Kathy Maus and J. Blake Hunter | Butler Weihmuller Katz Craig
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 illusory and inherently unreasonable, explaining that the exclusion precluded a small subset of claims. 12
Interestingly, this same court, in this same case, relating to the same project, ruled at the motion to dismiss stage that an EIFS exclusion did not bar another insurer’s duty to defend the general contractor. 13 The differing results were explained by the court because the EIFS exclusion in that insurer’s policy was not as broad.
Prior to BITCO, the federal district court for the Middle District of Florida took a different view in Amerisure Insurance Co. v. Auchter Co., 2017 WL 3584896, **1-2 (M.D. Fla. Mar. 20, 2017) (not reported). Auchter concerned construction of an office building that experienced water intrusion problems caused in part by the building’s window system. The general contractor’s insurer provided it a defense in the underlying lawsuit under a reservation of rights, but filed a declaratory judgment action arguing that the glass and glazing subcontractor’s insurance company owed the general contractor a duty to defend and indemnify it as an additional insured for the allegations in the underlying lawsuit. 14
The subcontractor’s insurer counterclaimed, asserting that it had no duty to provide coverage pursuant to the EIFS exclusion, which provided:
This insurance does not apply to.”property damage”.included in the “products – completed operations hazard” and arising out of “your work” or “your product” shown in the SCHEDULE.
SCHEDULE
Description of “your work”:
* * *
1. The design, manufacture, construction, fabrication, preparation, installation, application, maintenance or repair, including remodeling, service, correction, or replacement of an “exterior insulation and finish system” (EIFS).
2. Any work or operations with respect to any exterior component, fixture or feature of any structure if an “exterior insulation and finish system” is used in any part of that structure. 15
The subcontractor’s insurer argued that the EIFS exclusion barred coverage for property damage that involved exterior components of the building when EIFS was used anywhere on the same building. Because EIFS was used on the exterior of the building and its insured installed the window/curtain wall system on the exterior of the building, all coverage for any damages was barred. 16 The general contractor’s insurer argued, to the contrary, that the property damage was not caused by EIFS and EIFS was merely an aesthetic component of the building. 17 The general contractor also argued that the exclusion did not apply because EIFS was not used in the building, but merely sat on top of the building; thus, the exclusion did not apply. It further argued that the subcontractor’s insurer’s interpretation of the EIFS exclusion, if applied, resulted in illusory coverage. 18
Importantly, no evidence in the record demonstrated that the subcontractor (the named insured) ever worked with, installed, maintained, repaired, or in any way came in contact with EIFS. 19 As such, the court held that §1 of the quoted language from the policy did not apply. The subcontractor’s insurer cited multiple cases in other states that enforced the EIFS exclusion even where the work and/or the damages alleged did not involve EIFS. 20 However, the court held that §2 of the EIFS exclusion was “so sweeping” that it rendered the policies illusory and unenforceable. 21 Construing both Georgia and Florida law, the court held that an insurance policy cannot grant rights in one paragraph and take back those rights in another paragraph:
Thus, under Landmark’s interpretation, Landmark purported to provide coverage and presumably accepted premiums to cover “property damage” caused by [the subcontractor]’s defective work, while at the same time included in the [p]olicies an exclusion that would immediately and inevitably eviscerate all coverage because EIFS was allegedly “used” somewhere on the [p]roject. This kind of “gotcha” no-coverage exclusion cannot be countenanced. 22
