On Monday, November 15th, 2010, the New Jersey Supreme Court issued its highly anticipated decision in the controversial case of Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), cert. granted, 200 N.J. 207, 976 (2009). The contested issue in Dean was whether the economic loss doctrine, a judicial construct which bars recovery in tort for damage a product causes only to itself, applied to bar a homeowner’s tort claim for a defective exterior finishing system installed on their home during construction. The salient question the Supreme Court had to answer was whether a home built with the exterior siding product, in this case manufactured by defendant Sto Corporation (“Sto”), was considered the “product itself” for purposes of delineating Sto’s tort liability. If the exterior siding product was considered to be fully integrated into the home, then home purchasers would be precluded from pursuing products liability relief against manufacturers of allegedly defective products permanently affixed to the outside of the home, for damage those products caused to the home. In a triumph for home purchasers, innocent builders and developers, the Supreme Court held that Sto’s exterior finishing product, Exterior Insulation and Finish System (“EIFS”), was a separate product from, and not fully integrated into, plaintiffs’ home. A cause of action, therefore, exists against Sto to the extent that its EIFS product caused damage to the house or its structural components.

The New Jersey Products Liability Act (the “Act”) creates a tort cause of action against a manufacturer or seller of a defective product. N.J.S.A. 2A:58C-2. However, the Act specifically limits recovery to the harm done to people or property, other than the product itself. N.J.S.A. 2A:58C-1b(2). If a defective product causes damage exclusively to itself, the loss is said to be strictly “economic” and the claimant does not have a cause of action in tort. Thus, the judicial construct known as the “economic loss rule” was embodied by the legislature in the Act and serves to bar tort remedies in strict liability or negligence when the only claim is for damage to the product itself. See Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555 (1985).

In Dean, the plaintiffs, Robert, Jennifer, and Mary Sue Dean, purchased a home in 2002 from its original owners. The home had been built with EIFS. Prior to closing, plaintiffs hired a home inspector to conduct an investigation. The inspection report raised some concerns regarding the EIFS siding. Later, plaintiffs learned that their insurer would not transfer their existing homeowner’s policy to the new property, allegedly because of the EIFS. Nonetheless, plaintiffs purchased the home and moved in. About one year after moving in, they started noticing black lines on the exterior of their home and consequently hired an industrial hygienist to inspect their house. The industrial hygienist found toxic mold that he attributed to leaks from the EIFS. Plaintiffs eventually had all of the EIFS cladding removed and replaced. In May 2004, plaintiffs filed suit against multiple defendants including Sto Corp., the manufacturer of the EIFS. As the case progressed, plaintiffs settled with all of the defendants except Sto. Sto moved for summary judgment, which the Court granted, reasoning that the EIFS was so integrated into the home that the home itself was the product and any damage to its structural elements was strictly an economic loss. In other words, the Court used the integrated product doctrine to conclude that the attachment of the EIFS to the home made the home itself the “product” at issue and then relied on the economic loss rule to bar plaintiffs’ tort claim against Sto because their cause of action only alleged damage to their house, the “product”. On appeal, the Appellate Division affirmed the trial court’s grant of summary judgment. Appeal to the New Jersey Supreme Court followed.

The Supreme Court granted certification to decide first, whether it will adopt the integrated product doctrine and, if so, whether the EIFS was sufficiently integrated into plaintiffs’ home that the economic loss rule bars any recovery for damages to the EIFS or to the home. The Court reasoned that “a product that is merely attached to or included as part of the structure is not necessarily considered to be an integrated part thereof”, particularly in the case of homes. Noting that California courts have declined to apply the integrated product doctrine to products used in building houses, the Court concluded that the affixed EIFS did not become a fundamental part of the house structure itself, and at all times was distinct from the house. Holding that the EIFS was a separate and distinct product from the home itself, the Court concluded that the economic loss rule precluded plaintiffs from recovering for damage to the EIFS itself i.e. cost of replacement, however, they were not precluded from recovering for damage “the EIFS caused to the house’s structure or to its environs.” Thus, “to the extent that the EIFS caused damage to the structure of the house or its immediate environs,” plaintiffs retained a viable cause of action against Sto, the product’s manufacturer.

Donald B. Brenner, Chair of Stark & Stark’s Construction Litigation group, interviewed Ron Wright, Chief Operating Officer of R.V. Buric Construction Consultants in a four-part video series. In this second installment, Mr. Brenner and Mr. Wright discuss exterior insulation finish systems (EIFS). Mr. Brenner and Mr. Wright cover topics related to EIFS including, what is EIFS, how do EIFS work, what are the different types of EIFS used, and what are the common problems associated with EIFS?

Legal Briefs on Construction Litigation: Exterior Insulation Finish Systems from Stark & Stark on Vimeo.

