Much has been written in W&C about the issue of insurance in the EIFS industry. The Exterior Design Institute, a trade association based in Norfolk, Va., has recently developed an insurance program for EIFS inspectors and contractors called "The Integrity Program."
This article is a conglomeration of bits and pieces of several interviews with EDI about the program. This program is a significant attempt to address the insurance issue. For more information, visit www.eifshotline.org.
The people involved with the interview are:
• Ray Lynch: President of Design Management Group
• Austin Scanlon: Chairman of the Board of Exterior Design Institute
• Jim Whalen: President of EDI
The integrity program, in generalW&C: The magazine has a broad readership, including contractors, distributors, manufacturers and others who are very involved with the EIFS industry. Give the readers an idea of what EDI is, who EDI's members are, what the group does, so W&C readers can get a perspective on where this program is coming from.
RL: I formed EDI in 1992 during an ASTM symposium in Washington on EIFS. I met with a lot of guys who were doing consulting work. There were about 20 of us. I said, "We're all out here consulting but have no books or guidelines. Wouldn't it make sense if we formed an organization where we can get together and exchange ideas?" It was an informal organization, formed by consultants-not inspectors-to share information.
JW: We have 500 members now. We have changed directions, from what happened in 1996. We have graduated 1,500 inspectors around the country and internationally. There's a mix. About 40 percent home inspectors, an equal number of applicators, and the last 20 percent are engineers, architects and other professionals.
W&C: What is the thrust of EDI now? Marketing? Industry information? Technical?
AS: Back in 1996, there were projects that needed to be inspected. Someone needed to set up a training and certification program. We were reading all the horror stories of people with no experience, making decisions about tearing things off and fixing them. So, we got our group together and wrote a program.
W&C: How do your members now get their EIFS experience?
RL: I wrote a program. I drew in the leaders in the industry, to teach the first class, and ended up with about 15 (instructors). I brought in specialists in many areas. We had quite a platform. We also did a wet wall training demo, but found it didn't work and had to get rid of that.
W&C: Why was that a problem?
RL: It was so hard to coordinate and get done. We had 140 people at one session in Hilton Head.
W&C: As I recall, you've done these (training sessions) all around the country.
RL: We've done more than 20 around the country. This was a volunteer effort.
W&C: From what I've seen from your Web site, it looks like now you are going toward an online program.
RL: The problem was that we were not getting enough inspectors.
W&C: Why was that a problem? Travel, maybe?
RL: Travel and time commitment. At least a few days of lost work time. We tried to do it over the weekend. Every day they are at training, they cannot work. There are not that many salaried people floating around in the inspection business. Almost all are independent. We finally took it (the program) and converted it into an online program.
W&C: By online, you mean the Internet?
RL: Yes, it's partially Internet and five CDs.
W&C: Can you take it at home without Internet access?
RL: No. We had to do some of the stuff on CDs because a lot of people do not yet have high-speed Internet connections, such as (are needed for) videos. That (the Internet) has been our only training method for the last year.
W&C: This interview is about the Integrity program. Is that what you are describing?
RL: No. The Integrity program ties into our insurance program (for inspectors).
W&C: How do they fit together? What's the connection?
JW: First we found that our own inspectors were having trouble getting insurance. They were getting exclusions for doing EIFS. This trend seemed to be spreading through the industry to architects and contractors and so on. There were restrictions and very high deductibles. So, we went around trying to find a carrier for insuring EIFS.
The ads (media coverage) about EIFS were getting out of hand. The negative publicity was horrendous. They're getting drawn into lawsuits from synthetic stucco. But then we were asking them (the insurance industry) to get involved with the same industry again.
W&C: I hear you and I say, "I'm an inspector and I need insurance, and I'm a contractor and need insurance, and then there's the manufacturer that also has insurance issues." Is the EDI program really an "insurance" program?
RL: The EDI insurance program is an insurance program but there are three parts to it. The first step was to take care of our membership-the inspectors-and we have such a program now.
RL: Now that our guys are insured, I still hear that the contractors are having trouble getting insurance. I thought, "This is great. Now they can't get insurance, so there's no one to put the stuff on. Thus, we (our EDI inspectors) have nothing to inspect." What is really happening now, about 75 percent of the applicators are doing the work without any coverage.
W&C: How do they do this?
RL: What they have is general liability insurance but EIFS exclusions are not always in the language of the certificate of insurance GL policy itself.
W&C: It seems that what you want is to not want to have these problems in the first place. How does your program deal with that side of the matter? What is different about EDI's program? Why is it unique? Who funds this program? EDI is not an insurance company.