The court explained that by the subcontractor’s insurer’s reasoning, the subcontractor’s policy did not provide coverage the moment that the subcontractor entered into the insurance contract with the insurer due to the EIFS exclusion. 23 The court further noted that the insurer continued to collect insurance premiums while, at the same time, the EIFS exclusion barred all coverage to the insured for property damage caused by the insured’s work because EIFS was used on the building. 24 For those reasons, the court found the coverage to be illusory and refused to enforce the EIFS exclusion. 25
These cases demonstrate a dramatic inconsistency in this area of law in Florida. Two different federal courts, both in Florida, analyzed essentially the same EIFS exclusion language and came to opposite conclusions when determining additional insured coverage. The court in BITCO held that the EIFS exclusion barred coverage, while the court in Auchter held that the EIFS exclusion provided illusory coverage and refused to enforce the exclusion. Importantly, the court in BITCO was well aware of the Auchter case, but refused to follow that decision because it was not binding, and the court found its reasoning unpersuasive:
The [c]ourt recognizes that a single district court in this [c]ircuit has found a materially identical EIFS exclusion to be illusory, see Amerisure Ins. Co. v. Auchter Co., 2017 WL 3584896 (M.D. Fla. Mar. 30, 2017), but respectfully disagrees with that court’s non-binding analysis and ruling. Instead, for the reasons articulated in the Summary Judgment Order.the [c]ourt finds that Eleventh Circuit precedent on illusory coverage compels a conclusion that the Crum EIFS exclusion does not “eliminate all – or at least virtually all – coverage in” the Crum CGL policy and, thus, is not illusory. See Zucker, 856 F.3d at 1352; see also Interline Brands, 749 F.3d at 966. 26
Other States
Federal courts in other states generally bar coverage under the EIFS exclusion if an insured performs work on the exterior of a building that contains EIFS that causes property damage even if the insured’s work did not damage the EIFS or was not related to the EIFS. For example, in First Mercury Insurance Co. v. Miller Roofing Enterprises, 2013 WL 662970, *1 (W.D. Wash. Feb. 22, 2013) (not reported), the roofing subcontractor’s insurer defended the subcontractor in the underlying suit under a reservation of rights, but also filed a declaratory judgment action arguing no coverage existed under an EIFS exclusion. The defendants argued that the EIFS exclusion did not apply because the leak was the result of “defective workmanship to the roof,” and the roofer “did not install the EIFS on the building, nor did it undertake to make any repairs to the EIFS.” 27 Disagreeing, the court held that the exclusion not only barred coverage for property damage arising from EIFS-related work by the insured, it also barred coverage for property damage arising from any work by the insured on the exterior of the structure, as long as EIFS was used on any part of that structure. 28
However, this same court roughly one year earlier refused to apply the EIFS exclusion. In Capitol Specialty Insurance Corp. v. Yuan Zhang, 2012 WL 1252638, at *2 (W.D. Wash. Apr. 13, 2012) (not reported), the insured contractor performed remediation exterior siding work on an apartment building, but its scope of work did not include EIFS. EIFS was installed on the apartment building before the owner purchased the building and prior to the insured performing the work. 29 Additionally, the owner’s contract with the insured did not specify any repairs to the EIFS. 30
The court declined to apply the endorsement and explained:
The] argument that the language of the exclusion bars coverage for property damages arising out of an insured’s exterior work if any prior individual used or installed the EIFS present on the structure, no matter how small that EIFS area is, and no matter how unrelated that EIFS was to the insured’s work and the resulting damage, is unreasonable as a matter of law. 31
Additionally, the court explained that the EIFS exclusion only barred coverage for property damage arising out of EIFS work performed by or on behalf of any insured. 32 The Yuan Zhang court seemed to go a step further, like the court in Auchter, by holding that the EIFS exclusion rendered the policy illusory and unreasonable as a matter of law.
