THE PROBLEM WITH SYNTHETIC STUCCO:

AN INTRODUCTION AND COMMENTARY ON THE CURRENT HISTORY, PRECEDENT AND LEGAL THEORIES BEHIND EIFS LITIGATION
by
Ralph C. McCullough II and Michael M. Shetterly

As any unfortunate homeowner can testify, water damage is one of the most devastating injuries a house can suffer. Like a cancer, water invades the house, breaking down defense barriers as it seeps its way into the infrastructure and, ultimately, into the interior. In its wake, the water leaves behind rotted wood, spongy sheetrock and other such damages that effectively sicken the house. In this weakened state, the house is vulnerable to a variety of external attacks, most notably those crafted by the animal kingdom. In the end, it is the termite that inflicts the most serious damage and who signals the inevitable demise of the house as a shelter and as a valuable asset.

Technology has ventured far in combating this problem through the development and use of treated wood, sealants and other such devices designed to eliminate, or at least to substantially mitigate, the presence of water in the home. Today, however, it seems that technology has taken a step backwards, and it is synthetic stucco that is in the forefront of this regression.

Designed originally in Europe to repair bomb-damaged buildings in World War II, synthetic stucco has recently become the newest trend in modern home building. This is especially true in the southeast where stucco homes have rapidly proliferated. Synthetic stucco’s popularity and success is due in large part to the fact that it represents an alternative to the traditional wood or brick home. Moreover, stucco is unique in that it allows architects and homebuilders to produce more creative and more versatile designs. Synthetic stucco, itself, however, is more than a singular substance like brick or wood. Rather, synthetic stucco is the sum of many parts, a system. This system is known as Exterior Insulation and Finishing System, or as it is more commonly called "EIFS."

EIFS consists of three major components. First, there is an insulation board, made of foam, that is secured to the exterior of the house through a specially designed adhesive. Second, a water-resistant base coat is applied on top of the insulation which is then reinforced by a fiber glass mesh for extra strength and support. Finally, an acrylic coat ("stucco") is employed which is essentially crack-resistant and which gives the stucco its colorful and aesthetic touch. The result is a stone-like finish that looks quite formidable and strong. Reality has shown, however, that water can still enter a stucco home either through possible cracks in the exterior or through exposed joints around windows, doors or other openings. Once the water enters, EIFS homes retain it more so than other building system. The slow evaporation process allows significant moisture build-up within the house. In short, EIFS is designed to keep water out, but if water should get in, it becomes essentially trapped and therefore cannot drain or otherwise be transferred from inside the wall. The end result is a rotted and weakened infrastructure that ultimately serves as a launching pad for invading and hungry termites, molds, and mildew. It is these features that create the problem.

And what a problem it is. Lawsuits have sprung forth throughout the southeast including South Carolina, North Carolina, Georgia and Florida. More significant is the fact that one of the nation’s largest construction liability insurers, Maryland Casualty Company of Baltimore, no longer offers coverage for EIFS-installed homes. Likewise, some banks are refusing to approve loans for EIFS houses. The problem was so bad in North Carolina that the State’s Attorney General requested that builders provide potential EIFS customers with a full disclosure identifying and warning of the moisture problems.

As for the lawsuits, many are being organized into class actions against the manufacturer. Currently, there are several proceeding in North Carolina, including a state case in New Hanover county. While the New Hanover class action has produced a settlement from one of the nine manufacturers named in the suit, the general rule is that class actions are not the best approach for the consumer. First, many stucco class actions are encountering problems even obtaining certification. Recently, the federal court for the Eastern District of North Carolina denied a nationwide certification, holding that the EIFS cases should instead be heard on an individual and a case by case basis. Specifically, the court stated:

This case . . . involves numerous Defendants and many products sold by many companies. There is no history of litigation over EIFS that has helped to crystallize the issues and the case implicates multiple causes of action asserted under the laws of every state. Most significantly . . . is the role of third parties, such a contractors, EIFS applicators, architects, and window manufacturers, in the construction of Plaintiffs’ homes.

The second reason a class action is not preferable is due to the fact that most are directed toward the manufacturer and focus almost exclusively on products liability. The suit ignores the builder, the applicator, the architect, and the termite company. All of these aforementioned Defendants are potentially culpable, and each could contribute to a global settlement to render the consumer more whole. Bifurcating the manufacturer from the other potentially culpable Defendants only weakens the client’s chances. In this regard, there are few, if any, houses that are actually installed according to the manufacturer’s specifications. By bringing the products liability case in a class action, the manufacturer is gifted a defense which, if successful, could bar recovery. If the homeowner then decides to attack the applicator, that applicator has the rather persuasive defense that the product is defective. The more preferable approach is to allow this collage of Defendants to fight among one another. In this respect, they will perform much of the Plaintiff’s work for him. The third and final reason is that class actions generally yield exorbitant attorneys fees, but the respective distribution to the client is, in most cases, grossly inadequate to pay for the damages necessary to repair the home. This is especially true in EIFS cases because there are no collateral sources paying for the actual damages due to the fact that stucco homeowners’ insurance companies are routinely denying stucco claims. Furthermore, there are no recoverable "soft" damages, such as pain and suffering, that would otherwise help to absorb the attorney’s fees or the reduced rate of payment that naturally occurs with a settlement.

