Is palladium really that poisonous?
Intoxication can be acute (short time of exposure, effects appear fast), or chronic (longer exposures, the onset toxic effects will take days, months or years). For Iron Man it seems clear that this would be a chronic intoxication.

I found this safety guideline from the EMA, which states:


  Mice given $\ce{PdCl2}$ in drinking water (5 mg palladium/l) for a lifetime
  showed suppression of body weight and an increase in amyloidosis of
  several inner organs. In another study of questionable value
  (chloropalladosamine was given enterally to rats for about 6 months) a
  dose of 0.08 mg/kg body weight (corresponding to 0.041 mg $\ce{Pd^2+}$/kg) was
  determined as the no-observed-effect-level (NOEL), above which changes
  in body weight, hemoglobin content, blood serum parameters as well as
  functional and morphological changes have been reported. There is
  insufficient histological information available from this study.


Extrapolating human toxicity from mice data is a long shot, but since this is all we have it will have to do. Also, bear with me for pretty inaccurate math from here on (it's fiction anyway).

It's been a while since I watched the movie, but if I recall correctly each palladium piece was roughly 7cm x 4cm x 1cm. That's a volume of 28cm$^3$. The density of palladium is 12.023g/cm$^3$, therefore this piece weighs a bit under 350g.

I'm going to assume that he burns through a palladium piece every two days. Good times.

The NOEL (see above) is 0.08mg/kg/day. For an 85kg human, that's 6.8mg/day,  roughly 0.02% of the mass in the reactor. I recall that the palladium was heavily corroded when he extracted it, so a loss of 0.5-1% of palladium seems pretty reasonable. Being conservative, the reactor would release about 0.9g a day. If more than one tenth of a thousandth of this palladium is absorbed by Tony's bloodstream (which doesn't sound like much), then he will be in trouble.

To sum up, yes, I do believe it possible to suffer from palladium poisoning if you have a chunk of that thing dissolving inside your chest day and night.

Answering the other half of your question, Tony Stark used palladium for his first arc reactor in the first Iron Man. I don't think it was planned, they just went with it.