A common question of late is: Why is it necessary for a liability policy to include a lead paint exclusion when the policy already contains a pollution exclusion? A related question is: To what extent can this exclusion be deleted for an additional premium, or a separate policy purchased to provide coverage?
It's easy to answer the second question. It is doubtful an insurer will sell the coverage, since it is likely to involve a case of adverse selection; that is, only those persons who are confronted with a potential loss are likely to want to purchase the insurance. It may always be possible to obtain coverage, of course. But from a cost standpoint, it may be a matter of trading dollars.
Whether a lead paint exclusion is necessary with a liability policy hinges on the nature of the risk. The owner or lessor of an apartment house or other form of habitational occupancy is likely to be high on the underwriter's list of targets to be issued an exclusion. Within this category are older buildings and structures where young children have been exposed to metallic lead-based paint resulting in mental injuries.
How this exposure comes about can vary. Children can actually eat portions of painted wood in these buildings or they can be exposed from lead paint dust that is generated when the walls are sanded for purposes of re-painting. There have even been some cases where infants allegedly sustained injuries from chewing on painted cribs.
Actual cases
The number of cases involving lead paint injuries is growing. One such case is Lefrak Organization, Inc., v. Chubb Custom Insurance Company, 942 F. Supp. 949 (S.D.N.Y. 1996). The insured filed suit because its insurer refused to defend an action in negligence alleging lead paint poisoning.
The insured was sued for $3 million in compensatory, and $1 million in punitive damages by the parents and guardian of an infant. They alleged that their infant was exposed to lead paint within the interior of the apartment complex in violation of the New York City Health Code. Their complaint, however, did not say how the infant was exposed to the lead paint, i.e., whether she ingested paint chips or inhaled lead dust, or whether stripping the walls precipitated her injuries.
The insurer denied defense based on its pollution exclusion which is quite similar to exclusion f. of the standard 1988 edition of ISO commercial general liability forms. The court, however, held that the pollution exclusion was ambiguous. The court questioned whether lead paint reasonably could be characterized as a pollutant, as defined in the policy.
In the final analysis of this case, the court held that there was more than a reasonable possibility that the insurance policy provided coverage for the lead poisoning claims asserted against the insureds in the negligence action. The insurer therefore had the obligation to provide defense.
Another case where a CGL policy's pollution exclusion was not broad enough to encompass lead paint is Insurance Company of Illinois v. Stringfield, et al., 685 N.E.2d 980 (App. Ct. IL. 1997). This suit was also brought by the parents of a minor who allegedly sustained injuries due to his consumption of lead-based paint and plaster that had chipped, flaked, broken and fallen away from various exposed surfaces of the premises.
The insurer of the building owners and others who had an interest in the realty denied coverage based on the pollution exclusion. The court, however, ruled that the exclusion was ambiguous for purposes of this fact pattern, since the injuries did not arise from the discharge, dispersal, release or escape of a pollutant, as defined in the policy.
Undoubtedly, it is cases such as the two preceding ones that have prompted insurers to add lead paint exclusions to their policies, particularly in cases involving habitational occupancies, such as apartment houses. Lead-based paint cases also are particularly troublesome to insurers because there is not likely to be any trail to a particular paint manufacturer enabling insurers to exercise their rights of subrogation.
Insurers also may have to contend with a long-tail exposure, since infants or minors technically are not precluded from bringing suit until they reach majority and this may entail many years or decades. Habitational risks, such as apartment houses and other rental property, long viewed as potentially favorable liability insurance risks from an underwriting standpoint, are no longer viewed as such without some kind of lead paint exclusion in light of adverse cases being rendered against insurers.
Lead paint exclusion cases
A case where a lead paint exclusion was upheld is Peerless Insurance Co. v. Gonzalez, et al., 697 Atl.2d 680 (Sup. Ct. CT. 1997). A minor child, again the victim, allegedly sustained injuries after having been exposed to toxic levels of lead paint that had been applied to the interior and exterior walls of a dwelling that was leased to the minor's mother.
The liability policy exclusion on which the insurer relied to deny defense and indemnity to its insured read:
"LEAD EXCLUSION...A. This insurance does not apply: (1) To Bodily Injury, Property Damage or Personal Injury arising in whole or in part out of the mining, processing, manufacture, storage, distribution, sale, installation, removal, disposal, handling, use or existence of, exposure to, or contact with lead or lead contained in goods, products or materials...."
The insureds maintained that the above exclusion did not apply to injuries arising from lead paint poisoning because the exclusionary provision contains no express reference to lead paint, and paint does not fall within the meaning of "goods, products or materials." In support of this argument, the insureds contended that once paint has been applied to a building, it could not be considered a "good, product or material."
Referring to a dictionary of these terms, the court disagreed with the insureds and held that paint could fall within the definition of goods or materials. In affirming the trial court's decision, this higher court stated that "the average policyholder could not reasonably reach a conclusion of coverage in the particular circumstances here in light of and having in mind the language of the exclusionary provision."
Lead poisoning exclusions are not limited solely to commercial general liability or excess liability policies. Some insurers issue them also with their homeowners and other personal lines policies perhaps to prevent payment with respect to inter-family suits. However, the major target of adding this kind of an exclusion to personal lines packages is likely to be occupants of rental properties.
One such case is Nationwide Mutual Fire Insurance Co. v. Mekiliesky, 976 F. Supp. 351 (D. Md. 1997). The insurer of a homeowners policy sought a declaratory judgment that its exclusion for lead poisoning applied to the occupant of an insured's rental property.
Briefly, the facts were as follows: In 1991, the insured added a lead exclusion to all of its homeowners policies, including those with liability coverage for rental properties. The endorsement excluded personal liability for claims "arising out of the ingestion or inhalation of lead or lead compounds." The insurer alerted its insureds with the new endorsement, issued at renewal, by mailing a stuffer highlighting the exclusion and its impact. This particular notice was mailed to the insured in July 1991 to become effective on August 27, 1991.
The claimant was a tenant of the insured's rental property for the one-year period ending March 1991. The claimant's daughter was diagnosed with an elevated blood lead level on November 24, 1992. It was in 1996 that the insured was sued for damages of $1 million. The insurer denied coverage based on its exclusion and the suit ensued.
The claimant alleged that the insurer's stuffer did not constitute adequate notice. The court disagreed. The claimant also lost her second argument for coverage because there were no allegations that the exposure to lead occurred prior to the inception of the exclusion. The allegations, instead, were based on exposure after the exclusion became effective. The court therefore concluded that the insurer owed no duty to defend or indemnify the insured.
Lead poisoning is hazardous to the health of people. And lead exclusions without a doubt can cause financial problems to property owners, considering defense costs today, not to speak about the potential for compensatory and punitive damages. Fortunately, the stuffers commonly issued by insurers save producers a lot of time and expense that would otherwise have to be expended in notifying their clients about this exclusion, when issued.
It might be a good idea for those producers who still issue newsletters to their clients--as a means to keep in touch and to provide personal service--to alert clients to this exclusion, if applicable, and explain why a market for this insurance might be difficult to find or cost-prohibitive. *
©COPYRIGHT: The Rough Notes Magazine, 1998