The Insurance Services Office (ISO) introduced CG 21 86, Exclusion–Exterior Insulation and Finish Systems in 2004. However, most insurance carriers actively writing contractors had been using their own versions of this form since the mid-1990s. The mold problems first appeared in some southeastern states because wind-driven moisture accumulated behind the siding. It didn't take long for major class action mold-related litigation to spring up in condominium projects in California in addition to other problems involving construction defects.

One solution was for contractors to simply not use EIFS products. The manufacturers found this solution unacceptable and starting working with the marketplace to develop solutions to the problems. Since trapped moisture seemed to be the obvious culprit, the manufacturers developed a drainage system that allowed the moisture to escape. As a result, some insurance carriers resumed offering CGL coverage for EIFS to contractors that used the drainage system. Unfortunately, the drainage system failed to provide the hoped-for relief and most admitted carriers again refused to provide CGL coverage for EIFS. Since the manufacturers failed to provide an effective solution that also solved the insurance problem, most admitted markets stopped providing the needed coverage for EIFS contractors.

The nonadmitted market has developed programs that provide coverage for the EIFS exposure on a carve-out basis using a stand-alone product. Jill Bay, EIFS program manager at PGI Commercial, targets smaller artisan contractors that cannot convince their CGL carriers to remove the EIFS exclusion. The PGI policy replaces the EIFS exclusion on a “carve-out" basis. As a result, the contractor still needs to keep its CGL coverage with a standard carrier. PGI uses nonadmitted paper, as do most of the markets offering this coverage.

Limits of insurance are usually $1,000,000/$2,000,000 and the policies are written on a claims-made basis, with a limited extended reporting period (ERP). A self-insured retention (SIR) should be expected and varies, depending on the size of the contractor. Ms. Bay states that PGI normally requires a $10,000 SIR on smaller artisan contractors.

Roger Ware of Genesee General and Ms. Bay both explain that this coverage is not price sensitive and is relatively stable. Michael Egan, director of property programs at NSM Insurance Group, adds, “More markets are writing the coverage this year so pricing is leveling off from hard market pricing.” Patrick Fleming, Jr., of Jimcor Agencies, says “With the introduction of a few new carriers and an association captive, price is declining slightly but definitely not with the same softening as the majority of the insurance marketplace.

Geographic issues enter into the EIFS marketplace. According to Mr. Egan, “Wind-driven claims are a problem in the southeastern states along with any states that have a coastal exposure.” Mr. Fleming adds, “In areas such as Metro New York the overall contractors market still remains somewhat hard, therefore EIFS is also difficult to place in that area.”

Mr. Fleming warns about the sunset provisions in some EIFS liability products. The policy may provide coverage for only the projects listed on the policy. This means that the agent must be very diligent and thorough in keeping the insurance coverage on track with the projects as they come aboard. He says, “If an agent or insured fails to notify the carrier that coverage is needed for a particular project not originally scheduled, the policy will not respond to claims arising from that project. More importantly, if the insured’s agent doesn’t provide the carrier with a list of projects to be added to the scheduled project endorsement at renewal, the renewal policy will not provide coverage on those operations either."

EIFS specialty products are not all created equal. Even when EIFS coverage is provided, mold exclusions may be added that virtually eliminate all mold-related coverage. This limitation is very significant, especially in southeastern states with the problem of wind-driven rain. Some carriers may be willing to extend mold coverage for a price. Others are not.

Mr. Ware believes the insurance industry is 10 years behind when it comes to EIFS issues, since it is still reeling from claims paid from the original product, but he is excited about a new EIFS product developed by EIFS manufacturers Sto Corp. and Dryvit Sytems, Inc., and the reaction he has received from one of his markets. He explains, “The product is a spray-on product that looks like paint and both coats the drywall to keep moisture out yet allows air to circulate, eliminating potential mold problems.” This product has a 10-year warranty but it is expensive. Mr. Ware is working with a major east coast insurance company that is willing to write CGL coverage, without any EIFS or mold exclusions, for contractors that use this new product and attend a three-day training course on proper installation developed and put on by the manufacturer.

Other insurance carriers also see the value of encouraging relationships with manufacturers of these systems. Mr. Fleming says that contractors who become “certified” installers of EIFS products for a particular manufacturer become more insurable after attending and participating in such training.

Will this new EIFS product be the solution to the EIFS coverage issue, or will it go the way of the drainage system solution? Everyone is hoping for the best.