the house on which the insured performed its work.
The court reiterated the general concept that CGL policies are only intended to provide coverage for personal injury or property damage caused by accidents which are not anticipated, expected or foreseeable by the contractor. Insurance policies are not intended to and do not act as a performance bond for business risks– i.e., risks that are normal, frequent, or predictable consequences of doing business and which the business management could and should control or manage.
In addition, the court refused to place the property damage within the products-completed operations hazard provision—which is excepted from the faulty workmanship exclusion—in order to restore coverage. The court found that exception did not apply because the house was still in the possession of the contractor who was still performing its work when the damage first occurred.
Various courts have applied a variety of coverage trigger theories in EIFS cases, including the continuous trigger and modified continuous trigger theories, the manifestation theory and the exposure theory.
For example, in a recent Texas decision, Summit Custom Homes, Inc. v. Great American Lloyds Ins. Co., 202 S.W.3d 823 (Tex.App.-Dallas, 2006), the court held that the CGL policy provides no coverage for property damage unless the property damage manifests itself, or becomes apparent, during the policy period.
In Summit, the plaintiff homebuyers alleged that their home was constructed in 1996, and that they had since suffered property damage, without specifying the dates of damage. Great American had issued general liability policies to Summit, effective January 15, 1996 to January 15, 2000. Great American argued that because the plaintiffs pleaded the discovery rule, in effect stating they only discovered the defects within the applicable statutes of limitations, which would have been around 2000 and the suit was filed in 2003, the plaintiffs could not have discovered damage in 1996 and within the earliest policy period. The court found it could not determine if the 1996-2000 policies applied, and held that Great American failed to establish as a matter of law that the damages did not manifest during 1996 or anytime before 2000. The court explained that according to the facts in the pleadings, although vague, damage could have manifested earlier and that the plaintiffs had thus triggered each of Great American's policies for purposes of its duty to defend.
In Pine Oaks, the court considered whether the four suits remaining in the law suit alleged an occurrence within the various policy periods. The court rejected application of the manifestation trigger and instead adopted the "exposure rule" for the cases. Citing the policy's definition of occurrence, the court combined the definition and trigger issues with a claims-reporting requirement and concluded that applying the manifestation trigger was tantamount to rendering the policy a claims-made policy. Because each of the four remaining suits alleged that damage began to occur sometime between 1996 and 1997, the court held that each of the post-1995 policies was potentially triggered.
In Owners v. James, the court held that CGL insurer had no duty to provide coverage absent evidence that the alleged damage to the residence from the alleged improper use of EIFS arose during the applicable policy period, and that based on the plain language of the policies, the relevant question in determining coverage was when the property damage occurred, rather than when the event causing that damage occurred.
The court in Century Indem. Co. held that a modified continuous trigger theory applied to property damage to the house as a result of EIFS constructed by insured's subcontractor, and thus any coverage under a CGL policy began with property damage that occurred during the policy period and applied to any continuing damage after the policy period.
Insurers have undertaken a number of strategies for dealing with the growing cost of construction defect claims, and many insurers have adopted an underwriting philosophy of avoiding altogether certain classes of contractors, types of construction, or problematic regions. Alternatively, insurers may decline to write contractors with more than a certain percentage of their work in problematic areas such as EIFS installation. Some insurers have completely withdrawn from construction insurance markets in problematic regions of the country.
In addition to the underwriting restrictions described above, many insurers attach exclusions to contractors' and subcontractors' policies that target common types of construction defects claims, such as mold and damages attributable to the use of EIFS on the building. The precise combination of endorsements will vary by class of contractor, type of construction, and by state. Although residential construction has been harder hit by EIFS claims than commercial buildings, EIFS exclusions are in widespread use for both residential and commercial construction contractors, and ISO introduced an EIFS exclusion (Exclusion-Exterior Insulation and Finish Systems, CG 21 86) effective in December 2004 in most jurisdictions.
As EIFS exclusions have become more widely used, issues surrounding them have become more prevalent in case law. For instance, in Pine Oaks, the Mid-Continent policies and the final two years of the Great American policies contained EIFS exclusions that broadly precluded coverage for property damage related to EIFS and for "damage resulting from work performed on any 'exterior component , fixture, or feature' of a structure if EIFS is installed on any part of that structure." After examining the factual allegations of each of the lawsuits, the court concluded that all the damages were either excluded by the broad EIFS exclusion or the "your work" exclusions of the policies. Consequently, only Great American had a duty to defend under its policies issued prior to the addition of the EIFS exclusion.
In Summit, the court found that the builder's CGL policy which excluded coverage for liability for damage caused by EIFS or failure to properly caulk around windows, doors, and other openings exclusion made the policy inapplicable to property damage claims arising out of the EIFS hazard, including caulking or sealants in connection with EIFS. In The Devington Condominium Association a/k/a The Devington Homeowner's Assoc. v. Steadfast Insurance Co, 2007 WL 869954 (W.D.Wash.), the court held that the EIFS endorsement in a CGL policy barred coverage for property damage claims arising for water intrusion caused by allegedly defectively installed EIFS.
And in Lennar, the court held that for purposes of the insured party's claim of negligent misrepresentation on the part of the insurer, the insurer's failure to include in the commercial umbrella liability policy an exclusion for claims related to the insured party's use of EIFS did not amount to representation that the policy would cover such claims.
Construction defect litigation is undeniably complicated, and perhaps EIFS-related construction litigation even more so. As is evident from this discussion, coverage issues are abundant in EIFS claims, and the how courts view issues surrounding EIFS often varies by jurisdiction.
Some experts argue that what may have been a more long-term problem will not be as a result of the retraction of the CGL market, and that at some point in the future the problem is going to go away entirely because people are going to stop using the construction methods that created the problems.
original August 2007