Why it matters: In a victory for policyholders, a Pennsylvania federal court ruled that an asbestos exclusion was ambiguous as applied to the maker and supplier of asbestos-containing refractory products and therefore unenforceable. The insured was sued in several asbestos-related lawsuits and sought coverage from its insurers. All but one of the insurers settled with the insured. The one hold-out insurer asserted that the asbestos exclusion in its policies barred coverage. The court disagreed and ruled in favor of coverage. The exclusion, barring coverage for excess net loss “arising out of asbestos,” was held to be ambiguous as to whether the term “asbestos” meant only the raw mineral, or whether it encompassed asbestos-containing products as well. The court did not decide which party proffered the more reasonable interpretation. Rather, because the exclusion’s terms were capable of being understood in more than one sense, the exclusion was ambiguous and therefore construed against the insurer, the drafter of the exclusion and in favor of coverage.

Detailed discussion: A manufacturer and supplier of refractory products, General Refractories Company (GRC) sued its carriers seeking a declaration of coverage for a host of asbestos-related lawsuits.

GRC’s insurers all settled, with one exception: Travelers Casualty and Surety Company. Travelers maintained that an Asbestos Exclusion in a 1985 policy eliminated coverage. The Exclusion provided: “It is agreed that this policy does not apply to the Excess Net Loss arising out of asbestos, including but not limited to bodily injury arising out of asbestosis or related diseases or to property damage.”

The issue before the court was, what does “arising out of asbestos” mean? GRC argued that the exclusion referred to asbestos in its pure mineral form, in contrast to asbestos contained in products such as those GRC sold. On the other hand, Travelers argued that the exclusion should be read broadly to exclude asbestos-related claims, period, regardless of whether the claims are based on exposure to asbestos as a raw mineral or asbestos-containing products.

The court, applying Pennsylvania law, ruled that the exclusion is ambiguous and thus construed it against Travelers, the drafter of the exclusion, and in favor of coverage. The court noted that dictionaries define “asbestos” in its mineral form.

In addition, the court was persuaded by evidence that other insurers from the late 1970s to 1985 used exclusions that distinguished between asbestos and asbestos-containing products or materials. Indeed, at that time Travelers itself was issuing policies to other policyholders containing asbestos exclusions that expressly mentioned “asbestos . . . contained in a product.”

Finally, the court was persuaded by other extrinsic evidence that, during the same time period, the insurance industry used the terms “asbestos” and “asbestos-containing products” with distinct, specialized meanings. The court observed: “Travelers chose not to define ‘asbestos’ in the policies sold to GRC. Also, more precise, broader exclusionary language could have been but was not used. On these facts, it is fair to interpret ‘asbestos’ in favor of coverage for the policyholder, GRC.”

At the one-day bench trial held on the applicability of the Exclusion, Travelers contended that it broadly covered any and all types of asbestos-related injuries, from those arising out of mining, milling, or manufacturing raw asbestos, or from exposure to other finished products that contained only some of the mineral. “It’s all the same stuff because the harm is the fiber,” Travelers told the court.

Refuting Travelers’ position that the Exclusion was subject to only one reasonable interpretation, GRC countered that from the late 1970s to 1985, the phrase “arising out of asbestos” did not mean the same thing as “arising out of asbestos-containing products.”

GRC asserted that the word “asbestos” simply meant the mineral form. GRC did not make raw mineral asbestos products, the company added, so the policy provided coverage for the underlying lawsuits that were for bodily injuries allegedly resulting from exposure to asbestos-containing products—not the mineral itself.

To support its argument distinguishing “arising out of asbestos” from “arising out of asbestos-containing products,” GRC presented evidence of policies with comparable exclusions and testimony about industry practices during the relevant time period.

The court agreed with the insured, concluding that the Asbestos Exclusion was ambiguous and must therefore be construed in favor of GRC.

Pennsylvania law requires that exclusions be strictly and narrowly interpreted to favor coverage for the insured, the court ruled, and viewed through such a lens, “asbestos” and “arising out of asbestos” are “used, respectively, as a noun and a verbal noun-phrase modifying ‘Excess Net Loss.’ In this use, ‘asbestos’ is commonly defined to mean a physical substance, a mineral.”

The court also stated that “As between Travelers and GRC, which proffers the more reasonable interpretation of the Asbestos Exclusion is not decided here. It is ruled only that GRC’s interpretation of ‘arising out of asbestos’ is consistent with the plain meaning of the written policy terms and common English usage. That is, GRC’s interpretation is objectively reasonable. Travelers has not met its burden of showing that GRC’s interpretation is not reasonable. Because the exclusionary terms are reasonably capable of being understood in more than one sense, the Exclusion is ambiguous.”

Travelers chose not to define “asbestos” in the GRC policies, the court added. “Also, more precise, broader exclusionary language could have been but was not used. On these facts, it is fair to interpret ‘asbestos’ in favor of coverage for the policyholder, GRC.”

To read the opinion in General Refractories Company v. First State Insurance Co., click here.