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Lead-Based Paint Insurance Coverage: Courts Mandate Coverage Despite Insurance Industry Opposition
06.01.97
Environmental Claims Journal

People: Mark E. Miller

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By Mark E. Miller
From Environmental Claims Journal, Vol. 9, No. 4, Summer 1997

Lead poisoning has been characterized as the number one environmental threat to the health of children in the United States. Recent state and federal regulations are helping to alleviate the problem, but the "solution" is placing an immense financial burden on building owners, landlords, and paint manufactures. Many individuals and businesses shouldering this financial burden, however, may not be aware that they already have purchased liability insurance to cover lead-based paint liability. A survey of applicable lead-based paint insurance coverage cases indicates that many types of standard form liability insurance policies cover not only defense and indemnity costs of lead-poisoning personal injury actions, but also costs expended in abatement of lead-based paint hazards.

Lead poisoning is a devastating yet preventable disease that is most damaging to children, fetuses, and women of childbearing age, and is often referred to as the "silent disease" because its effects typically occur gradually and without detection. Low bloodlead levels have been associated with learning disabilities, growth impairment, permanent hearing loss, visual impairment, and other damage to the brain and nervous system. At higher levels, lead exposure can cause severe brain damage, convulsions, and death. Additionally, lead exposure during pregnancy can alter fetal development and cause miscarriages.

Because of the alarming number of children subjected to the harmful and lifelong effects of lead poisoning, in 1991 the Secretary of the Department of Health and Human Services described lead poisoning as the "number one environmental threat to the health of children in the United States."1 In fact, one study estimates that 1.7 million children under the age of six in the United States have blood-lead levels that exceed toxic levels set by the Centers for Disease Control and Prevention.2

Lead was used extensively in many oil-based interior and exterior house paints from the turn of the century to 1978, when it was banned from residential use. Indeed, it is estimated that 83 percent of the privately owned housing units built in the United States before 1980 contain some lead-based paint, and approximately 64 million homes contain lead-based paint that, if not properly managed, may pose a hazard to occupants.

Exposure to lead-based paint, in the residential context, often results from breathing or ingesting lead-based paint dust or chips. Lead-based paint dust, the result of normal paint wear, can create a toxic film on many household surfaces or collect near windows and doors. Children subject to such conditions can unknowingly poison themselves by putting their fingers in their mouths and ingesting lead-based paint dust or other contaminants. The hazard, however, is not limited to children. Adults also can receive hazardous lead exposures by inhaling or ingesting lead-based paint dust.

Insurance companies are well aware of the fact that landlords and property owners across the country are bearing an enormous financial burden as a result of lead-based paint contamination. In the past several years, there has been an avalanche of lawsuits filed on behalf of children allegedly poisoned by ingestion of lead-based paint. In fact, America is in the midst of a litigation frenzy in which multimillion-dollar jury verdicts appear to be the rule rather than the exception. Indeed, the insurance industry, which keeps a watchful eye on lead-based paint litigation, now estimates that defendants will pay $3 billion during the next decade to settle these lawsuits.

The issue of who will pay this $3 billion tab has turned numerous insurance companies against the very policyholders they have contractually promised to protect. For example, when presented with a valid lead-based paint lawsuit, a large number of insurance companies breach their fiduciary responsibilities by suing their policyholders in an attempt to escape their contractual obligations.3 Indeed, the First Circuit Court of Appeals in United States Liability Insurance Co. v. Selman, 70 F.3d 684, 688 (1st Cir. 1995), criticized one insurance company in this regard as being "[b]ent on exonerating itself from all responsibility under its policies in regard to this claim," despite the fact that the lead-based paint claim at issue was clearly covered.

Nonetheless, insurance company lawyers routinely formulate arguments for denial of coverage and publish them in industry trade publications.4 Yet, despite the insurance industry's substantial effort to the contrary, the overwhelming majority of courts across the country have held that lead-based paint claims are covered under a variety of boilerplate liability insurance policies commonly sold to paint manufacturers, building owners, and landlords of residential property.
New Regulations Fuel the Litigation Fires

Because of the debilitating symptoms associated with lead poisoning, the federal government and numerous state and local governments have enacted legislation directed at reducing lead hazards. The general public and landlords across the nation gained an increased awareness of the lead-poisoning problem when the Environmental Protection Agency and the Department of Housing and Urban Development promulgated a final rule addressing lead-based paint disclosure requirements on March 6, 1996.5 Known as the Disclosure Rule, it requires persons selling or leasing most residential housing built before 1978 to provide purchasers and renters with a federally approved lead hazard information pamphlet and to disclose the existence of known lead-based paint hazards.

