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.
Currently | 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.
Quality Controls
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.
Documentation
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.
Contract Issues
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.
Conclusion
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.