Trouble Brews: Insuring Synthetic Stucco Homes
July 2002
Learn more about synthetic stucco, or Exterior
Insulating and Finish System (EIFS), which some claim results in water and other
related damage to homes and why insurers are turning away from this market.
by Robin Olson
IRMI
Congratulations on the purchase of your new synthetic stucco home. But perhaps
congratulations are premature, because your homeowners insurer is hesitant to
write insurance for it. What is the problem?
Synthetic stucco is commonly referred to as Exterior Insulating and Finish
System (EIFS). Homes with this exterior finish are often strikingly beautiful,
offer great flexibility in home design, and provide energy savings. EIFS (usually
pronounced "eefs") constructed homes, however, have a dark cloud surrounding
them—allegations of water accumulation and damage resulting in mold growth.
EIFS construction consists of an insulation board secured to the exterior
wall surface (e.g., plywood), a durable, water-resistant base coat applied on
top of the insulation and reinforced with fiberglass mesh, and a finish coat,
which gives the product its stucco-like appearance. See
Exhibit 1.
EIFS Background
EIFS was developed in post-World War II Germany to repair war-related damage
to large buildings. It was introduced in the United States on commercial buildings
in the 1970s and on homes in the 1980s. This system is currently applied to
approximately 2 percent of residential structures.
The moisture intrusion controversy erupted in 1995, with several EIFS-related
lawsuits filed in North Carolina. Homeowners alleged the following:
- Increased level of humidity within the home
- Infestations of termites, ants, and other insects
- Mold, mildew, or fungi growth on the interior walls or on window frames
- Cracking of the drywall
- Cracking, peeling, and bubbling of paint
- Cracking on the EIFS dressing bands around windows
- Delamination—EIFS coming loose from the sheathing of the house
- Rotting of wood trim
- Loss of structural integrity
Growing evidence suggests that once water gets into the EIFS insulation board,
it has no way of getting out. Thus, water penetration is not the problem itself,
as water can easily penetrate many types of exterior finishes, such as wood
and brick. The problem is, according to some civil engineers, water retention.
The EIFS system virtually wraps the exterior of the home in an energy-efficient
blanket, which promotes energy efficiency but can leave water trapped within.
According to Homer Barham, a member of the Georgia Area Home Inspectors and
the owner of Barham Inspections in Atlanta, "This product cannot breathe." He
contends that it collects moisture, and the moisture has no way to drain or
evaporate. "If the EIFS contractors or applicators could only develop vapor
barriers, this could solve much of the problem," he said. Mr. Barham said that
some "speed merchant" contractors focus only on applying the product as quickly
as possible and ignore the water retention problems.
To counteract these problems, the EIFS industry developed a more drainable
type of exterior finish in the last few years. The new "drainable" or "water-managed"
system incorporates a secondary moisture barrier and a drainage mat with weep
holes in the bottom that allow the escape of water that might get trapped. Mr.
Barham contends that these are still unproven.
Lawsuits
Since 1995, thousands of EIFS-related lawsuits have been filed in the United
States. Typically, this involves the homeowner filing suit against the builder,
manufacturer of the EIFS product, distributor, and the applicator. According
to Peter Burke, a partner with Whatley Drake in Birmingham, Alabama, between
400 and 600 lawsuits have been filed in Alabama since 1998. "There are tremendous
problems in North Carolina and Virginia as well," he said, "involving hundreds
of cases. At first, we thought this was perhaps unique to the Carolinas due
to their high humidity levels, but we soon saw cases in Virginia and surrounding
states." He stated that the vast majority of these cases have been settled out
of court.
Mr. Burke, who has represented numerous homeowners in these cases, argues
that the damages include not only moisture-related problems such as mold, but
diminution of value as well. "When people try to sell these homes, they often
cannot find buyers," he said. "When they do, they have to sell the home at a
discount of 20 percent or more. In addition, they normally have to purchase
a warranty policy."
When asked about the newer drainable EIFS products, he said all of his lawsuits
involved the older "barrier" type of product. He also stated that he has seen
very few lawsuits from homeowners suing builders for similar water-related damage
on other types of exterior finish, such as traditional stucco or brick.
There has been one successful EIFS-related class-action suit, Ruff, et al. v Parex, et al., 508 SE2d 524 (NC
App 1998). Another case, Posey, et al. v Dryvitt Systems,
Inc., was preliminarily certified by a Tennessee judge, according to
Brent Crumpton, with Brent L. Crumpton, P.C., also out of Birmingham. Mr. Crumpton,
who has settled 200 EIFS-related cases with 150 more still pending, said that
the Posey fairness hearing is set for October 1, 2002. This involves a national
settlement with one company, Dryvitt Systems, an EIFS manufacturer.
When asked about other class-action lawsuits, Mr. Crumpton said that several
state courts, including a federal court, have denied certification. "Most courts
have reacted this way because these cases are so complex," he said. "They often
involve numerous parties including the manufacturer, distributor, applicator,
contractor, and homeowner." Mr. Crumpton has seen many cases in which, for example,
the manufacturer may blame the applicator, or the distributor may blame the
manufacturer, and so on. "Class-action cases need more clear-cut issues in order
to work and that is not the case with EIFS claims," he said. "This is why these
are normally handled, and eventually settled, on an individual basis." In his
opinion, the Dryvitt case was preliminarily certified
only because Dryvit agreed upfront to it.
In addition to the wide variety of water and other damages due to EIFS—structural
failure, mold and fungi, termites, respiratory and allergy ailments, diminution
of value of the home averaging 20 to 35 percent after the damage is repaired—Mr.