The Disclosure Rule and its authorizing legislation create great incentive for personal injury litigation. Under the applicable regulations, a property owner or real estate agent who knowingly violates the Disclosure Rule can be held jointly and severally liable to the purchaser or lessee for attorney fees and "3 times the amount of damages incurred by such individual."6

Many of the details of lead hazard reduction and abatement, however, have been left to state and local regulators. Roughly two-thirds of the states have regulations addressing lead hazard reduction and, of these states, more than 20 have enacted specific statutes designed to eliminate or reduce dangerous blood-lead levels in children.7 For example, New York's Lead Poisoning Prevention and Control Act authorizes:

* Mandatory blood-lead screening by primary health care providers for all children six months to six years of age;

* Mandatory reporting of all children with elevated blood-lead levels to the appropriate state or local health agency; and

* The New York Health Commissioner, upon a finding that "conditions conducive to lead poisoning" exist, to issue a notice and demand for discontinuance of conditions conducive to lead poisoning to the owner of the dwelling requiring abatement of such conditions.8

These various state and federal regulations have heightened the public's awareness of lead poisoning, resulting in an avalanche of personal injury lawsuits against property owners and lessors. Moreover, staggering multimillion-dollar judgments in these cases are commonplace. In the past several years, for example, Manhattan juries alone have awarded plaintiffs in excess of $30 million in five separate cases.9 Further, this frenzy shows no signs of cessation as juries and courts in many northeastern states routinely award plaintiffs stratospheric multimillion-dollar awards.10
Insurance Coverage for Lead-Based Paint Claims

The presence of lead-based paint in a home or building may subject the owner to (1) the threat of personal injury lawsuits alleging lead poisoning as a result of lead-based paint exposure, and (2) the obligation to abate the lead-based paint hazard pursuant to governmental directives. Moreover, the cost of defending against such a claim can easily cost in excess of $100,000. Fortunately, these costs are typically covered under insurance policies that are routinely purchased by property owners.

A number of insurance policies sold to residential apartment owners and homeowners typically cover the costs of third-party liability and abatement costs associated with lead-based paint hazards. These include:

* Comprehensive general liability (CGL) insurance policies
* Umbrella liability insurance policies
* Excess liability insurance policies
* Homeowners' insurance policies
* Owners’, landlords’, and tenants’ (OLT) insurance policies

Although a number of insurance policies provide coverage for landlord liability associated with lead-based paint hazards, provisions of CGL insurance policies probably provide the best starting point for analysis because standard form CGL language, with minor variations, is found in a large number of liability insurance policies. The grant of coverage for bodily injury liability and property damage liability in a typical CGL policy provides that the insurance company:

will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence. [emphasis added]

An "occurrence" is often defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." "Bodily injury" is generally defined as "bodily harm, sickness or disease to a person including required care, loss of services and death resulting from these at any time." The 1966 standard form CGL policy defines "property damage" as "injury to or destruction of tangible property."

In a general sense, absent a breach of policy conditions or an exclusion to the contrary, coverage is provided for any claim alleging "bodily injury" or "property damage" caused by an "Occurrence" during the policy period.

Third-Party Lead-Poisoning Personal Injury Lawsuits

When a landlord is sued in a lead-poisoning personal injury action, the immediate concern is to hire legal counsel to defend against the lawsuit. Defense of a typical lead-poisoning lawsuit can be quite expensive medical experts, attorney fees, and court costs in a typical lead-poisoning action can easily exceed $100,000. But that is only the beginning. Even if a landlord can afford to pay for a defense, he or she still faces the threat of a multimillion-dollar judgment if the plaintiff is able to prove liability. In short, being named as a defendant in a lead-poisoning action can be financially devastating.