Similarly, a Texas federal court in Luxury Living, Inc. v. Mid-Continent Casualty Co., 2003 WL 22116202 (S.D. Tex. Sept. 10, 2003) (not reported), analyzed an EIFS exclusion. The homeowners began experiencing water intrusion around doors, windows, and other locations – water accumulated under the crawl space in their home; the deck and balcony were falling off; numerous building code violations existed; and, wood rot and fungus were found. 33 An engineering inspection showed the EIFS system sustained damage from water intrusion and water was intruding through the EIFS and windows. 34
The homeowners sued the general contractor, and the contractor tendered the complaint to its insurer for a defense and indemnity. 35 The insurer denied coverage, citing numerous exclusions, including the EIFS exclusion. 36 The insurer argued that the EIFS exclusion barred coverage “because all the harm to the house alleged by the [homeowners] stemm[ed] from water penetration and deterioration, which necessarily relate[d] to and [arose] out of defects in the exterior of the house.” 37 The insurer emphasized that the EIFS exclusion precluded coverage for any damages not only from the EIFS but also any operations on any exterior component, fixture, or feature performed by the general contractor or its subcontractors. 38 The contractor argued that the EIFS exclusion did not bar the possibility of coverage. “[B]ecause the underlying petition include[d] allegations that [went] beyond the installation of the synthetic stucco product, as to which [the insurer] [did] not assert an exclusion, the duty to defend [was] triggered.” 39 The contractor further contended that a reasonable insured would not believe that the EIFS exclusion applied to damages unrelated to the EIFS. 40
The Luxury court agreed with the contractor and held that many of the other alleged construction defects did not involve any work or operations on any exterior component, fixture, or feature of any structure. Because the complaint contained allegations that went beyond the installation of the EFIS, as to which the insurer does not assert an exclusion, a duty to defend was triggered. 41
Conclusion
Most caselaw indicates that an EIFS exclusion will bar coverage if the insured performed work on EIFS and the defective work caused property damage. As discussed above, if the EIFS exclusion states that it bars coverage when the insured performs work on any exterior component or portion of the structure and EIFS is used on any part of that structure, or similar terms, courts generally interpret this to mean that no coverage exists for property damage if the insured’s work on the outside of the structure caused the property damage, even if the property damage was unrelated to EIFS. A handful of courts in the U.S. held or implied that this language in an EIFS exclusion provides illusory coverage and refused to enforce the endorsement, but these courts are the exception and not the rule. However, if the underlying complaint alleges that an insured performed work on the interior of the building that caused property damage, an EIFS exclusion likely does not bar an insurer’s duty to provide coverage, including a duty to defend.
If this issue is ever examined by the 11th Circuit Court of Appeals, it will likely side with the court in BITCO by finding that an insurer does not have a duty to provide coverage, including a duty to defend, as long as the EIFS exclusion is broad and the underlying complaint does not allege that the insured performed interior work that caused property damage. “Florida law provides that insurance contracts are construed in accordance with the plain language of the policies as bargained for by the parties.” 42 In order for an insurer to provide an insurance policy to an insured, the parties must bargain for the terms of the policy, including the exclusions set forth therein. For an exclusion to cause a policy to be illusory, the exclusion must “completely contradict the insuring provisions” and “eliminate all – or virtually all – coverage in a policy.” 43 A general liability policy with an EIFS exclusion would still provide coverage to an insured for property damage or bodily injury caused by the insured on a building that did not contain EIFS or for work to the interior of the building. A court will enforce the bargained-for exclusions as long as they are not ambiguous or violate public policy. We expect the 11th Circuit will recognize this axiom and hold that the presence of a broad EIFS exclusion does not make coverage illusory.
Attorneys who practice in insurance coverage should carefully review the EIFS exclusion in the insured’s policy to determine its scope when analyzing whether coverage is owed to the insured. For attorneys who draft contracts between general contractors and subcontractors containing language requiring additional insured coverage, they should be careful if EIFS will be used on the building. If the subcontractor performs defective exterior work on a building containing EIFS that causes property damage, an EIFS exclusion will likely bar coverage.
Footnotes
1. Janet Wickell, What Is EIFS — Synthetic Stucco? Synthetic Stucco Explained, The Balance Small Business (Oct. 2019), available at https://www.thebalancesmb.com/eifs-synthetic-stucco-1797883.
2.Id.
3.Lennar Corp. v. Markel Am. Ins. Co., 413 S.W. 3d 750, 751-52 (Tex. 2013).
4. Fla. Stat. §95.11(3)(c) (2020).
5.Id.
