Diagnosis
This is not normal operation. It indicates the lid was exposed to temperatures exceeding the paint's rating, often from incorrect initial seasoning or a runaway fire.
How to Fix It
The damaged paint must be addressed to prevent rust. Let the grill cool completely. Use a wire brush to remove all loose, flaking paint. Sand the area smooth. Apply a high-temperature grill paint, following the can's instructions for curing.
If That Didn't Work
If blistering recurs in the same spot, there may be a hotspot from thin metal or a reflective flaw inside the lid. Consider using a grill cover to protect the exterior from weathering after repainting.
Heads Up
Do not continue to cook with flaking paint. Paint particles can contaminate food. Ensure the grill is properly seasoned initially by coating all interior surfaces with cooking oil and heating to 250-300°F for two hours.