Interpreting Insurance Coverage and Exclusions: When Sudden means Sudden and EIFS means Faulty
EIFS, or Exterior Insulation and Finish System, is an integrated exterior insulation and synthetic stucco system, praised for its energy efficiency. However, EIFS has come to be well known in the construction defect world as placing homes at risk due to a lack of a built-in moisture management system. Before long, insurance companies recognized the risk and began explicitly excluding coverage for EIFS-related damage. However, EIFS exclusions have not always been so clearly set forth in some policies, causing insurance coverage litigation.
Recently, a Greenwood Village couple, Mark and Susan Mock, lost this fight.
Built in 1994, the Mocks’ home was constructed with an EIFS system. The Mocks carried a homeowner’s insurance policy through Allstate, which covered “sudden and accidental loss” to property, but excluded coverage for “planning, construction or maintenance” issues. Such “planning, construction or maintenance” exclusions included “faulty, inadequate or defective designs.”
A few months after a hailstorm, the Mocks discovered moisture-related damage to their home’s EIFS system. They reported the damage to Allstate, but Allstate would not cover it, reasoning that the damage to the EIFS system was excluded as a design and/or construction failure, and thus not covered as a “sudden and accidental” loss. The experts who evaluated the damage concluded it was the result of inherent flaws in the EIFS systems common in the 1994 timeframe, which involved long term moisture intrusion behind the cladding and no means for the water to escape.
The Mocks subsequently sued Allstate for 1) entry of a declaratory judgment; 2) breach of contract; 3) common law insurance bad faith; and 4) improper denial of claim under C.R.S. § 10-3-1115. Allstate moved for summary judgment.
The District Court Case: When Sudden means Sudden
At the district court level, the Mocks made several arguments for denial of Allstate’s summary judgment motion, only two of which the court analyzed.
First, the Mocks argued Allstate’s policy was ambiguous. That is, because the policy expressly covered sudden and accidental loss to property without defining “sudden and accidental,” the terms should be construed against the insurance company and in favor of the insured to mean “unexpected and unintended.” Because the damage to their home was “unexpected and unintended,” the Mocks argued, the loss should be covered.In making this argument, the Mocks relied on Hecla Min. Co. v. N.H. Ins. Co., 811 P.2d 1083, 1090 (Colo. 1991), which defined “sudden and accidental” in certain pollution policy exclusions to mean “unexpected and unintended.”
However, here, the district court found Hecla’s definition of “sudden and accidental” to be inapposite.
Hecla holds that “a pollution exclusion clause in a commercial liability insurance policy which provides coverage for a ‘sudden and accidental’ event is inconsistent with that policy’s definition of an ‘occurrence’ as an accident including ‘continuous or repeated exposure to conditions.’” Because of that inconsistency, Heclaheld that the word “sudden” in that context was ambiguous and defined it to mean “unexpected and unintended,” so as to ensure consistency in the policy. In other words, Heclawas about defining ambiguous terms in an insurance policy to be harmonious with one another, ensuring none are rendered meaningless.
Upon finding Hecla does not apply here, the district court defined “sudden,” according to its plain meaning, which, according to the Merriam-Webster dictionary, implicates something that happens abruptly or hastily. Thus, the court rejected the Mocks’ attempt to construe “sudden” as “gradual or continuous” to fit the fact pattern of a slowly deteriorating EIFS stucco system.
Second, the Mocks argued that a factual dispute existed with respect to whether the EIFS system suffered a design flaw or a construction flaw. The district court summarily dismissed this argument, relying on the experts’ reports, which consistently opined that the EIFS system was damaged as a result of long-term water intrusion, not a “sudden” incident.
The Appeal: When EIFS means Faulty
On appeal, the Tenth Circuit Court of Appeals did not address the district court’s analysis surrounding coverage for “sudden and accidental” loss. Instead, the Court of Appeals affirmed summary judgment based on the faulty construction or design exclusion.
The Tenth Circuit’s opinion, therefore, focused on the experts’ opinions that the damage to the Mocks’ home flowed from inherent flaws with EIFS stucco systems. The issue with respect to whether EIFS systems met building codes at the time of construction in the 90s is a legal issue—the court said—and thus not a material dispute of fact to be analyzed on summary judgment.
The Tenth Circuit concluded that “[t]he undisputed facts show that the manufacturer’s design of the EIFS system caused water infiltration and damage.”
When considering installing EIFS systems, construction professionals should beware—not just of EIFS exclusions in their insurance policies—but also of potentially ambiguous language in those policies that courts will construe as excluding EIFS-related damage.
 See Mock v. Allstate Ins. Co., 340 F. Supp. 3d 1087 (D. Colo. 2018).
 See Martinez v. Am. Fam. Mut. Ins. Co., 413 P.3d 201, 203 (Colo. App. 2017).
 Mock, 340 F. Supp. 3d at 1090-91.
 Mock v. Allstate Ins. Co., No. 18-1407, 2020 U.S. App. LEXIS 642 (10th Cir. Jan. 9, 2020).
For more information on EIFS, you can reach Ben Volpe at (303) 987-7140 or by e-mail at firstname.lastname@example.org.