Crompton's clients have seen their termite policies and homeowners policies
nonrenewed. "Several of my clients advised me that they filed no claims against
their homeowners policy," he said, "but were nonrenewed anyway. These clients
attributed this to the EIFS construction, although the insurers did not admit
to this."
Insurers' Response
Many personal lines insurers are concerned about writing homes clad with
EIFS. However, the major insurers, such as State Farm, Nationwide, Farmers,
Chubb, and Safeco, declined to comment on the EIFS issue. One insurance industry
source said that the dominant player in the high-end home sector "is scared
to death of synthetic stucco and makes no exceptions for it, at least in Texas
and probably other states." Other sources confirmed this policy; in addition,
the company does not appear to differentiate between the "barrier" or conventional
EIFS and the newer "drainable" EIFS.
Spokespersons for these insurers referred us to the Institute for Business
and Home Safety (IBHS), located in Tampa, Florida, for comments on this
issue. IBHS is a nonprofit association that engages in communication, education,
engineering, and research. Its members include nearly 500 insurers and reinsurers.
Jeff Sciaudone, P.E., director of engineering with IBHS said that EIFS is "probably
not the best choice as far as sustainable wall cladding or exterior siding.
It is hard to pull off a high-quality EIFS job." He says that because the system
is so tight, water cannot get out.
"Any imperfections over time become magnified and can result in water retention,"
he said. "There is simply no room for error." Mr. Sciaudone contends that once
the insulation or gypsum board becomes wet, it loses strength and capacity.
"The problem is insidious because people cannot see it until it is too late,"
he said. When asked about the newer drainable EIFS, he believes it is an improvement,
but for "long-term wear, a consumer is better off with brick cladding." In summary,
he believes his member insurers should be very wary about insuring homes with
any type of synthetic stucco.
Other insurers referred us to the Insurance Information
Institute (III), based out of New York. The III seeks to improve public
understanding of insurance - what it does and how it works. Robert Hartwig,
chief economist with III, encountered the EIFS issue when researching mold problems
in homes. He believes that "Insurers are increasingly recognizing this as a
problem and are justified in their concerns."
Some insurers do still write EIFS-constructed homes; however, one regional
southwestern insurer stated that if there are any water damage claims or signs
of water damage, they decline it. This insurer also does not differentiate between
the conventional EIFS and the drainable variety.
With the most influential and major insurer of the high-end home sector opting
not to write EIFS clad homes, there is a distinct possibility that other insurers
will follow its lead. Perhaps, on the other hand, some will decide that the
water-managed system is insurable if properly maintained, and see an opportunity
to write more business.
Defense of EIFS
The EIFS Industry Members Association (EIMA) is a nonprofit trade association
based in Morrow, Georgia, composed of more than 500 leading manufacturers, suppliers,
distributors, and applicators involved in the EIFS industry. Bernie Allmayer,
a spokesperson with EIMA, said, "The moisture intrusion problem within the wall
cavity is a universal problem that can damage homes sided with brick, wood,
stucco, and vinyl as well as EIFS." According to Mr. Allmayer, brick has many
more moisture entry points than EIFS; however, moisture problems are more difficult
to test in brick homes.
Mr. Allmayer believes that the drainable EIFS is an effective moisture barrier
provided the entry points are adequately flashed and sealed. "In addition,"
he said, "other components, such as a high-quality roof, windows, gutters, and
downspouts need to be properly installed and maintained to prevent moisture
retention, which is also true with other exterior finishes."
Stephen Klamke, executive director of EIMA, expressed concerns that many
underwriters have failed to recognize the latest generation (drainable system)
of EIFS—developed in response to the ongoing moisture intrusion debate. He stated
that this system is "designed to eliminate incidental moisture buildup in the
wall assembly of homes. There is not a higher likelihood of moisture intrusion
in these homes than in traditional brick homes."
Mr. Klamke contends that with the drainable EIFS, there is air space provided
in the application, just as with brick. "It is exactly the same configuration
as brick," he said. "In fact, drainable EIFS is a superior weather barrier."
When asked why there are so many lawsuits concerning the EIFS product as compared
to brick or traditional stucco, he claims that with brick, there is not an "entity
as definitive to sue." He also believes that the brick industry has "fanned
the flames of this controversy due to their loss of market share to EIFS."
Allen Entrekin, a Philadelphia area builder, echoes some of EIMA's views.
Mr. Entrekin has installed EIFS on over 100 homes in the last decade and has
never been sued. "EIFS is a premium system, particularly the drainable types,
if the application is carefully performed with strict guidelines," he said.
He believes the main problem is with poor installations performed by improperly
trained applicators. He said the EIFS lawsuits are "wholesale attacks on manufacturers
without justification." He does admit, however, that other exterior products
may be more forgiving.
Conclusion
So, which way is this dispute headed? If other insurers follow the dominant
player's lead, it may be more difficult to insure these homes, particularly
with the major concerns over mold problems. If insurance becomes less attainable,
these homes will suffer continued diminution in value.
It is incumbent on insurers to look at the evidence regarding the new "drainable"
EIFS, as research suggests that this is a vastly improved product. A differentiation
between conventional EIFS and drainable EIFS by insurers may be in order, which
could provide insurers the opportunity to write more high-value homes.
From this vantage point, the great synthetic stucco debate is far from resolved
and one worth watching closely in the future.
Helpful websites on the
EIFS Issue Table
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.