Fortunately, individuals and organizations purchase insurance to protect themselves against these types of unexpected events. Unfortunately, when presented with a lead-poisoning claim, most insurance companies either deny coverage or sue the policyholder, seeking a declaration that the insurance company has no obligation under its policy. Nonetheless, courts in general have been unsympathetic to insurance companies seeking to exonerate themselves from their contractual obligations under their policies.

Duty To Defend

With respect to an insurance company's duty to defend, black letter insurance law mandates that (1) an insurance company has the burden of disproving coverage before it can be relieved of its duty to defend, (2) an insurance company will be relieved of its duty to defend only where it can prove as a matter of law that the injury claimed is not covered or falls entirely within a policy exclusion, and (3) if some of the allegations of the complaint fall within coverage and others do not, a defense must be provided.11 The applicability of these rules in the context of lead-based paint poisoning coverage actions often dictates that an insurance company must defend its policyholder.12

For example, the court in Cepeda v. Varveris, 651 N.Y.S.2d 185 (N.Y. App. Div. 1996), addressed the duty to defend under facts that are typical in lead-based paint poisoning coverage disputes. A landlord was sued in a negligence action alleging that a child was injured from ingestion of lead-based paint, and the insurance company claimed that the injury did not occur during its policy period. The court, however, flatly rejected the insurance company's argument and held that the insurance company did not meet its burden of proving that there was no duty to defend the underlying action. The court noted that the duty to defend is broader than the duty to indemnify and stated that a[t]he duty to defend arises whenever the allegations in a complaint against the insured fall within the scope of risks undertaken by the insurer, regardless of how false or groundless those allegations might be" (citation omitted). Accordingly, the court reasoned that the allegations of the complaint in the underlying negligence action fell squarely within the scope of risks covered by the policy.

Similarly, in United States Liability Insurance Co. v. Parley, 626 N.Y.S.2d 238 (N.Y. App. Div. 1995), another New York appellate court held that an insurance company had a duty to defend, despite the fact that some of the lead-based paint poisoning allegations of the complaint were proven to have taken place prior to the policy period in question. The court held that the insurance company failed to prove that it had no duty to defend the policyholder because the allegations in the complaint alleged that some of the injuries occurred during the policy period. Despite this, the insurance company sought to evade its obligations on the basis that it presented proof that the injured children suffered injuries from lead poisoning prior to the inception of the policy.

The court reasoned that because the insurance company did not prove that additional injury did not occur during the policy period, the insurance company therefore "failed to prove that there is no possible factual basis on which it might be required to indemnify the insured pursuant to the policy."

A similar situation is presented when an insurance company argues that a defense is not warranted because some of the allegations of the complaint are excluded by a policy exclusion. In GRE Insurance Group v. Metropolitan Boston Housing Partnership, 61 F.3d 79 (1st Cir. 1995), the complaint alleged that the defendant housing authority failed to inspect adequately for lead-based paint before agreeing to subsidize low-rent apartments. The insurance company argued that professional service exclusions in the policies at issue barred coverage because they excluded coverage for liability "arising out of the rendering or failure to render any professional services by or for you, including . . inspection or engineering services."

Although the court in Metropolitan Boston did not address the applicability of the exclusions at issue, the court did hold that the insurance company had a duty to defend the policyholder based on the fact that the claims at issue raised legal theories broader than inadequate inspections, such as negligence, negligent misrepresentation, breach of contract, and various other theories of liability alleging the failure to take appropriate action with respect to lead-based paint found in the apartments at issue. The court stated that "the weight of authority places the duty to defend all counts on an insurer which has a duty to defend at least one count of a complaint."

Duty To Indemnify

Because an insurance company's duty to indemnify is not based on the allegations of the underlying complaint, but rather rests on the actual facts of the case as proven, insurance companies typically attempt to defeat coverage by asserting that "bodily injury" did not occur during their respective policy periods despite the fact that an injured child was exposed to lead-based paint when their policies were in force. Courts addressing this issue have uniformly held that childhood lead poisoning constitutes bodily injury under the policies.l3 Moreover, these courts have also uniformly held that childhood exposure to lead-based paint during the policy period triggers coverage.

