Can You Get Stuck with Stucco? Coverage Under an EIFS Exclusion for Property Damage Caused by Construction Defects.

• Date: 01 November 2020
• Author: Hunter, J. Blake

Many commercial general liability policies contain an exterior insulation and finish systems (EIFS) exclusion, which bars coverage under specific circumstances when EIFS is used in construction. EIFS is also known as synthetic stucco and generally refers to a multi-layered exterior building finish. EIFS usually has six layers: 1) an optional water-resistive barrier; 2) adhesive that attaches the insulation board to the supporting structure; 3) a foam insulation board that is secured to the exterior wall substrate; 4) a base coat that is applied to the top of the insulation; 5) a fiberglass mesh that reinforces the base coat; and 6) a finish. (1) These layers are bonded together, but moisture can become trapped between them and lead to wood rot. (2) The trapped moisture can cause damages to the buildings, leading to many property damage lawsuits.

When analyzing the history of property damage caused by EIFS, the Supreme Court in Texas explained:

Long used in commercial construction, EIFS was marketed in the early 1990s as an attractive alternative to conventional stucco in home construction. But installed on wood-frame walls typical of single-family homes, EIFS traps water inside, causing rot and structural damage, mildew and mold, and termite infestations.... Lennar Corporation and another homebuilder it bought built some 800 homes using EIFS, but stopped using it in 1998. After the problems with EIFS were exposed on the NBC television show Dateline in 1999, homeowner complaints poured in. (3) The use of EIFS is no longer as prevalent in the construction of homes, condominiums, and other buildings as it was in the 1990s and 2000s, but it is still in use.

Generally, a person or entity in Florida has four years after a project is completed or after discovery of any latent defect to bring a lawsuit involving the design, planning, or construction of an improvement to real property. (4) In addition, Florida's statute of repose requires an action "founded on the design, planning, or construction of an improvement to real property" must be commenced within 10 years after the latest of several conditions. (5) Due to the statute of repose, claimants are no longer able to file lawsuits for construction defects on buildings that contained EIFS in the 1990s and early 2000s. But some homes, condominiums, and other buildings continue to be constructed using EIFS.

A great deal of insurance coverage disputes arose over the years due to the tendency of EIFS to trap water behind a building's walls. As a result, many insurers implemented an EIFS exclusion in commercial general liability policies barring coverage for property damage that results when EIFS is used in construction. When a commercial general liability policy contains an EIFS exclusion, coverage issues include 1) whether an EIFS exclusion bars coverage if EIFS is used on the exterior of a building, even though the insured did not perform work on or related to the EIFS; and 2) whether the EIFS exclusion precludes coverage for property damage unrelated to the EIFS.

Despite the existence of coverage issues related to EIFS exclusions, few courts in the United States analyzed the scope of an EIFS exclusion. Even though one federal district court in Florida held that a policy containing an EIFS exclusion was invalid because it provided illusory coverage, another federal district court enforced the EIFS exclusion to bar all coverage. The 11th Circuit Court of Appeals has yet to address this issue.

Florida

Recently, in BITCO National Insurance Co. v. Old Dominion Insurance Co., 379 F. Supp. 3d 1230, 1233-34 (N.D. Fla. 2019),6 the Northern District of Florida examined whether various insurance companies had a duty to defend and indemnify a general contractor for property damage allegedly caused by some of its subcontractors' defective work. One of the subcontractors installed the roof, gutters, and downspouts on the project. (7)

The subcontractor's insurer argued that the EIFS exclusion in the roofing subcontractor's policy barred its duty to defend the general contractor, who was an additional insured. 8 The pertinent portions of the EIFS exclusion excluded coverage for property damage arising out of 1) the installation or application of EIFS; or 2) the insured's work with respect to any exterior component, fixture, or feature of any structure if EIFS is used on any part of that structure. (9) The court held that the EIFS exclusion barred coverage "for damage resulting from defective work performed on the exterior of a building if EIFS was used on any part of the building, even where the insured's work did not in any way come in contact with EIFS." (10) Because EIFS was used on the exterior soffits and ceilings throughout the project, the court concluded the EIFS exclusion barred coverage for any work that the roofing subcontractor performed on the exterior components of the project. (11) The court also rejected the argument that the EIFS exclusion would render coverage under the policies...