The amount of litigation related to exterior insulation and finish systems has led to many insurance carriers refusing to write contractors that install it. In addition, some carriers require attachment of an endorsement to Commercial General Liability (CGL) policies issued to such contractors that specifically excludes bodily injury, property damage, personal injury and advertising injury arising out of any act relating to the installation, replacement or maintenance of any of these systems. In spite of this, and as the graph above suggests, the use of EIFS is increasing instead of slowing down. Despite its problems, the building industry continues to use EIFS because of its many benefits. Unfortunately, this also means that many contractors face a significant gap in coverage.
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An example of a typical loss scenario illustrates the problem.
Kaitlyn was excited about buying a new house. Two years after she moved in, one of her children became ill and the doctors suggested that the cause might be mold in the house. She thoroughly searched the house and couldn’t find any apparent evidence of mold. Kaitlyn asked her neighbors if they were having similar problems and the question soon spread throughout the entire subdivision. A local attorney who lived in the neighborhood remembered hearing about problems with siding that retained moisture. He spoke with Kaitlyn about this and they discovered mold behind a section of EIFS siding they removed. Since the house was fairly new, the simple solution was to remove the EIFS, thoroughly clean the exterior and install another type of siding. Word spread quickly and most of the residents in the subdivision approached the contractor, seeking a solution to their own EIFS problems. The contractor notified its insurance carrier of the situation but was informed that coverage for the problem was not available because of the EIFS exclusion on its CGL policy.
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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.
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