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The multimillion dollar jury awards and six-figure settlements emerging from lead paint liability suits against landlords and property managers could be a costly thorn in the side of commercial insurers for years to come.
Suits alleging that the paint in public housing and private apartment buildings caused lead poisoning in children also are threatening to overwhelm court systems, primarily in big Northeastern cities. In New York alone, an estimated 6,000 lead paint suits have been filed in the past three years and the pace shows no signs of slackening.
Only recently did insurers begin trying to exclude lead paint damage from general liability coverage, and only certain states will permit such exclusions. Without them, general liability policies cover the defense costs and indemnification when landlords are sued on behalf of children with lead-related blood contamination, in the opinion of most courts that have considered the issue.
"Suffice it to say that on indoor lead paint, unless the pollution exclusion specifically identifies lead or refers to indoor or residential releases, coverage should be anticipated in the major industrial states where these cases flourish," noted NAC Re Corp. in a recent liability bulletin.
"If you liked asbestos," runs the joke in insurer circles, "you'll love lead."
It is estimated that more than 10,000 suits alleging lead poising from paint have been filed against landlords in the 1990s. One reason for that proliferation: In 1991, the Centers for Disease Control significantly lowered the threshold for lead poisoning to 10 micrograms per deciliter of blood from 25.
Because lead paint was only banned by the Consumer Products Safety Commission in 1978, there are still millions of apartment units and other buildings nationwide where lead paint is a problem.
Most lead paint suits focus on injury to children who eat the sweet-tasting paint or breathe paint-laden dust-and juries are responding. In a notable 1995 case, for example, a Bronx County jury awarded $10 million to the family of a child who was poisoned in the family's public housing apartment. The judge cut the award to $4.4 million and the city is still appealing.
Early estimates had put the average settlement in lead paint suits at $500,000 per person injured (BI, July 12, 1993).
"Plaintiffs have the upper hand in these cases. Juries don't want to hear about other reasons for a child's mental impairment," said Paul Bottari, an attorney with Wilson, Elser, Moskowitz, Edelman & Dicker in New York. "It seems landlords are in trouble."
"The game board is now tipped toward plaintiffs," said another lawyer who specializes in defending these cases, Charles Norris of Fischer Fiden & Norris in New York. "The cases are sexy because you have children as victims. Juries are sympathetic to that."
Much as they did with asbestos cases in their early years, trial lawyers are watching lead paint cases carefully. No state high court has ruled on the pollution exclusion yet, but if continued rejection of that defense prompts settlements, the litigation could explode. And if paint and pigment manufacturers, rather than just landlords and property managers, are ever found liable, the stakes would be raised markedly.
To date, paint and pigment companies-such as NL Industries Inc. and Sherwin Williams Co.-have stayed out of the fray because it cannot be determined which company's products were responsible for any particular poisoning.
Plaintiffs' lawyers are trying to overcome that problem by arguing, in a class action in U.S. District Court in Manhattan, that nine companies that made lead pigment from 1925 to 1960 should be liable based on their share of the pigment market, or jointly and severally liable on the basis that they all knew of the risks and misled consumers about them. That suit covers several hundred thousand children under 6 years old and pregnant women.
Market share is rarely used as a basis for liability. Even asbestos companies have not been held liable on the basis of their share of any particular market. Market share liability primarily has been used against makers of the anti-miscarriage drug diethylstilbestrol, or DES.
In fact, the 1st U.S. Circuit Court of Appeals and other courts have expressly rejected the use of market share liability in lead paint cases (BI, Sept. 20, 1993).
"Counsel is throwing a lot out here hoping something sticks. The paint companies certainly will have arguments aimed at getting themselves out of this case, as they have in other cases," said Mr. Bottari, who is representing New York City in the class action.
"How big this litigation gets really depends on whether it ever gets going against the paint and pigment manufacturers. They've been slipping out of these cases because no one knows whose paint it was. But if the dam breaks and a court holds manufacturers jointly and severally liable, it's a whole new ballgame," said Paula Osborn, an attorney with Oppenheimer Wolff & Donnelly in Minneapolis.
"This field is growing because cities, especially New York, are woefully behind in enforcing the old laws that make it clear that if there's lead, it must be safely removed," said John Fitzgerald of Fitzgerald & Fitzgerald in Yonkers, who is lead counsel for the plaintiffs in the Manhattan class action.
So how are liability insurers responding?
Some are "lead lining"-a politically incorrect term for not insuring inner city apartment buildings and other habitational risks.