RL: The insurance is being underwritten by Lloyds of London. They are not partners (in the EDI program, per se) but they are insurers. Here is what is different between what we have and what insurance companies normally do: Most companies use Insurance Services Office rates to develop loss ratios, which is the ratio based on payments coming in, versus payments paid out. There are other things (costs) that an insurer needs to consider. For example, if they put it through an underwriting agency, they also take a hunk (of the premium). So does a wholesale (insurance) broker.
W&C: Does EDI deal directly with Lloyds?
JW: No, EDI deals directly with Design Management Group. DMG has a contract with EDI to provide all training and has extended that to insurance.
W&C: So, you are the conduit to the top-level insurer, which is Lloyds.
RL: Lloyds handles the contractor insurance but is not involved with the inspector insurance. We did not approach Lloyds about the inspector insurance. In the United States, the insurance industry totally works on "guess" principle. But for any insurer, anything more than 40-percent loss ratio is not considered.
W&C: They must want plenty of margins then.
RL: No, they have 25 percent that goes to the agents. Then they have a legal network and adjusters, too. So, they write the insurance and figure the rates after it's happened.
To get the insurance, they go through our insurance advisor in New Jersey, who is Lloyds' agent.
To finish your questions, what we did is take the loss ratio for the EIFS industry, took all the things that affect it, and reduced it. One is a requirement for drainage EIFS, which has had very few claims. We also add inspection for the work as it is done. An inspector can file a note with DMG if the work is being done improperly. If so, the contractor gets a notice of intent to cancel the insurance. What we want to do is limit the claims.
The other difference is that you cannot just go to the lawyer and sue somebody. All our contracts have clauses requiring binding arbitration.
The third step in our program is the manufacturer. The only way the contractor can come into the program is by being sponsored by one of our registered manufacturers. The manufacturer has to issue a 10-year warranty on every project.
W&C: On any project? Even a house?
RL: Yes. It's a three-year warranty that is extended for another seven if it is re-inspected during the first three years. The contractor issues to us a blanket three-year warranty for the labor only.
We took the position that we wanted to get rid of the risk exposure at the very front (end of the construction process), with a quality-control program that has some stiff requirements in it. We broke down each project into eight items. Those items are sent into us and we review them to make sure those items are being done right at the jobsite, and then the job goes forward.
W&C: Do you have the staff to do all this?
RL: We have the key people in place and are ready to expand as needed. We even wrote our own software for it.
W&C: Big EIFS companies may have their own standards for how to do things. How do you know what's acceptable?
RL: On each project, the applicator is insured only if he submits a copy of his contract, his actual contract amount, and the square footage. Then, we issue the general contractor a certificate of insurance. And then we assign the inspector. They (the EIFS contractor or the EIFS manufacturer) have nothing to say about who the inspector will be, to avoid any type of collusion.
W&C: How do you know that what on the job is appropriate? The details, etc.?
RL: We actually have a requirement of what has to be photographed. As part of the applicator's contract, it states that only registered manufacturers details prevail.
W&C: How do you handle it if it's a building with some crazy details that are not published?
RL: Under the manufacturer's program, when they register with us, their details and any special instructions that they want, go on our Web page in our online library that anyone can get to, so that everyone is working under the same conditions.
W&C: It seems there's a high reliance on quick communications that allows people to share information and know what going on. Is that right?
JW: We can't have inspectors on a job site slowing the job down. If there is a problem, we need to get it fixed right away; otherwise we could delay the entire job.
W&C: How do you handle the issue of it not being a standard detail?
RL: There's a part of the applicator's contract that says he must install it according to the manufacturer's instructions, and only a registered manufacturer's system. Let's say some big customer of a manufacturer calls up and says, "I've installed a square groove (but you require) an arrowhead groove, so the water will run out, on the horizontals (joints). So, write me a letter and say that a square groove is OK." They can't do that under this program. This is what happens: They have to request (a variance) from the manufacturer. The manufacturer cannot change any of their details. He does not have the (sole) authority to issue a letter saying it's OK to do it that way. Nor do we at DMG. The only way is for both the manufacturer and DMG to agree on a custom detail.
W&C: Do you think that that would stifle the construction process?
RL: I don't think so. I don't think there are that many weird details that cannot be figured out fairly quickly.
W&C: This sounds very rational to me. The irrationality of some of the things that have been going on is the reason we're sitting here today.
AS: And there was heavy competition too. There are, say, 30 manufacturers all chasing the same customer, the same way a general contractor can play one applicator against another to get his number down. For more than 20 years, from the 1970s to the 1990s, we had very few problems in this industry. And those problems we did have got fixed in a hurry.
