Eventually, Time Heals All Wounds
In my office lies a copy of the Declaration of Independence. Maybe it’s the upcoming election and all the accompanying hype but I find myself contemplating our good fortune of living in a country that allows us rights of equality and freedom. Don’t worry, this article isn’t about politics. But as I reflect on that recognizable if not infamous phrase, “We hold these truths to be self-evident, that all men are created equal,” I can’t help but think about the wall and ceiling industry. While I’m completely aware that the founders were talking about human rights, over the last several years the concept of equality and fairness has applied less to contractors that apply EIFS than possibly any other trade.
For years the EIFS industry has hoped for a case of amnesia to settle in regarding lawsuits back in the late ’90s. Has a dark period ever hung with a single industry as long as this? Tylenol got over its scare in much quicker fashion. Today, it sits on the shelves of millions of households across the country without so much as a glimmer of what happened back in September 1982. As the saying goes, “time heals all wounds.” Eventually it does. But the question is, has this stretch of time helped heal the EIFS community? Lately, the soft insurance market has made it seem that way. I’ve been flooded with questions from various people looking to confirm that the insurance market is softening. It seems every time I walk into a meeting it’s the first thing people want to hear about. After years of frustration, it’s not surprising, and frankly, I don’t blame them.
While the insurance market has softened somewhat, giving what is probably a window of temporary relief to many difficult trades in the construction industry, the procurement of affordable insurance policies that allow for the application of EIFS is still a challenging process. New programs with nifty acronyms or carefully packaged policy combinations look promising. But, in our business, you typically get what you pay for. From the contractor’s perspective, it gets very confusing. One thing that will not change is the contractual demand component of a subcontractor’s operation.
The insurance policy purchased has a direct correlation to jobs that the sub can qualify for, as well as the effectiveness of the transfer of risk. The confusing part is whether or not the programs out there will actually perform as needed. Some tout low entry premiums, only to have premium costs as high as 5 percent of overall job costs and coverage typically unacceptable to construction contracts. Some sound spawned and geared solely for EIFS contractors but don’t contemplate coverage that is demanded by risk managers of the very general contractor’s subs plan to work for.
Let’s take a step back and very simply explain what a soft market is. In a soft insurance market, carrier surpluses are high, which allows them to cut rates in an attempt to gain market share over their competitors. The competition for business becomes fierce, driving rates down, usually to levels below what is prudent. Eventually, when rates get towards the bottom, carriers are forced to find other means of generating revenues. Opening the underwriting door to classes of business previously “unacceptable” is one way carriers can do that. Right now, EIFS is starting to fall into that category.
So, it can be said that some insurance carriers are merely dipping their toe in the water, looking to take in premium without assuming much risk. Are there ones that go in heads up, committed to the cause? Yes. You’ll know the ones that aren’t when you see them. The evidence usually manifests itself by a refusal to write business in states where construction law is challenging, such as Nevada, Oregon, California or New York. They also steer clear of work that is residential in nature, such as single family homes, condominiums or mixed-use projects. They feel that regardless of a contractor’s experience or expertise-or loss history for that matter-the sweet spot for their profitability is providing coverage for the application of “moisture drainage” systems on commercial structures with substrates consisting of concrete block or steel.
For those that understand EIFS and basic building sciences, that’s a no-brainer. However, while it would be convenient if the work EIFS contractors do always fell into that box, it often times does not. Job types vary and system types vary. Contractors would rather not pass up a job regardless of what it is if they feel they can make money, it fits within their expertise, and it’s geographically manageable. Many contractors have vast experience on these job types. They have performed work of the highest quality without incident. Their workers at the ground level have been educated and certified. They do not begin their processes unless a job is ready to receive them, pushing back on a GC when something isn’t quite right. They follow manufacturer’s specifications, and call for technical assistance when needed. But a lack of true ground level understanding by the insurance industry creates a void of actual underwriting, leaving a contractor to fall in our out of certain predetermined boxes.
While many contractors are happy to gain some coverage, they are still being short changed. The inability to look at a variety of projects is hurting the contractors who are, in today’s challenging economy, looking for ways to diversify and grow revenues.
A few months ago, I received a call from a client contractor specializing in exterior maintenance and repair out of the Midwest. With revenues down, they were excited when they were contacted about a potential renovation job on a series of condominiums involving EIFS, and spanning several states. This would make their year. We talked through a series of questions that I use to gain better understanding of the scope. In the end, it was gratifying to be able to tell this company that they were approved to move forward and tackle this profitable project.
While most construction contracts require contractors to carry “occurrence” form policies on “A” rated paper (as rated by AM Best rating service), the mere fact that there are options available today that contain those critical elements is reason enough to get excited. This opens the door for EIFS contractors to talk with GCs about various systems they are comfortable installing in large project settings. This is good for the industry overall.
How long will these options last? First off, soft markets end. They always do. My sense is that carriers who have a positive experience with EIFS contractors from a claims and profitability standpoint will hang in there for the long haul, if they feel they’re being guided in the right direction. The ones that don’t quite get it will jump ship when their strategy doesn’t work out, and that will hurt the industry again. Thus the importance of understanding who you’re working with, what you’re buying and what the long-term outlook is.
Another additional burden that is manifesting itself around the country is the demand for contractors to carry both EIFS and mold coverage. More and more, general contractors are being advised by their risk managers to ensure they are protected by demanding subcontractors carry both, naming them and the project owner additional insured. Why both EIFS and mold? Remember our phrase “time heals all wounds”? Further evidence that we’re not there yet is being manifested in the risk management community. Risk managers hired by general contractors often have the same misconception about EIFS and mold as everyone else, assuming that one will certainly lead to another.
While on a conference call representing an EIFS contractor regarding his insurance and how it would apply on a mixed use project in New York, the risk manager for the general contractor told me flatly, “if we have an EIFS claim, it’s going to involve mold. We demand that you carry the coverage or we’ll find someone else who does.” While I argued the issue, citing case histories where EIFS related claims did not result in mold, they ultimately stuck to their guns relying on some article the guy read five years ago. Fortunately, we had recently opened up a low cost mold coverage option that provided the solution and the project was able to move forward. Since then we have received numerous requests for the same combination to be provided. Several conversations with risk managers indicate the trend to continue.
The EIFS manufacturers and industry in general are fully committed to the cause. There are no trepidations about its potential in a world that’s turning green. While they are actively promoting their products to be used on all types of projects, owners and GCs will continue to take extra precautions so that they can feel comfortable, at least for now. Is this fair compared to the roofer or the window installer? I do not believe it is. With that said, the increased demand for EIFS as well as the general contractors/risk managers’ willingness to get themselves comfortable with it is part of a gradual restoring process for the industry. These are baby steps towards a long awaited goal.
Architects should also feel comfortable writing EIFS into their plans. Owners should embrace its value. With all of its advantages, EIFS is the perfect exterior cladding to help project owners reduce their carbon footprint and achieve their aesthetic and energy efficiency goals. The EIFS industry is in high gear with every intention on growing its market share and becoming the cladding of choice. EIFS is now and the future. Let’s hope that the insurance industry is set to equal the commitment. W&C