"There's a lot of selective underwriting going on. Basically, there's no coverage for pre-1978 buildings. There's a real dearth of lead coverage in most new GL policies. The property insurance industry is seeking to exclude lead wherever possible," said Jack Anderson, director of finance and insurance at the National Center for Lead-Safe Housing, a non-profit group in Columbia, Md.
Others are seeking state approval to add lead paint exclusions to their policies. New York, Maryland, Connecticut and Pennsylvania all permit such exclusions. New Jersey does not, and few insurers cover habitational risks in that state. In Massachusetts, insurers by law cannot deny insurance coverage to landlords that comply with a 1994 law aimed at preventing lead poisoning in children.
Still other insurance companies do not really know how big their problem is.
"These claims are just emerging, and the impact hasn't been contemplated by insurers and reflected in rates or reserves. At some (insurance) companies, only the claims people know what's going on. It hasn't worked it's way to underwriting yet," said Vickie Kartchner, president and chief operating officer of TIG Excess & Surplus Co. in Phoenix. The insurer does not write lead liability coverage.
Landlords looking for coverage can find some specific, stand-alone policies, policies that critics say are too limited in scope.
Surex Managers of Hunt Valley, Md., for instance, sells coverage on behalf of specialty insurers United National Insurance Co., Frontier Insurance Co. and Commercial Underwriters Insurance Co., depending on the state.
Surex manages the program, except New York, where SIR Services Inc. manages it.
Limits range from $25,000 to $1 million, and mandatory self-insured retentions range from $5,000 to $100,000. Coverage is written on a per-occurrence basis, with higher aggregate limits available. But only claims involving people with at least 25 micrograms of lead per deciliter of blood will be covered.
"Most of the business we're writing currently is in New York, where there is a claims explosion," said Tom Schruben, assistant vp with URC Environmental Specialty Underwriters, a unit of Underwriters Re Corp. and an affiliate of Commercial Underwriters. But policies have also been written for Connecticut, Massachusetts, Washington, Philadelphia, Maryland, Chicago and San Francisco.
"Some people may think we're crazy to be taking this on, but our strength is our underwriting requirements. We do inspections and screenings of every risk, and we feel that....we can avoid the true high-risk buildings," Mr. Schruben said.
A landlord program developed by Kaye Insurance Associates Inc. in New York offers $250,000 in coverage if blood contamination is at least 15 micrograms per deciliter. It's a claims-made policy that calls for an SIR of $10,000 or $20,000, and multiyear tails can be purchased.
The program is sold by the AROMA Purchasing Group, a unit of Kaye. Coverage is backed by insurers including Kaye unit Old Lyme Insurance Co. of Rhode Island Inc. and units of Reliance Group Holdings Inc.
"Most carriers have put in lead paint exclusions, and to make matters worse for policyholders, insurers that don't have exclusions are only responding to claims with reservations of rights letters. There are a lot of angry property managers out there, and we're trying to offer something that's solid, if not comprehensive," said Mike Zeldes, director of new business development with Kaye.
For housing authorities, another common target of lead liability lawsuits, coverage has been available since 1988 through the Housing Authority Risk Retention Group in Cheshire, Conn.
In conjunction with general liability, public housing authorities can buy up to $500,000 in coverage for existing lead hazards. The minimum deductible on this claims-made program is $25,000, and applicants must go through a risk assessment.
"We've seen all the articles about how settlements are coming in for millions of dollars, but so far, we haven't seen that," said Dan Labrie, vp of underwriting with Housing Authority Insurance, the parent of the RRG. "The problem isn't as big as one might believe in conventional public housing. There's a lot of monitoring going on. Higher risks come when HUD asks a housing authority to take over single family homes in disrepair."
Other insurers just don't want to write any lead-related coverage.
Insuring lead paint liability on low- to middle-income housing doesn't afford Zurich-American Insurance Co. in New York "any chance of insuring the policyholder properly and still making a profit," said Bill McElroy, assistant vp-environmental. So Zurich excludes lead paint damage where it permitted.
"We do write habitational risks, but no stand-alone lead," said Philip Conti, senior staff underwriter with Nationwide Mutual Insurance Co. in Columbus, Ohio.
"Otherwise, we look for lead-specific exclusions," explained Mr. Conti. "Writing lead is a lot like asbestos. It requires a high degree of expertise and loss control to underwrite it. Those doing it must think there's a lot of up-front money to be made, but who knows? It hasn't really sifted out yet in the courts."
"I really wish those that are doing this luck," said Ms. Kartchner of TIG E&S. "I just don't believe there's enough money in it to make it work."
There is even a moral hazard involved, asserted Ms. Kartchner. "People will actually feed their children paint chips (to raise their blood poisoning levels). I don't see how you can price against something like that."