On March 11, 2008, in the matter of Camelot Condominium Association, Inc v. Dryvit Systems, Inc., pending before the Superior Court of New jersey, Docket No. BER-L-012457-04, a jury entered a verdict in favor of the Plaintiff and against Dryvit Systems, Inc (“Dryvit”) for violations of the New Jersey Consumer Fraud Act. Dryvit Systems is the largest manufacturer of Exterior Insulation and Finish Systems for residential and commercial construction in the United States.

With settlements the Plaintiff obtained before and during trial from other defendants, the total irecovery for the Plaintiff following the jury verdict was $5,046,000.

The case involved a joint repair project done in 1998 on what was then a 16 year old high rise building clad with roughly 300 panels coated with Dryvit’s EIFS. The jury returned a verdict that charged Dryvit with knowledge that the Dryvit EIFS finish coating on the buildng’s exterior panels softened when exposed to substantial water penetration. That softening caused cohesive failures at critical caulk joints, which resulted in openings for water to penetrate inside the building and cause catastrophic damage to the framing and sheathing on the building.

The jury found that Dryvit made knowing omissions and affirmative misrepresentations of material fact in connection with the repair of the Exterior Insulation and Finish System (EIFS) on the building located in Hackensack, New Jersey. This is the first time in New Jersey that an EIFS manufacturer has been subjected to a jury verdict for violations of the New Jersey Consumer Fraud Act. There will be no appeal.

John Randy Sawyer and Donald B. Brenner Shareholders of Stark & Stark’s Construction Litigation group represented the Plaintiff in the case.

In a unanimous vote of 26-0, Oregon State Senators, led by Senator Jackie Winters (R-Salem), voted to ban the use of synthetic stucco on Oregon homes. This decision came after Senator Winters told the story of an 11-year old Salem resident, Whitney McClain, who is currently being treated for multiple brain tumors after a mold outbreak in her home. The girl is Senator Winters’ granddaughter, and just one of many sufferers of several diseases (including brain tumors, pneumonia and bronchitis) caused by mold infestations in their homes.

After the unanimous vote by the Senate, the bill was sent to the House of Representatives. Representative Paul Holvey (D-Eugene), led an initiative to deny the bill, until it also includes banning stucco on commercial buildings. While this would increase the safety for the residents of Oregon, many feel the ban on commercial properties is not necessary. A conference committee was assigned to reconcile House and Senate approaches in HB 2112-B.

While the bill is still awaiting final approval, the Oregon senators hope this vote will ensure that other families will not have to endure the devastating side effects of insufficient Exterior Insulation and Finish Systems (EFIS), like the McClain family had to.

You can read more on the bill, and the McClain’s story here.

When evaluating a new case, it is important to look at many factors. One of the first considerations is applicable statutes of limitation or repose. The statute of limitations is a statutory limit on when a claim can be brought. It is an equitable statute. The case law allows the statute to be extended if a reasonable person could not, through the exercise of reasonable diligence, have known about the defect. This is known as the “discovery rule.”

A statute of repose is different in that, rather than allowing a claim to be brought within a specified number of years that can be extended by the “discovery rule,” this statute simply says that within “x” number of years after substantial completion of work, no claims exist-ever. For example, in New Jersey, the statute of limitations on negligence claims resulting in property loss is six years, which is then extended by the discovery rule. The statute of repose in New Jersey, and in many other states, is absolute, even if the builder, subcontractor or design professional intentionally and fraudulently concealed known defects. There is no extension of this statute under any circumstances, and the discovery rule is inapplicable. Thus, at the case intake stage, it is absolutely imperative that counsel be familiar with these statutes and understand how they are going to deal with arguments based upon those statutes.

Another important factor in evaluating a new case is available insurance policies for the general contractor, subcontractors and design professionals. We recommend that clients who have reason to believe that there is no insurance hold off on spending substantial money on expert and legal fees until the availability of insurance is determined in discovery. Many states have court rules allowing quick discovery of insurance information, a simple process that can provide critically needed information early in a case. If the case is being taken on a contingency, it is a good idea to have an agreement in advance of filing suit that counsel will hold off aggressively litigating until counsel gets the insurance policies in discovery, and can make certain that there are no obvious exclusions that destroy coverage. (For example, if you are litigating over damages caused by EIFS , you will want to know as quickly as possible if the developer and the EIFS applicator have insurance policies that contain EIFS exclusions. If it turns out that there is no insurance, the case can be dismissed before the association spends substantial money on litigation that is going to be fruitless in generating a recovery.

