Texas Court Could Limit Risk by Defining Exposure Trigger for Long-Tail Claims

The Northern District of Texas recently issued a pivotal decision for long-tail injury cases. It clarified that under Texas law, excess liability coverage for long-tail injury claims can center on an exposure trigger theory.

The court resolved the dispute between measuring potential liability from the exposure as opposed to the injury-in-fact. It prioritized policy language and defined “occurrence” as exposure during the policy period. By adopting the exposure trigger theory based on specific policy language and rejecting a universal rule for these cases, the court limited insurer liability to claims alleging asbestos exposure within that policy period. This ruling also impacts how insurers assess and reserve for latent injuries.

The case analyzed a coverage dispute involving excess liability insurance for personal injury claims against Murco Wall Products, Inc., a drywall manufacturer that used asbestos during the 1970s and 1980s. Berkshire Hathaway Specialty Insurance Co. indemnified Murco for settlements in three cases, Smith, Murray and Galier, and sought contribution from excess insurers Canal Insurance Company and Interstate Fire & Casualty Company.

Canal and Interstate denied coverage, arguing that the claims did not trigger coverage under their policies. The court granted Canal’s summary judgment motion in full and Interstate’s in part, after applying an exposure trigger theory. The court analyzed the primary issue of whether coverage was triggered by exposure to asbestos during the policy period or by an injury-in-fact.

How did the insurers’ policy language define coverage limits?

The court first distinguished the case from the Texas Supreme Court’s Don’s Building Supply, Inc. v. OneBeacon Ins. Co. and aligned its reasoning with the Fifth Circuit case Guaranty National Insurance Co. v. Azrock Industries.

In Don’s Building, the Texas Supreme Court addressed property damage claims under a commercial general liability policy that covered “property damage [occurring] during the policy period.” The court used an injury-in-fact trigger. It emphasized that Texas law did not mandate a universal trigger rule for all claims and required courts to interpret policies based on their specific policy language. The Don’s Building court noted it was not addressing bodily or personal injury claims, leaving open the possibility of different triggers for such cases.

In Azrock, the Fifth Circuit interpreted a policy covering “personal injury . . . caused by an occurrence during the policy period,” with “occurrence” defined as “a continuous or repeated exposure to conditions which unexpectedly or unintentionally results in personal injury.” The Fifth Circuit held that damage caused by asbestos inhalation caused the relevant injury. The Fifth Circuit in Azrock effectively adopted an exposure trigger and remanded the case to determine if exposure occurred during the policy period.

Here, the Northern District of Texas court noted that the Canal policy covered “personal injury caused by . . . an occurrence which takes place during the policy period.” It defined “occurrence” as “an accident which takes place during the policy period, or that portion within the policy period of a continuous or repeated exposure to conditions, which causes personal injury.”

The Interstate policy similarly covered “personal injury . . . caused by or arising out of an occurrence which takes place during the policy period,” with “occurrence” defined as “injurious exposure to conditions, which results in personal injury.”

The court found that both definitions focused on “exposure” as the triggering event, unlike Don Building’s broader language of “property damage.” The court therefore rejected an injury-in-fact trigger in favor of an exposure-based approach.

The court adopted the exposure trigger theory because the Canal and Interstate policies defined “occurrence” as “exposure to conditions” causing personal injury, which it interpreted as the physical act of inhaling asbestos fibers during the policy period. The court also clarified that the plain meaning of “exposure” referred to the physical proximity and inhalation of asbestos rather than the subsequent development of diseases like lung cancer or mesothelioma. Thus, the policies’ requirement that the “occurrence” take place during the policy period precluded coverage for injuries manifesting later from earlier exposures.

The court also compared this case to Azrock, which applied an exposure trigger for asbestos personal injury claims. The court, however, noted that while Azrock required both exposure and injury during the policy period, the Canal and Interstate policies required only exposure, making coverage narrower and aligned with the policies’ intent to limit liability to the time frame of the harmful act (inhalation), not the latent consequences.

When are indemnity obligations triggered under the eight corners rule?

The court further held that the duty to indemnify under the Canal and Interstate policies was triggered from allegations of exposure during the policy period, not by the facts “actually established” in the underlying lawsuits. The court noted that the policies adopted an “eight-corners rule” after analyzing the policies’ definition of ultimate net loss.

The court explained that indemnity obligations typically depend on facts proven in the underlying litigation. However, the Canal and Interstate policies’ definitions of the ultimate net loss included “all sums” the insured became obligated to pay as damages. This required Canal and Interstate to indemnify Murco for settlements, judgments and defense costs based on allegations of covered exposure, even if the damages were still not “actually established.”

As a result, the broad policy language used contractually modified the standard from “actually established” damages to the “eight corners rule,” which only looks at the policy and pleadings. The court noted Texas’ preference for freedom of contract that allows parties to override default rules like the “actually established” standard.

Using the exposure trigger theory and the eight corners rule, the court found no coverage for Smith or Murray, as both claims predated the policy periods. However, Galier’s allegations of exposure into the “late 1980s” created a genuine issue of material fact, precluding summary judgment for Interstate for that claim. Canal’s motion was granted in full, as it did not relate to Galier.

How does the court’s ruling impact insurers and insureds?

By emphasizing policy language over a universal trigger rule, the court underscored the importance of precise drafting in insurance contracts. The distinction between the policies here and those in Don’s Building highlight how subtle wording differences, such as “occurrence” as opposed to “damage” during the policy period, can impact coverage determinations. It is important for insurers to review their policy language, particularly for definitions of “occurrence” and “ultimate net loss,” to ensure alignment with intended coverage scopes. Policies explicitly tying coverage to exposure may limit liability, while broader language could invite additional injury-in-fact arguments that the Canal and Interstate policies avoided here.

Importantly, the court’s analysis under the eight corners rule, as modified by the Canal and Interstate policies, established that allegations instead of established facts triggered indemnity. This effectively applied a duty-to-defend-like standard to indemnity and potentially increased the insurers’ exposure to defense and settlement costs based on pleadings alone. Excess insurers whose policies modify the standard to use the eight corners rule or something similar may face heightened financial exposure in asbestos litigation, even for claims that settle or fail, if plaintiffs allege exposure during policy periods. Insurers should assess whether their policies contractually modify default indemnity standards and note the potential of significant litigation costs and different coverage determinations, particularly when broad allegations create factual disputes precluding summary judgment.

Please contact Tillman Grogan, Sara Nau or any member of the Phelps insurance team if you have questions or need advice or guidance.