Accordingly then, and in light of the above authority and considerations, the future of stucco class actions appears very dim, and at best uncertain. What is certain, however, is that lawsuits are indeed going forward, with or without class certification, and they are going forward on essentially three theories.

One such theory involves the application process, and the supervision thereof. Here, attention is primarily focused on the actual installer, i.e., the contractor and/or the subcontractor(s). The causes of action are predicated on the traditional principles of negligence, breach of contract, and implied warranties of workmanlike quality and habitability (if the contractor is also the seller of the home), and they center around the installer’s failure to correctly install the EIFS by inadequately sealing exposed joints such as windows and doors. The supervisory facet of this theory concerns the contractor’s negligent failure to adequately supervise the subcontractor’s work.

A second theory involves the use of misleading words and the concepts of express warranty and negligent misrepresentation. In this regard, an express warranty is created and a representation proffered where an affirmation of fact is made concerning the workmanship and quality of the EIFS. A breach subsequently occurs when the resulting workmanship or quality fails to conform to the above warranty or representation. This theory is potentially powerful because it focuses on the falsity of the warranty or representation. Therefore, and if proved, these actions can in turn lead to the substantial possibility of an additional action under the South Carolina Unfair Trade Practices Act. This, of course, is significant because such an action entitles the stucco Plaintiff to not only recover treble damages, but attorney’s fees as well.

The third, and final theory looks to the EIFS, itself, and therefore contemplates a traditional products liability approach. This theory asserts that EIFS constitutes a product by virtue of the fact that EIFS is marketed and functions as a complete and integrated unit. In this regard, it is the inherent qualities of EIFS, or the lack of adequate instructions as to its use, that ultimately allow water to be trapped within the home thereby causing moisture build-up and subsequent damage. EIFS is therefore defective because it is "unreasonably dangerous" to the home.

EIFS manufacturers have hotly contested liability under such a theory by arguing that the system works fine if installed correctly. In this regard, they contend that EIFS only becomes defective when the contractor or subcontractor fails to adequately seal exposed joints such as windows or doors. Yet, proponents of this theory counter that, if this is indeed the case, then why is the problem so pervasive and why are so many stucco homes consistently constructed by inept builders? There is no doubt that the EIFS manufacturers owe a duty to at least provide adequate instructions as to how to install the synthetic stucco. While the manufacturers do indeed provide such instructions, the fact still remains that EIFS is continually and consistently being installed incorrectly. One possible answer is that the instructions themselves are not adequate so as to permit proper installation. Another is that EIFS, itself, is inherently incapable of being installed correctly. Either way, the proponents argue that EIFS is defective as to instructions or as to design.

Accordingly then, pointing the finger at the contractors may not necessarily insulate the EIFS manufacturers from liability. At this stage of the game, manufacturers cannot honestly argue that they are unaware of problems with their system or the installation thereof. Notice has been provided through numerous lawsuits and public complaints. As a result, it would be hard to accept EIFS manufacturers standing idly by while their product damages homes, even if said damage results from negligent workmanship. The problem is simply too pervasive for the manufacturers to delegate such responsibility to other parties where they can reasonably foresee that EIFS will not be installed correctly. The duty of safety demands more. It is for this reason that it has been argued that, at the very least, warnings as to the potential danger of EIFS should be provided.

Most likely because of the relatively recent nature of the EIFS litigation, very few reported opinions have been rendered that would provide guidance as to the above issues and to the current or prospective EIFS practitioner. These cases have, however, evinced an early, but discernable trend. In this regard, it is the builders and applicators who are, thus far, shouldering the blame. Contractors and/or their subcontractors have been held liable primarily for negligent supervision, negligent construction and/or negligent application in three EIFS cases from three separate jurisdictions, including South Carolina. Manufacturers, on the other hand, have managed to escape the executioner’s sword. In fact, and only recently, a jury in the State of Washington returned a verdict in favor of a Defendant EIFS manufacturer. In that case, the jury was apparently not persuaded by Plaintiffs’ argument that the EIFS system was, in one form another, inherently defective. Instead, the jury found that the stucco product was reasonably effective as designed, that it was accompanied by adequate instructions and warnings, and that it did not violate the State’s consumer protection laws.

The early results of the above decisions seem to suggest that strong cases can be made concerning the acts and omissions of the builders and applicators. As for the manufacturer, similar progress has not yet occurred. This does not mean, however, that the EIFS-makers should be excluded from the pleadings altogether. Until an appellate court properly addresses manufacturer liability in this context, it is an issue still very much open to debate.

In any event, the one thing that is unquestionably clear is that there is something very wrong with EIFS. Whether this problem hails from the application process, inadequate instructions or warnings, or EIFS itself, the fact remains that water and termites are inflicting damage within stucco homes. Consequently, such injuries are leaving homeowners with a sickened house of little, if any, significant market value. There is no question in this author’s mind that stucco homeowners should be compensated for their ill-fortuned reliance on the construction industry. Negligence, at least, cannot be in the air.