In the unpublished opinion of the Honorable Robert P. Contillo, J.S.C. in Supreme Tank, Inc., et al. v. Evanston Insurance Co., et al., BER-C-81-06, Chancery Division, Bergen County, September 18, 2006, the court determined that an insurance company cannot change the coverage provided to an insured without giving specific, direct, notice to the insured. In this case, the insurance company, Evanston, provided insurance coverage to a company engaged in the business of installing and removing underground oil storage tanks, ATS. ATS was insured with Evanston from 2002 through 2005. In 2004, Evanston changed the coverage from $2 million to $1 million but failed to directly notify ATS of the change. In December of 2005 a devastating explosion took place while ATS was removing an underground oil tank. The explosion killed three people and destroyed a 24 unit apartment building.

Evanston attempted to enforce the 2005 policy which contained only $1 million of coverage. ATS argued that it was unaware of the change in coverage until after the explosion occurred, when Evanston claimed to be responsible for only $1 million in coverage. The court found that Evanston had a non delegable duty to notify its insured of a material change in coverage. Therefore, notice to the wholesale broker of Evanston’s policies was insufficient to provide notice to the insured. The court stated that:

not every insured would fully appreciate what changes had been made. But any sentient adult would know that changes had been made. The insurers fiduciary duty includes this de minimus duty – which averts much mischief and grievous consequences – of simply altering your insured that the insurer has worked a change in coverage.

[Slip op. at 12.]

Evanston had failed to send even a simple letter alerting ATS to the change, and instead relied upon notice given to its wholesale broker. The court found this to be an imperfect chain of information. The court then found that the modifications in coverage by Evanston were improper, and should not be enforced. As such, the failure to alert the insured of the change in the 2004 policy, required that the pre-2004 policy limit of $2 million be restored.

This case has a direct correlation to many construction defect cases, in which an insurance company alters a contractors’ insurance policy to exclude a specific type of product or activity. Without direct notice to the insured, and arguably without a reduction in premiums, the insurance company will be bound by the policy in effect prior to the change. For example, several insurance companies have attempted to exclude coverage to contractors for the installation Exterior Insulation and Finish Systems (EIFS). Under the above case law, the insurance company would have to directly notify the insured contractor of such a significant change in its policy, or it would be bound by previous policies that did not contain such an exclusion.

The New Jersey Uniform Construction Code (“UCC”) governs construction in New Jersey. The Department of Community Affairs has created regulations in the NJ Administrative Code (“NJAC”) that implement the requirements of the UCC. The UCC incorporates through adoption or amendment specific model sub-codes in order to regulate the major divisions of construction. NJAC 5:23-3.6(a) provides as follows:

“This chapter, together with the sub-codes, national standards and appendices it adopts by reference shall be the primary guide to accepted engineering practice in respect to any material, equipment, system, or method of construction therein specified.”

The UCC adopts many sub-codes such as a building sub-code, a plumbing sub-code, an electrical sub-code, etc. Violations of the sub-codes and referenced standards, materials, and documents within the various provisions of the UCC are known as “code violations”.

There are various types of building materials such as brick that are specifically delineated in the UCC and its sub-codes so that anyone wanting to know how to apply them can simply look at the UCC and the applicable sub-codes and find the requisite manner of installation. There are many other materials that are not specifically delineated in the UCC. That leads to the question of how does one apply or use those materials in a manner consistent with the building code?

The UCC and the implementing regulations have what is known as the “alternate materials” provision. NJSA 5:23-3.6(b) says:

“When this chapter and the sub-codes , national standards and appendices it adopts by reference are silent, a manufacturer’s recommendations for installation of any material or assembly may be considered to be accepted engineering practice; provided, however, that a manufacturer’s recommendations shall not be read to overrule this chapter or any sub-code, national standard or appendix which it adopts by reference. “

This language means that when the UCC and the foregoing sub-codes and national standards are silent, the manufacturer’s installation specifications govern. Unfortunately, we have learned from depositions and document discovery in hundreds of cases that, all too many applicators of EIFS, “thin brick” products, stucco and other exterior cladding materials are unfamiliar with the manufacturer’s installation specifications. They install materials in whatever manner they think is appropriate based upon their “skill” or “experience” or based upon their (often vague and incomplete) recollection of some training they may have gotten years before. This often leads to disaster.

Exterior insulation and finish system (“EIFS”) has been around since the 1970’s. The older systems are known as “barrier” EIFS because they are designed to be face-sealed barriers to water penetration and do not incorporate any secondary drainage mechanism. Thus, any moisture that gets behind the barrier EIFS may be trapped inside the walls and can cause serious damage to sheathing, framing and other building components. In about 1997, EIFS manufacturers introduced drainage EIFS that incorporated a secondary drainage mechanism behind the EIFS. That would allow incidental moisture that gets behind the EIFS to drain out without harming sheathing and framing.

