A Tale of Insurance
It's a very hot topic right now: insurance companies refusing to cover EIFS construction due to excessive claims. The result could be a war of attrition that mathematically threatens EIFS construction in the United States.
Mathematically, meaning that if the insurance companies that will cover EIFS construction-like the one in this article-will only allow a percentage of the contractor's business to be EIFS for that contractor to qualify for coverage, numerically speaking, EIFS could be an endangered cladding.
S&S Interior and Exterior Finishes, of Woodland, Wash., was established in the 1980s as a sole proprietorship and incorporated between Chris Shinpaugh and his father for the past five years. The company usually consists of a crew of six. Until March of this year, S&S's insurance coverage was provided by Ohio Casualty. This is because halfway through 2001, Ohio Casualty informed S&S that it wasn't going to cover EIFS anymore.
"They pulled out because our agent said the market is scary out there but not to worry," says Dana Shinpaugh.
What, we worry?Dana says she is very familiar with the negative press resulting from poor EIFS installation. As the negative vibe spread, S&S began to get very cautious on its EIFS jobs, taking pictures and making sure all the windows were wrapped.
"We were seeing poor framing or things not by the book and we took pictures to protect us," she adds. "We have never been sued and have a perfect record."
That perfect record, however, did not mean a thing to Ohio Casualty and S&S was forced to seek insurance elsewhere if it wanted to stay in the EIFS business.
"We felt a little victimized," says Chris. "We only had one EIFS callback and even that was speculated ? it was an area of 4 square feet. I guess the thing that annoyed me is that we're traditionally a stucco family but because of this widespread hysteria, anything stucco was bad. We did plenty of EIFS but now, we can only do 20 percent EIFS work annually."
This 20 percent is based on just one of the stipulations for coverage by its current insurance company, Northfield Insurance Co. Before finding Northfield, plenty of insurance companies refused coverage. In fact, S&S only managed to find Northfield one day before its EIFS coverage ran out-while still working on an EIFS project.
"I filled out applications to different insurance companies and just because we had touched EIFS, they wouldn't cover us," says Dana. "And that's because they fear it will fail down the road."
It was discouraging to a company that had always done good work, was fully certified, insured and paid its taxes-especially when one judge stated that all EIFS systems are inferior and should not be put on.
"We've never had any problem with EIFS," says Dana. "We still endorse it. It's just like anything else. That judge just jumped on the bandwagon."
It was persistence that found a company to cover S&S. Dana said agents were no help and even some distributors felt that this development regarding EIFS and insurance would weed out the smaller contractors.
Enter the policyDana finally found insurance agency Northfield and Kathy Elder. Elder has 30 years of experience with construction and insurance, and she knew immediately that although Northfield could cover S&S, there would be stipulations. Also, the price of coverage jumped $4,000 annually from the previous policy-all because of EIFS.
"That's still a great price," says Dana. "I got quotes from one company for $25,000!"
Elder says that the reason for this situation is simply too many claims caused by poor installation practices.
"This situation will definitely weed out those not doing the job properly because they will not be able to find coverage at all," says Elder. "Unfortunately, it will also weed out smaller companies that may not deserve it because these smaller companies cannot afford the higher rates."
Elder says there are several criteria for coverage. First, Northfield looks at a contractor's length of time in business and claim history. If there are too many claims, the contractor will not get coverage. If there are some claims, the price goes up accordingly. Northfield works from a program developed between Accordia and the National Wall and Ceiling Bureau that specifies that a contractor must fit into a certain niche (no more than 50 percent of the work must come from EIFS); the contractor can do traditional stucco and plastering, but 75 percent of the work needs to touch the wall and ceiling. Contractors offering other services, such as landscaping, cannot include this service in a project under coverage if it negates the wall and ceiling work to the point that it is less than 75 percent. If a contractor does 25 percent EIFS, manufacturer certification is required. If the work is 26 percent to 50 percent EIFS, the contractor must be certified by the Wall and Ceiling Bureau. This may be a necessary stipulation.
"A lot of subs don't have the coverage but no one is asking them," Elder says. "They have only a certificate of insurance and it doesn't necessarily specify EIFS on the certificate. I point out to GCs that a particular sub needs this certification. If the sub does not have it and there's a claim, the GC will be responsible; and if the GC doesn't have it either, the GC has to come up with bucks."
The root of the problem, according to Elder: poor installation.
"Clients I have been in business with awhile are educated and they know what they're doing," she adds. "Unfortunately of late, anyone and everyone are doing EIFS and bingo-it's coming back on the industry."
Chris agrees that imperfect application practices contribute heavily to the current problem.
"Any new cladding is going to have its problems because homeowners and business owners are the guinea pigs," he says. "Accelerated weather testing in labs is not the real world. I do believe it has a lot to do with windows, roofing, flashings and areas of penetration, especially here. It's very wet here. With the constant rain we have, all the humidity in the air, the moisture is in the substrate before you even start a project. You could cover the materials months before construction but the material is already saturated from mills, being in yards stacked, the material has residual moisture."
Elder says the solution is that basically, it will take time for loss ratios and actuarial information to get back to companies or the claims will have to stop.
"Every time one thing happens, everyone wants to sue," she says.
How is this affecting the bottom line at S&S?
"When I look at EIFS jobs, I am more conservative when estimating because I can only do so much EIFS and I want it to have a higher revenue margin," Chris says. "Luckily, we have plenty of other avenues of income." W&C
AWCI's CAPThe Association of the Wall and Ceiling Industries-International Contractor's Advantage Program (CAP) provides general liability and umbrella coverage for wall and ceiling contractors and distributors at highly competitive rates. AWCI members receive an additional 10 percent premium reduction. The program is targeted primarily to commercial contractors who do multiple trades including drywall, framing, plastering, fireproofing and ceiling systems, and whose business is 50 percent or less EIFS work.
Within the first year, coverage was extended to 140 contractors who met the underwriting guidelines. The total premium base exceeded $3 million in the first year. For more information, or to receive a quote, call Accordia at (800) 523-7526. The program is open to independent agents.
The current underwriter is Northland Insurance Companies. AWCI and Accordia are negotiating with new underwriters to replace Northland to provide expanded coverage. Travelers Insurance, parent to Northland, has made a company-wide decision not to support insurance programs for the construction industry. The new underwriters are being asked to provide coverage for commercial EIFS contractors as well as provide mold coverage for all contractors.