Exterior Insulation and Finish Systems, or "EIFS", is a multi-layer wall system attached to the exterior of a residential or commercial structure. EIFS generally consists of a substrate, an adhesive to adhere the system to the building, an insulating layer (generally stiff EPS foamboard), a reinforcing mesh and the exterior finish. Users of EIFS are attracted by the variety of exterior finishes which are available, many of which resemble stucco, at a relatively low cost. Also, because of the insulation component of the system, energy savings are touted. Further adding to EIFS' popularity is its durability and need for only minimal maintenance.
Problems arise, nevertheless, where the EIFS system is not sealed properly. In such situations, water can infiltrate and reach the structure of the building. Perversely, because the EIFS system is a sealed system, the infiltrating water has no place to go and, instead of manifesting itself as a small leak, it remains in the structure-hidden-where it can cause rotting of the underlying structure. By the time the first rotting is discovered, the problem is actually widespread and the damage extensive.
Liability insurers came to the realization that the failure of an EIFS system was certain to lead to significant exposures. Accordingly, insurers issuing CGL policies began to draft exclusions of coverage related to EIFS systems, and many contractors ceased to install EIFS or any work which interfaced with an EIFS system. However, the recent case of First Mercury Insurance Company v. Miller Roofing Enterprises highlights just how a broad EIFS exclusion can be enforced.
The facts of Miller Roofing were not disputed. Miller Roofing was retained by the owner to replace three roofs in 1998. The structures on which the roofs were installed were clad in EIFS, although the roof did not interface with the EIFS system, and Miller Roofing performed no EIFS-related work. In 2006, one of the roofs began to leak, causing water infiltration into the owner's showroom. Miller Roofing attempted some repairs but, after some heavy rain and snowstorms in 2007, significant amounts of water damaged the ceiling, walls, and product which was on the showroom floor.
The owner sued Miller Roofing for breach of contract and for negligence to recover for both the cost to remediate the roof, as well as the cost of the non-roof related items damaged in the flood. First Mercury accepted Miller Roofing's defense under a reservation of rights, but then commenced a declaratory judgment action seeking to disclaim coverage. The policy at issue contained the following EIFS exclusion:
This insurance does not apply to ... "property damage" included in the "products-completed operations hazard" and arising out of "your work" described as ... [a]ny work or operation with respect to any exterior component, fixture or feature of any structure if any "exterior insulation and finish system" is used on any part of that structure.
First Mercury moved for summary judgment on its complaint, contending that inasmuch as the building admittedly contained an EIFS system, the exclusion applied. Miller Roofing opposed, contending that the exclusion did not apply because the defective workmanship was to the roof, not the EIFS system and, in any event, Miller Roofing did no work involving the EIFS system. While the court credited Miller Roofing's explanation that its work did not involve the EIFS-system, it held that such was irrelevant in light of the policy language triggering the exclusion if "any exterior insulation and finish system is used on any part of the structure" (emphasis supplied). As to Miller Roofing's contention that First Mercury would be allowed to escape liability for any otherwise covered act at the building simply because EIFS cladding was placed on the exterior walls, the Court held that this was precisely the policy Miller Roofing paid for and signed, and the Court was constrained to apply the exclusion.
Clearly, a roofer is going to be performing work on the exterior of a structure. While insureds should always read the terms of their policies, a broker would be well advised that the best way to service such a client would be to see to it that exclusions such as the one the Court relied upon in Miller Roofing are removed or tailored as narrowly as possible so that the insured's foreseeable work is not caught up in the breadth of the exclusion.