Resolution of the issue of when bodily injury occurs as a result of exposure to lead-based paint has been the subject of a great deal of medical testimony. In Chantel Associates v. Mount Vernon Fire Insurance Co., 656 A.2d 779, 785 (Md. 1995), for example, the policyholder moved for summary judgment on defense and indemnity of a lead-based paint poisoning action prior to final resolution of the underlying tort case. The timing of when the bodily injury occurred was a critical issue in the case because two of the injured children resided at the property within the applicable policy period, and the third injured child was not born until two months after the policy expired. Basing its decision on an uncontested medical affidavit submitted by the policyholder, however, the court held that the insurance company at issue had a duty to defend and indemnify its policyholder in the underlying lead-poisoning tort action.

The court reasoned, based on an undisputed medical affidavit, that "bodily injury" occurred immediately or shortly after exposure, and in the unborn infant's case, through in-utero exposure. The affidavit stated:

An injury is the alteration of structure or function of a cell, tissue or organ. Physical or chemical damage to the body which may be detectable only on a microscopic or subclinical level also constitute[s] an injury.

* * *

Exposure to lead produces both direct and indirect damage to the cells, tissues and organs of the body that begin immediately or shortly after exposure....

* * *

Human infants and toddlers below the age of three years are at special risk because of in utero exposure.

Basing its decision on similar medical testimony, a federal district court in Scottsdale Insurance Co. v. American Empire Surplus Lines Insurance Co., 811 F. Supp. 210, 215 (D. Md. 1993), similarly held that all policies in force during the period of ingestion of lead will be triggered. The court reasoned that:

a young child’s continuous exposure to lead will (by interfering with the transmission of nerve impulses and with the functions of calcium in the brain) stunt the growth of the brain. Although not instantly measurable, adverse physiological effects occur "very quickly" after continuous exposure and ultimately manifest themselves in learning disabilities and reduced I.Q.

Despite overwhelming evidence to the contrary, insurance companies often argue that bodily injury resulting from lead exposure is not continuing in nature. In Selman, mentioned above, an insurance company attempted to sidestep its obligations to the policyholder by arguing that when a disease such as lead poisoning "manifests itself before an insurance policy incepts, all future bodily injury of the same genre should be deemed to relate back to the original condition even if the victim incurs subsequent injury from continued exposure to the causative agent during the policy period."

The Selman court flatly rejected this argument and held that each exposure can be reasonably seen as a separate injury-producing occurrence. The court noted that the insurance company's argument had no merit, stating, "[a]s doctrines go, this one has very little in the way of a pedigree."

Alleged Coverage Defenses

In addition to making the argument that "bodily injury" did not occur during their respective policy periods, insurance companies have also attempted to rely on a host of inapplicable policy exclusions and defenses to defeat coverage. These include assertions that (1) pollution exclusions preclude coverage, (2) the policyholder’s notice to the insurance company was late, (3) the loss was "known" to the policyholder at the time it purchased insurance coverage or was expected or intended by the policyholder, and (4) lead-specific exclusions preclude coverage. Most of these arguments for exclusion of coverage have been rejected in their entirety by the courts, and the remaining arguments only apply, at best, to narrow factual scenarios that may not be present in a lead-based paint coverage dispute.

Pollution Exclusions

It is obvious to most people that lead-based paint in a house or building is not pollution. Nonetheless, the insurance industry repeatedly asserts that pollution exclusions bar coverage in residential lead-poisoning cases. Two types of pollution exclusions found in general liability insurance policies may be implicated: the "sudden and accidental" pollution exclusion, adopted by the insurance industry in the early 1970s, and the "absolute pollution exclusion," which was almost universally used in insurance policies beginning in 1986.

The "sudden and accidental" pollution exclusion excludes coverage for:

bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental. [emphasis added]

Because many courts have held that the sudden and accidental pollution exclusion was ambiguous, the insurance industry promulgated a new exclusion in the mid-1980s called the "absolute pollution exclusion." The absolute pollution exclusion excludes coverage for "bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants...." Pollutants are defined as any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. . ." (emphasis added).

Regardless of whether a policy has a "sudden and accidental" or "absolute pollution exclusion," insurance companies assert the same argument: Lead-based paint poisoning cases are excluded from coverage because lead, although not defined as a pollutant, can be considered a pollutant because it is an "irritant" or "contaminant." Pursuant to this argument, everything under the sun is a pollutant so long as it irritates or contaminates somethi