Are insurers selling themselves short by issuing broad exterior insulation and finish systems exclusions on contractors' general liability policies? Could the reality be merely that some EIFS are better than others? Or some EIFS contractors do better work than others? There is an ongoing debate in the industry whether EIFS liability exposures can be underwritten or should simply be excluded. Underwriters need to carefully evaluate the risks faced by a contractor from exterior insulation and finish systems.
In response to the surge in construction defect claims involving exterior insulation and finish systems (EIFS), most insurers have slapped broad EIFS exclusions on contractors' general liability insurance policies. Unfortunately, many insurers are painting all contractors with the same brush, excluding all coverage for damage associated with an EIFS from virtually all contractors' policies. As a result, contractors who install EIFS have been forced to look elsewhere (e.g., an industry-funded risk retention group) for protection against liability claims.
The problem with categorically excluding all EIFS-related losses is that it is based on an assumption that EIFS are inherently bad—that is, they categorically pose a high risk of property damage regardless of the quality of the installation work—and therefore are inherently uninsurable. Could the reality be merely that some EIFS are better than others? Or some EIFS contractors do better work than others? These are issues that are true for virtually all classes of construction, and yet insurers routinely insure other classes of contractors. They merely try to avoid insuring those contractors within the class who are more likely to have losses. Could the commercial insurance industry be missing out on an entire class of business that has the potential to be underwritten profitably?
First, let's address the question of whether EIFS are inherently bad. There are strong opinions on both sides of this question. EIFS manufacturers adamantly maintain that the product is no more prone to damage caused by water infiltration than other types of finish, including brick. The key, they claim, is in designing a quality system, installing it properly, and protecting its integrity. Critics of EIFS argue that these systems, even if they are not more prone to water penetration (which is not a foregone conclusion among critics), they are very unforgiving in terms of allowing water that does penetrate the building envelope to escape. That is, the properties of the product that make it a good insulator (designed to keep air from moving from the inside to the outside) also make it a poor drainer/ventilator (does not allow water that gets in to get back out). EIFS manufacturers responded to this criticism by developing drainable systems that provide a way for water that gets behind the EIFS to escape. (Some manufacturers maintain that even barrier EIFS are water vapor permeable.)
The lack of agreement among construction experts regarding whether EIFS are more prone to claims than other types of finishes is partly responsible for insurers' decision to take the safe route of avoiding these risks altogether. However, insurance companies have historically shown a willingness and ability to develop ways to provide coverage for what were once considered largely uninsurable risks, and to make money doing it.
For example, in the years immediately following the enactment of the Superfund law, pollution liability insurance was difficult if not impossible for many property owners to obtain; just a few years later this same market was not only present, but highly competitive. Today, the market for pollution coverages remains robust. Likewise, after the attacks of September 11, 2001, terrorism exclusions appeared on virtually all commercial property policies. Some experts cited the virtually impossible task of predicting the frequency and severity of terrorist attacks as a reason why this was an insurable risk. But within a year, stand-alone terrorism policies were available, as a few insurers seized what they considered an opportunity to make headway into a new market. (Terrorism insurance was already being sold in other parts of the world, why not here?)
The bottom line is that if EIFS are not, in fact, inherently bad, there is no reason for insurers to avoid this class of business. The key, then, is giving underwriters the proper training to evaluate the EIFS exposure. That is, assuming not all EIFS contractors are created equal, how does an underwriter go about determining if a given contractor is an acceptable risk with regards to the EIFS exposure?
Figure 1 provides a list of questions that construction insurance underwriters can use (in addition to prior work experience and claim history) to assess the quality of an EIFS risk. This list, compiled by an EIFS manufacturer's representative in consultation with members of the construction and insurance communities, addresses the contractor's commitment to education, training, and quality. Contractors should also maintain proper documentation of their work and take other reasonable steps to facilitate the settling of any issues that do arise without litigation. A "yes" answer to all of these questions indicates a higher than average level of professionalism, quality control, and risk mitigation in an EIFS contractor.
Figure 1 EIFS Underwriting Questionnaire
- Is the contractor properly trained in EIFS installation?
- Do employees have product-specific training?
- Does the contractor have a quality control manual, including an installation and project completion checklist? Are the latter items used consistently?
- Does the contractor always use a single manufacturer's components on each project? Does the contractor maintain current documentation on products?
- Does the EIFS product the contractor uses have full code approval from the model code agency in its territory?
- Does the contractor require plan reviews by the EIFS manufacturer as part of its contract to do the work?
- Does the contractor primarily install drainable systems?
- Does the contractor require written contracts with (a) a well-defined scope of work, (b) an arbitration clause for disputed items, and (c) pre-construction meetings and coordination requirements?
- Does the contractor have a process to document and correct nonconformance issues discovered in the building process?
- Does the contractor perform a post-completion inspection to document any changes made to its original work? (e.g., installation of signs, lighting, or other attachments requiring holes through the system?)
- Are subcontractors used to perform all or any part of the EIFS contract? If so, what quality control criteria does the contractor have for its subcontractors?
- Is the contractor willing to walk away from the job if quality is being compromised?
