Trouble Brews: Insuring Synthetic Stucco Homes
International Risk Management Institute, Inc. 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.
CONVENTIONAL EIFS SYSTEM COMPONENTS Reprinted with permission from EIFS Industry Members Association: EIMA
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.
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 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 EIFS 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 Web Sites on the EIFS Issue Organization.
by Robin Olson
Website EIFS Industry Members Association Nonprofit trade association composed of 500 leading manufacturers, suppliers, distributors, and applicators of EIFS http://www.eima.com/
Kinsella Communications, Ltd Communications company that provides notification and information regarding class-action lawsuits, including EIFS http://www.kinsella.com/
Georgia Area Home Inspectors Statewide organization dedicated to improving the service and reputation of the home inspection profession http://www.gahi.com/eifshome.htm