W&C: It was extraordinary (back then) how much concern there was about jobs being right, and fixing them. Things have changed since then. Margins are lower, and the money to throw at the problems to fix them is not there, and that is part of the problem. How does a contractor become part of this "system"?
AS: If they have already gone through a training program, such as those provided by other groups like Association of Wall and Ceiling Industries or the Northwest Wall and Ceiling Bureau, and can show a certificate from any of these programs, then there's a minimum amount of additional training that is needed.
Plus, his lead foreman on each project must be trained. The lead foreman will be a sub member (of EDI) to the principal. The principal of the firm is the EDI member.
W&C: What do contractors do to get started?
RL: First, they need to become an EDI member.
W&C: How do they avail themselves of this opportunity?
JW: The first step would be to take the exam. The (EDI) membership dues are $400 per year. I'd take the exam first, pass it and then join. Then I'd sign up for the insurance.
W&C: As a result of passing the exam, does he get some kind of certificate of competence?
JW: Yes, but before that, he has to be recommended by a manufacturer.
W&C: What if the manufacturer approves of a contractor and then the work ends up being lousy?
RL: If the work is bad, he (may) gets a notice of intent to cancel the insurance and won't get another certificate from us. We'd refund the balance of his insurance.
Insurance vs. loss prevention vs. inspection
W&C: Is this EDI program an "insurance" program or a "quality assurance" program or a "loss prevention" program, or what?
RL: It's a hybrid. The last step in the chain (of construction) is the guy who's been forgotten, the owner. This came out of (my experience) working on houses, when many owners know absolutely nothing about construction ... they just "bought the house." Now they have a mess that needs to be fixed. That's the real customer ... the end users. That's who has to be protected.
W&C: The program strikes me, as insurance and assurance, and an attempt to never even have to invoke the insurance. How does that benefit contractors and owners?
RL: It's essentially a loss prevention program. The loss prevention is what the insurance companies often do after the claim. We're putting that up front. That's what makes it a hybrid. There's a double warranty.
W&C: What do you mean by that?
RL: The applicator has to warrant his work for three years. The manufacturer has to warrant his for three and seven more. To get to the insurance, we thus have two layers. It's designed not so much to protect the contractor but the building owner. Now, the owner can buy a place with confidence.
W&C: Do the contractors themselves need to keep records? Do they need to go online?
RL: Yes to both but the first step is to get the insurance certificate for that project.
W&C: Most EIFS now is commercial. Do you see any other markets?
AS: There is another broad goal (to this program), which is to bring EIFS back into residential.
W&C: By "we," you mean EDI?
AS: Right, through an insurance program that protects the owner. It's hard to find anyone in this area who's using EIFS on houses now. It used to be that half of the houses in the $200,000-plus range were being built were EIFS.
W&C: Is the insurance project-specific?
RL: Yes. And then we appoint the inspector, we coordinate the timing, so that the inspector is at the site at the right time, such as when the house wrap is being installed, or the flashings, so we can take shots (photos) and have a record. The final inspection even includes the sealants.
W&C: Are the inspections at the site "unannounced"?
RL: All they do is let them know what phase they are at and they're unannounced from then on.
W&C: I assume the inspector files his reports separate from the contractor?
RL: Yes, he sends them (to EDI) electronically. We're establishing a Web site and our software for doing this.
W&C: This sounds an administrative challenge ... keeping track of what could be thousands of projects per year.
RL: Yeah, that's one of the reasons why we have several computer consulting firms working for us on this. There's lots of information flowing back and forth. Without the technical abilities we have today, we could not do this. That's a big consideration for the contractor. He does not want to be waiting around on the construction site for some paperwork. On the other hand, if there is a problem, we can find out about it early, and that would save the contractor a lot of money. We are not saying that in every case that a contractor will be written up for not doing something correctly, we just want our inspectors to be comfortable with what is being done. It's a confidence-building thing.
W&C: One problem is sometimes there are minimal drawings and specs; the job is not well documented. Yet EIFS manufacturers have requirements but they are not part of the project's contract.
RL: Each manufacturer that registers with us registers its specs and details. Unless it is something exotic, it'll work out OK.
W&C: Sometimes there are no drawings all. Does EDI get involved in some sort of design role?
RL: That's why we have the online library (of design details). Both the inspectors and the applicator have this online library available to them.
W&C: This program is new. What kind of interest have you had from the various groups that would be part of it, such as contractors and inspectors and manufacturers?
RL: We are starting with a small base for premiums. We are working to expand but we have to deal with it as we go. That's the maximum premium amounts we can insure. That's only for the EIFS and some direct-applied, and some one-coat systems. Unless the systems has details, we can't get involved with them since we can't know how they should be installed.
