NL Industries recently prevailed against its commercial general liability insurers in the New York Appellate Division in a noteworthy case regarding the meaning of “expected or intended” injury and the meaning of “damages” in a liability insurance policy. In Certain Underwriters at Lloyd’s, London v. NL Industries, Inc., No. 2021-00241, 2022 WL 867910 (N.Y. App. Div. Mar. 24, 2022) (“NL Indus. II”), the Appellate Division held that exclusions for expected or intended injury required a finding that NL actually expected or intended the resulting harm; not merely have knowledge of an increased risk of harm. In addition, the court held that the funding of an abatement fund designed to prevent future harm amounted to “damages” in the context of a liability policy because the fund has a compensatory effect. NL Industries II is a reminder to insurers and policyholders alike that coverage is construed liberally and exclusions are construed narrowly towards maximizing coverage. 

The Underlying Litigation

NL used to manufacture lead paint. In 2000, several California municipalities filed a class action lawsuit against NL for public nuisance, alleging that NL marketed lead paint despite knowledge of its toxicity. The California trial court granted the governments’ motion for summary judgment and found that NL knew that lead paint was hazardous but continued to market it anyway. After multiple appeals and nearly 20 years of litigation, the parties finally reached a settlement in which NL agreed to pay $101.6 million to an abatement fund, which would be used to test for and remove lead paint from homes.

The Insurance Coverage Dispute

NL sought coverage for the settlement from its commercial general liability insurers, but the insurers denied coverage. There were 320 insurance policies spanning 70 years at issue. The insurers sought to deny coverage on two grounds.

First, the insurers argued that there was no coverage because NL expected or intended to cause harm. A representative policy read “‘Occurrence’ means an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” Certain Underwriters at Lloyd’s, London v. NL Indus., Inc., No. 650103/2014, 2020 WL 7711918, at *10 (N.Y. Sup. Ct. Dec. 29, 2020) (“NL Indus. I”) (emphasis added). The other policies used similar language. Id. at 10–11. Some policies also included an “expected or intended harm” exclusion. The insurers contended that there was no coverage because the trial court found that NL knew lead paint was toxic and, therefore, NL expected or intended the resulting damage and harm.

Second, the insurers argued that even if coverage was available under the policies, NL was not liable for any “damages.” As part of the settlement, NL paid money into an abatement fund that would be used to remove lead paint from dwellings. Under California law, the payment into the abatement fund was only to prevent future harm, not to compensate for past harm. The Insurers argued that the policies’ coverage for “damages” refers only to compensation for past harm, not future harm. Id. at *14. The insurers argued that this distinction meant that there was no coverage for the payment into the abatement fund.

The New York Supreme Court rejected both of the insurers’ arguments and denied their motion for summary judgment. The insurers appealed, and the Appellate Division affirmed the Supreme Court’s decision in full and largely adopted its reasoning.

Whether NL Was Found Liable for Expected or Intended Harm

Both courts rejected the insurers’ argument that there was no coverage because NL intended or expected the harm caused by lead paint. Under New York law, an exclusion must be construed narrowly and directly on point. NL Indus. I, 2020 WL 7711918, at *12. Applying this principal to the “expected or intended harm” exclusion, the Supreme Court explained “what makes injuries or damages expected or intended rather than accidental are the knowledge and intent of the insured. It is not enough that an insured was warned that damages might ensue from its actions, or that, once warned, an insured decided to take a calculated risk and proceed as before.” Id.

To determine whether NL was found liable for intending to cause damage or whether it merely knew of the risks of its actions, the Appellate Division examined the allegations in the underlying complaint. It pointed out that NL’s liability was premised on its knowledge that lead paint “posed a serious risk of harm.” NL Indus. II, 2022 WL 867910, at *1. The Appellate Division explained that this “is not a clear finding that NL either expected or intended to harm any person or property.” Id. Similarly, the Supreme Court found that NL was accused of knowing that lead paint was hazardous, but pointed out that there is a distinction between knowledge of the risk of hazardous consequences of one’s actions, and the intention to cause harm.” NL Indus. I, 2020 WL 7711918, at *13. The two courts thus found that the insurers failed to carry their burden to show that the “expected or intended harm” exclusion applied.

Whether NL Was Liable for “Damages”

Both courts also rejected the insurers’ argument that the settlement payment into the abatement fund did not constitute liability for “damages” under the policies because the California court stated that the payment was solely to prevent future harm, not to compensate for past harm. Under New York law, insurance policies must be read as “common speech [to give effect to] the reasonable expectation and purpose of the ordinary businessperson.” NL Indus. I, 2020, WL 7711918, at *14. Ambiguities must be resolved in favor of the policyholder. Id.

The Supreme Court found that “damages” was ambiguous, and construed it NL’s favor, holding that “an ordinary businessperson reading the policies at issue would believe coverage exists for NL’s liability, and NL’s liability under the California public nuisance statute constitutes ‘damages’ under the relevant policy language.” Id. The Appellate Division agreed, finding that the payments also had a compensatory effect and, therefore, were covered damages under the insurance policy. NL Indus. II, 2022 WL 867910, at *2.

Conclusion

The Appellate Division read the phrase “expected or intended harm” narrowly so as to cover NL’s willful conduct. What matters for the purposes of coverage is not whether NL was aware of the risks of its conduct, but whether it intended to cause the specific resulting harm.  Thus, whether the policyholder acted willfully with knowledge of certain risks is not the test for coverage. The Appellate Division broadly read the term “damages” to be ambiguous and, thus, the term should be read to include any money that the policyholder was required to pay as a result of harm that it caused. This case serves as a reminder of the important principles that grants of coverage are construed broadly and exclusions are construed narrowly, both in the policyholder’s favor.