6. The authors represented the plaintiffs in this case.
7.BITCO, 379 F. Supp. 3d at 1242.
8. An additional insured endorsement in a general liability policy provides coverage to other individuals or groups that are not a named insured under the policy. If an additional insured is sued, it will normally seek additional insured coverage from the named insured’s insurer under the named insured’s policy. BITCO, 379 F. Supp. 3d at 1241.
9.Id.
10.Id.
11.Id. at 1241-42.
12.Id. at 1242-43.
13.BITCO Nat’l Ins. Co. v. Old Dominion Ins. Co., 2018 WL 5726233, 2018 U.S. Dist. LEXIS 228408 *1 (N.D. Fla. Mar. 12, 2018).
14.Auchter, 2017 WL 3584896 at *8.
15.Id. at **9-10
16.Id.
17.Id.
18.Id.
19.Id. at *20.
20.Id. at *21.
21.Id. at *24
22.Id. at *25.
23.Id.
24.Id.
25.Id.
26.BITCO, 2018 WL 5726233 at n.1. The only other case in Florida that addressed the “any work” provisions in an EIFS exclusion is Vinings Insurance Co. v. Vallery Custom Homes. Inc., 2012 WL 13102313 [Lexis] (M.D. Fla. March 7, 2012) (not reported). The court held that the undisputed evidence demonstrated that EIFS was used on balconies (damage at issue) and on other portions of the home. The court further held that the EIFS exclusion’s broad language precluded coverage “because the balcony or column is an exterior component of a structure that has EIFS on it, or alternatively, the balcony was a structure with EIFS applied to it.”
27.First Mercury, 2013 WL 662970 at *2.
28.Id.See also Devington Condo. Ass’n v. Steadfast Ins. Co. 2007 WL 709032, at **1-3 (W.D. Wash. Mar. 5, 2007) (not reported) (holding that when the insured was hired to perform renovations on condominiums, “including replacing the exterior siding with an exterior insulation finish system (‘EIFS’),” and the insured hired a subcontractor to perform the EIFS work, the EIFS exclusion barred coverage for property damage caused by water intrusion because “the broad language of the EIFS endorsement suggests that the exclusion was meant to exclude any EIFS work from coverage, regardless of the party performing the work. Accordingly, the plain language of the EIFS endorsement excludes work performed by subcontractors from coverage.”).
29.Yuan Zhang, 2012 WL 1252638 at *3.
30.Id.
31.Id.
32. Id.
33.Luxury, 2003 WL 22116202.
34.Id.
35.Id. at *3.
36.Id.
37.Id. at *16.
38.Id.
39.Id.
40.Id.
41.Id. at *17. Trinity Universal Ins. Co. v. Employers Mut. Cas. Co., 592 F.3d 687, 693 (5th Cir. 2010) (holding that the EIFS exclusion did not preclude a duty to defend because the petition alleged property damage stemming from the insured’s work on non-exterior portions of the building); Catlin Specialty Ins. Co. v. Montelongo, 2013 WL 1702172, *3 (W.D. Tex. Apr. 18, 2013) (not reported) (holding that the property damage may be related to the installation of traditional stucco, which may not fall under the EIFS exclusion); Ins. Corp. of Hannover v. Skanska USA Bldg., Inc., 2008 WL 2704654, at *4 (S.D. Tex. July 3, 2008) (not reported) (coverage was owed because the endorsement only excluded coverage for property damage arising from work on an EIFS or “any component or part thereof,” and the scope of the insured’s work included traditional masonry and stucco in addition to EIFS; the policy did not include the “any work” provision).
42.Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29, 34 (Fla. 2000).
43.Zucker for BankUnited Fin. Corp. v. U.S. Specialty Ins. Co., 856 F.3d 1343, 1352 (11th Cir. 2017); Interline Brands, Inc. v. Chartis Specialty Ins. Co., 749 F.3d 962, 966 (11th Cir. 2014).