W&C: I've seen jobs where most of the wall is stucco, with some EIFS foam shapes added on. Does your program cover that type of system?
RL: Our package is for EIFS and some direct-applied (systems) and some one-coats (systems). We must have the details and specs.
W&C: Is this strictly an EDI program?
RL: DMG has a contract with EDI to provide technical training and loss prevention-the insurance aspect. EDI is a small organization and doesn't have the money to do such a program (in-house).
When designing this program, we also had to look at each group and see how it would benefit them. For example, how do they deal with the "trunk slammers" (fly-by-night operators)? He (a reputable contractor) can't deal with them based on price. But if he has to get insurance and get his jobs inspected, then he is on a fair playing field. And the "trunk slammer" has to find some manufacturer who will sponsor him. We do not accept an applicator directly. They have to be sponsored by a manufacturer.
W&C: Say, for instance, a contractor is already involved with another insurance or training program. Can he be involved with this program too?
RL: Sure. They are simply different organizations, with some things in common. For example, AWCI did a very good job on their program for applicators. We're actually not putting an inspector on the job site but rather a "quality control consultant." This program can also include retrofit and repair work.
W&C: Whom does the inspector's (pay) check come from?
RL: DMG. We collect that as part of the premium. It's based on square footage.
W&C: How do you handle disputes? Say, color/texture problems.
RL: If it can't be resolved on-site, we can get involved. We have a binding arbitration clause. Some problems resolve with the manufacturer, say, if the color in the pail is way off.
W&C: Any substrate (type) limitations in this program?
RL: Limited to those that are acceptable to the EIFS manufacturer.
W&C: How will you roll out this program?
RL: We've invited four manufacturers into the program; including the applicator packages to their distributors (so they can) talk to their contractors about insurance. This is an EDI member program.
The foreman may require some supplemental training. But the EDI membership is tied to the principal of the firm and is nontransferable. This protects the principal of the company from losing his investment if one of his people goes to work for another firm, or starts his own firm and competes against him.
W&C: You mentioned binding arbitration. There are a lot of small, family companies in the contracting business. They have their lives tied up in their companies. It's an ongoing concern that someone shows up at the front door and serves you some papers and ruins your whole life. Is it a requirement, and why is it set up that way?
RL: As a consultant, I've seen some ridiculous rulings come down. It's one reason why the industry is in such turmoil. The insurance company takes into account the cost of defense and settles more often than not because it's cheaper. It has to be a very large case in order to litigate all the way through. There has to be a lot at stake.
W&C: What do you think is the biggest challenge in getting this program running and being successful?
RL: Getting the manufacturers registered. The next (involves the fact that) the majority of EIFS contractors are doing EIFS work without EIFS insurance. What has happened is (that) a certificate of insurance is provided to the GC, but for GL only, not EIFS but that fact often is not stated in the copy the GC gets.
AS: When EIFS (industry) started out, everyone was excited because it was an opportunity to expand their business. People worked together. There was more pride in the system. It has (now) become more "selling lots of pails and selling them to anybody."
RL: We're trying to look at this as a whole industry. If there is anything we can do to augment programs by others, we're happy to do that. For example, if we could get EIMA to be a part of this package, that would be a good thing.
If this program works, the insurance rates may come down, because the losses have come down too. In Austin's case, in his construction business, (even) he has to go out and hire another EDI inspector to inspect his work. Those are our rules.
W&C: Let's assume I'm the president of an EIFS company and I say, "I want you to come up here and sell me on this program."
RL: Some manufacturers are part of the AWCI program, which includes insurance for all sorts of other work such as interiors, studs, and so on. (For more information on AWCI's insurance program, visit www.awci-insurance.bm). Our program is EIFS-specific. It's a stand-alone policy, or it can be an add-on to other insurance that excludes EIFS. One of the differences is that some other programs exclude certain substrates, or simply is not available in certain states. Thus, it makes sense that EDI would be the group that puts forth a program like this: We are inspectors and consultants.
Another selling point is that we take the field inspection process away from the manufacturer. This is a key issue, as they do not now have to worry about that aspect of their business. It also frees up their distributor to fulfill their normal role, instead of running around job sites.
W&C: Is there some specific other topic that we have not covered, or summing-up thing that you want say?
AS: The quality of construction is going down. The people hiring the EIFS contractors assume the people they are hiring have insurance. That's not so. Often, when the policies are fully reviewed, there is not inclusion of EIFS. Then the litigation goes back to the manufacturer, who is the only one left. With this program, we are trying to bring integrity to the industry.