The drainable EIF systems were intended to stem the tide of a significant wave of litigation against EIFS manufacturers seeking recompense for damages caused by barrier EIFS. The manufacturer’s installation specifications and details generally have to be strictly complied with. Unfortunately, while the drainable EIF systems should work in theory, in practice, they are exceptionally difficult–if not impossible– to install. In our experience, drainable EIFS is typically misapplied in the field and winds up functioning as a barrier system. This, in turn, often causes severe damage to sheathing, framing and other building components, including mold.

Stark & Stark is handling many cases for condominium associations involving claims that drainable EIFS was not installed in accordance with manufacturer’s installation specifications, details and the building code. Three of these involve claims worth in excess of $6 million. One particular claim demonstrates the severe damages that can occur when the manufacturer’s installation specifications and details are not strictly complied with.

We are handling a complex case in which the decks on numerous condominium buildings were designed to be constructed using parallam beams. The beams were not wolmanized because it was assumed that the drainable EIFS would keep water away from the parallam beams. Unfortunately, the EIFS applicator failed to comply with the manufacturer’s specifications and details requiring that the deck/wall interface be properly flashed and have a half-inch joint with backer rod and sealant. In addition, there was supposed to be a drainage mechanism in the bottom of the EIFS cladding on the face of the EIFS clad beams that was not installed. As a result, water accumulated inside the EIFS that drenched the non-wolmanized parallam beams, essentially damaging them beyond repair. Moreover, cracks and other openings developed between the decks and the EIFS clad walls further damaging the sheathing and framing of the walls and the non-wolmanized parallam beams.

The Association’s engineers issued a warning to the association that no one should use their decks in the affected units. An emergency repair costing over $1 million was done to replace all of the damaged beams, to rebuild the decks and to reclad the decks with a functioning exterior cladding. The buildings have been extensively inspected and massive failures to install the EIFS have been documented in all of the buildings. Additional testing proved that there is an enormous amount of moisture inside most of the walls of all of the buildings. The damages are massive.

The point is that drainable EIFS is a product that has to be very carefully applied in strict compliance with manufacturer’s specifications and details if it is to have any chance of working as intended. In our experience, this is almost never done. Applicators are poorly trained and general contractors do not know what the manufacturer’s installation specifications and details are. As a result, the general contractors pay the applicators without realizing that the job has been badly done and that they are all going to be open to massive claims a few years later when moisture penetration produces severe damage.

After more than four years of litigation, five manufacturers of exterior insulation and finish systems (EIFS) have agreed to a multimillion dollar settlement that will help hundreds of North Carolina homeowners repair or replace damaged EIFS systems.

The final settlement, approved on March 24, 2000 by State Superior Court Judge Ben Tennille, applies to five of the original nine defendants in the case: Parex, Sto Corp., WR Bonsal, Continental Stucco Products, and Dryvit Systems. Three other EIFS companies — Thomas Waterproof Coatings, United States Gypsum, and Shields Industries — haven’t settled. Senergy broke from the pack and reached an agreement with the plaintiffs about two years ago.

To receive payment, the homeowner must show proof that the company installed the EIFS system and must have an inspection done. An independent inspector is required to inspect each house and submit a report with field notes and photographs. The inspection must reveal two or more moisture readings greater than 25% from separate water sources or 2 square feet of wall with evidence of loss of structural integrity of the sheathing. The five EIFS companies have hired a claims administrator to handle the process and have also agreed to pay for the initial home inspection, hire and train independent inspectors, and pay court costs.

The settlement applies to everyone who, as of September 18, 1996, owned or formerly owned any one- or two-family residential dwelling or townhouse in North Carolina that was clad, in whole or in part, with one of the settling defendants’ EIFS. Commercial structures are not included in the settlement.

The claim form and other detailed information are posted on the Web at www.ncstucco.com.

Judge Tennille, in ruling that the settlement is “fair, reasonable, and adequate,” noted that it provides some immediate relief to North Carolina homeowners, without further litigation, under circumstances where “the liability issues are still very hotly debated.” Indeed, the EIFS manufacturers have long maintained that home builders, window manufacturers and installers, and other third parties bear much of the responsibility for the failures and should have been included as defendants in the suit. To simplify matters, Judge Tennille disallowed that motion from the start, noting that the EIFS manufacturers can seek redress from those third parties through the courts.

Though it is hard to imagine anything good actually coming out of the EIFS catastrophe in North Carolina and the corporate fortunes that were wasted litigating Ruff vs. Parex, the episode has produced at least three long- term benefits. First, it has provided a technological push toward better moisture meters and improved our understanding of how they should be used (or not) in the field. Second, we’ve learned once again not to depend on county code inspectors for quality control, especially in a red-hot construction market where they are drastically overworked and undermanned. Lastly, the financial pain and pressure from insurance companies has prompted all of the EIFS companies to offer and recommend residential systems that have some sort of integral drainage. Yes, Virginia, windows do leak. And redundancy in building systems is a super idea.