Education and Training
EIFS installation is a multistep process that must be coordinated with other key operations, such as window installation and flashing. Contractors need to have properly trained workers, who understand each step in the EIFS installation process as well as how it properly fits into the overall construction process, performing the installation. The question is, how can we know if a given contractor has properly trained employees? One way is to look at the types and quality of the training they receive.
The EIFSmart Contractor distinction was established by the Association of the Wall and Ceiling Industries (AWCI) in 2002 as a way to identify highly qualified EIFS installers. To be eligible for the EIFSmart distinction, a minimum percentage of a contractor's EIFS installation employees must complete a training course and pass a certification exam. The eligibility requirements for the EIFSmart distinction are summarized in Figure 2. Maintaining EIFSmart status requires annual reporting and renewal.
|Figure 2 EIFSmart Certification Requirements
||At least 10 percent of the contractor's EIFS employees are certified; and
||At least 1 management level employee is certified.
|Beginning July 2004
||At least 10 percent of the contractor's EIFS employees are certified;
||At least 1 management level employee is certified; and
||An EIFS-certified foreman must be assigned to each EIFS job site.
|Beginning July 2005
||At least 40 percent of a contractor's EIFS employees are EIFS certified.
||At least 1 management level employee is certified; and
||An EIFS-certified foreman must be assigned to each EIFS job site.
While this distinction does not guarantee the quality of a contractor's work, it does demonstrate a commitment to EIFS training and education, and can be used by underwriters as a baseline requirement in their underwriting criteria. For more information on the EIFSmart certification program, visit this site.
Product-Specific Training. Part of the problem in EIFS installation is that each manufacturer's system is different; therefore, the proper installation techniques vary by product. Contractors should have key field personnel periodically attend product-specific training programs for each EIFS product they use. An internal training program should be established for employees who did not attend the manufacturer's program, including newly-hired employees. A foreman with product-specific training should be assigned to each project.
EIFS are made up of several components. First, an expanded polystyrene (EPS) insulation board is secured to the substrate behind the exterior wall surface. A durable, water-resistant base coat is applied on top of the insulation, into which is embedded a layer of specially-coated fiberglass reinforcement mesh. A finish coat gives the product its final stucco-like aesthetic appearance.
One of the reasons some EIFS systems fail is that contractors mix and match the components of different systems (possibly for cost-cutting reasons), which sacrifices the integrity of the system. For this reason, it is imperative that contractors use only a single manufacturer's system components on any given project. (This not only reduces the risk of loss, but also preserves the integrity of any claims against the manufacturer.)
An up-to-date quality control manual should be available to all project foremen. In addition to installation information, these manuals should contain helpful tools, such as project completion checklists. When used consistently, these checklists can help avoid errors and oversights in the process. EIFS contractors should require that these checklists be completed and kept on file.
Contractors can avail themselves of the manufacturer's product expertise by requiring a plan review by the EIFS manufacturer as part of their contract to do the work. If the contractor uses subcontractors to perform any or all of its EIFS contract, the contractor should have written subcontractor selection criteria, including training and quality control requirements. Most of the training and quality control issues listed in this article would apply equally to subcontractors. The contractor should review key items and inspect all completed work.
Finally, if the quality of the EIFS work is being unreasonably compromised by another contractor's decisions, the EIFS contractor needs to be willing to walk away from the job. For example, in its desire to stay on schedule, the general contractor may try to rush the installation process, or perform other key work out of proper order to the EIFS installation. Because of what is at stake, contractors have to be willing to say "no" when asked to take shortcuts (or when forced to work around them) that sacrifice the product's integrity.
Contractors should keep copies of each manufacturer's product information sheets, brochures, specifications, instructions, and other details. When the products are modified, out-of-date items should be replaced with current information, but old items should not be discarded. Instead, move them to separate file (e.g., "out-of-date product information") for a minimum of 10 years (or whatever the statute of repose is in the applicable state). The contractor's records should show which manufacturer's system was used on each project, as well as the date of completion.
A process should be established for documenting and correcting nonconformance issues discovered during the building process. Further, contractors should always perform a post-completion inspection to document any changes made to their original work, such as installing lights, signs or other attachments to the exterior of the building, drilling holes for cables to be run into the building, etc. These records should also be retained until the applicable statute of repose expires.
Contractors can build certain protections into the contract documents. First, all contracts should be in writing, and should include a well-defined scope of work to avoid a misunderstanding regarding the contractor's responsibilities. Preconstruction meetings for the purpose of identifying problems and coordinating subcontractors' work can do much to improve the work processes and avoid disputes.
Another contractual provision to consider is an arbitration clause that requires both parties to a dispute to submit to an independent arbitrator, who will hear both sides of the dispute and render a binding decision. This process is much faster and significantly less expensive than litigation.
The debate over whether or not EIFS is an inherently inferior product may go on for some time, but it is still a very popular and commonly used construction material. Insurers who are committed to the construction industry should review their stance on this issue periodically to determine if they should be providing coverage for their customers. While EIFS present construction challenges, the insurance industry's response of categorically excluding the EIFS exposure may be unnecessary. With education and training, underwriters can learn how to identify quality EIFS installation contractors for whom coverage might be profitably written, and to assess whether their general contractor insureds are using best practices when selecting and managing EIFS installation subcontractors for their projects.