States sponsor guaranty funds to step in the shoes of insolvent insurance companies with respect to “covered claims.” In Chesterton, the insolvent carrier was Midland, which had issued four insurance policies to a Massachusetts company, Chesterton, that manufactured and distributed products that included asbestos.

Although the court held that Chesterton had not intentionally defrauded Midland into selling it insurance in the 1980s as the asbestos liability wave was gathering strength, the court nonetheless ruled that the fourth policy that Chesterton purchased was void because it failed to affirmatively bring to Midland’s attention the increasing number of claims against it and its overall concern over asbestos-related liability. The court found this nondisclosure to be material in part because, when Chesterton had sought a renewal of the fourth policy from Midland and at that time disclosed its increasing profile as an asbestos defendant Midland declined to renew. While the ruling on these points in Chesterton is largely fact specific, of general import are the rulings that the guaranty fund has standing to assert such a claim on behalf of the now-defunct carrier and that laches would not lie to bar the nondisclosure defense (absent some extraordinary circumstance).

The Supreme Judicial Court’s ruling on trigger of coverage has broader implications, a ruling that is a mixed bag for policyholders. The court recognized that the prevailing approach is to consider any of initial exposure, persistence of asbestos fibers in the body, and manifestation of actual asbestos-related disease or impairment all to be triggering events – i.e., the court sided with the “injury” or continuing-injury trigger that the plain language of standard policies contemplate. But the Chesterton court departed from this rule regarding one Midland policy, joining another case involving Midland and some other, uncited cases (including a Sixth Circuit case decided this year) and held that the cause of the injury must occur during the policy period for the policy to be triggered.

The court focused on an insuring agreement that provided that the insurer will pay ultimate net loss in excess of the underlying limit for damages because of bodily injury “caused by an occurrence anywhere during the policy period.” The court ruled that the event that must take place during the policy period in order to activate coverage was the “occurrence.”

Ruling that the occurrence was the cause of the injury, the Chesterton court held that what triggered coverage was exposure to asbestos during the policy period; accordingly, unless a plaintiff suffered (new) exposure during the policy period, the Midland policy did not apply.

The court followed the decision of a New York court, In Matter of the Liquidation of Midland Ins. Co. 164 Misc. 2d 363 (N.Y. sup. Ct. 1994), aff’d, 269 A.D. 30, 71 (N.Y. 2000). The Massachusetts high court rejected Chesterton’s ambiguity arguments, including the holding of the First Circuit on this point in Eagle-Picher Indus., Inc. v. Liberty Mut. Ins. Co., 682 F.2d 12, 24 (1st Cir. 1982).

As the court held: “We conclude that the trigger event under the . .. . Midland policies is the exposure to, or inhalation of asbestos, which results in the injury, and not the injury itself. The continuing progression of the asbestos-related disease, without some initial, or subsequent, exposure to asbestos during the effective dates of those policies, will not trigger coverage.” The court further rejected Chesterton’s argument that the continuing assault on the body internally from the presence of asbestos fibers amounted to exposure of new cells to injury, thus triggering the coverage. Id. at n. 12.

In addition to the New York decision in Midland and the new Massachusetts ruling in Chesterton, a handful of courts have ruled policies were triggered not by injury during the policy period but rather from the occurrence during the policy period of the cause of injury. State Farm Ins. Co. v. McGowan, (6th Cir. Aug. 31, 2005) (rejecting argument that occurrence requires “actionable” negligence, which entails the existence of injury as an element of proof); Babcock & Wilcox Co. v. Arkwright-Boston Mfr. Mut. Ins. Co.., 53 F.3d 762 (6th Cir. 1995); Public Serv. Elec. & Gas Co. v. Certain Underwriters at Lloyd's of London, 1994 U.S. Dist. LEXIS 21072 (D.N.J. 1994); Ins. Co. of N. Am. v. Sam Harris Constr. Inc., 22 Cal.3d 409 (1978)(where “occurrence” was undefined, “negligent maintenance of the plane within the policy period was an occurrence covered by the policy even though the accident caused thereby did not happen until after the policy period had expire”).

Some of these rulings on trigger are favorable to the policyholder and the court finding that the uncertainty of the policy language compels in the coverage-promoting construction. Some of these rulings, however, like Chesterton, are contra coverage; what the courts fail to grapple with is the substantial disruption in the coverage program that these “event” trigger rulings create. In other words, instead of a comprehensive coverage program with annual primary and excess policies that together respond, these event-trigger rulings create gaps in the coverage – gaps that are largely unexpected ex ante by the policyholder. Given the overwhelming custom and usage in the insurance industry and the structure of most corporate insurance programs, courts should be highly reluctant to find that a one set of policies within a coherent purchasing program has a different trigger, unless (i) there is contemporaneous evidence that this different result was disclosed/discussed at the time of policy purchase and (ii) some pricing difference is palpable to confirm the underwriting intent and the policyholder’s assuming of the risk of the disjunction in trigger. There is no indication in Chesterton that there was an affirmative intention by either Midland or Chesterton to change the trigger in the final policy. In the absence of such confirmatory evidence, the event-trigger arguments of carriers in service of a denial of coverage should not be found to be persuasive.