INS. CO. NORTH AMERICA v. FORTY-EIGHT INSULATIONS

KEITH, Circuit Judge.

This case presents a novel and important question of insurance law. A manufacturer of asbestos products faces huge potential liability because of numerous lawsuits filed around the country by persons who inhaled asbestos fibers allegedly manufactured by the company. The claimed basis for liability is that the asbestos manufacturer failed to warn asbestos workers and other ultimate users of its products that asbestos was a dangerous product which, if inhaled, could cause an early death from cancer or other disease. The company had various products liability insurance policies over a twenty-year period of time. These policies were issued by five different insurance companies. Which of the insurance companies is obligated to provide a defense to the numerous lawsuits? And, assuming the manufacturer is found liable, which of the insurance companies must cover the judgment? These are the issues presented by this case. They are not easy to resolve and they have split the American insurance industry, many of whose member companies have filed amicus curiae briefs.

FACTS

Background

From 1923 until 1970, Forty-Eight Insulations, Inc. manufactured products which contained asbestos. Asbestos is a mineral compound which has high tensile strength and flexibility. Asbestos also withstands high temperatures. For these reasons, asbestos has many commercial uses, especially in the construction industry. Asbestos is used in home insulation, cements, paints and tile.

The problem is that tiny asbestos particles can become airborne when asbestos is mined and processed, when asbestos materials are used at a construction or other site, and when old buildings containing asbestos are demolished. When these asbestos particles become airborne, a number of them are inhaled by persons in the area. The asbestos particles are deposited in the lungs. If, over the years, enough asbestos particles are inhaled, they can cause a variety of pulmonary diseases. Medical science is not certain exactly how these diseases develop, but there is universal agreement that excessive inhalation of asbestos can and does result in disease. These asbestos-caused diseases include mesothelioma, broncheogenic carcinoma (lung cancer), and asbestosis.1

The most common disease is asbestosis. Asbestosis occurs when fibrous lung tissue surrounds small asbestos particles in the lungs to prevent the particles from moving around or causing irritation to neighboring cells. Ordinarily, this encapsulation of the asbestos particles is a good thing. However, if too many asbestos particles are inhaled, then the encapsulation process diminishes pulmonary function and makes breathing difficult. When this occurs, the disease of asbestosis is said to be present.

Asbestosis is a progressive disease. It ordinarily takes years of breathing asbestos fibers for asbestosis to occur. And asbestosis varies greatly from person to person. Obviously, the concentration of the asbestos in the work environment is a critical factor. The more asbestos fibers a worker inhales, the more quickly a worker will contract asbestosis. Even so, there are many vagaries. The average human lung has much excess capacity and can absorb a fair amount of asbestos particles. How much varies. Many construction workers exposed to asbestos for forty years or more do not become diseased. Others, exposed to asbestos for shorter periods of time at lower concentrations, do contract asbestosis.2

The typical person who has contracted asbestosis is a worker who was employed in an industry in which many asbestos-laden products were used, e. g. construction. Usually, the worker has been exposed to asbestos particles for many years—at least ten, and generally for twenty or more.

By the late 1960s so many workers had contracted asbestosis that manufacturers began to cut back on the production of asbestos-containing products. Forty-Eight Insulations stopped using asbestos in its products in 1970. However, there remained the question of liability for the past sale of these products containing asbestos.

Suits on behalf of the injured workers were filed against the asbestos manufacturers. The workers' theory of liability was that under Restatement Torts 2d § 402(A), asbestos was an inherently dangerous product which the manufacturers had to warn them about. The workers claimed that the manufacturers had not so warned them and that therefore the workers should recover. To the extent that it was impossible to tell which particular manufacturer was responsible, they contended that all relevant asbestos manufacturers should be jointly and severally liable.3

The above-outlined theory of liability was endorsed in the leading case of Borel v. Fibreboard Paper Prods., 493 F.2d 1076 (5th Cir. 1973), cert. denied, 419 U.S. 869, 95 S.Ct. 127, 42 L.Ed.2d 107 (1974). See Prosser, Law of Torts, § 52 at 315-20 (4th Ed. 1971). Borel has triggered an avalanche of law suits against the entire asbestos manufacturing industry. The typical complaint names a multitude of companies which manufactured asbestos-containing products over the years. One of these companies is Forty-Eight Insulations. As of the date of the district court opinion, Forty-Eight had been named as a defendant in 251 "asbestos suits". By the end of 1978, Forty-Eight had over 800 such suits filed against it. By the summer of 1979, over 1,370 cases were filed.

The Instant Case

In recent years, most manufacturers have taken out insurance policies to protect them against products liability suits. Before 1955, Forty-Eight was apparently self-insured.4 Starting in that year, Forty-Eight was covered by various insurance policies issued by different companies. The Insurance Company of North America (INA) insured Forty-Eight from October 31, 1955 to October 31, 1972 with six consecutive insurance policies whose coverage limits varied. Affiliated FM Insurance Company (Affiliated FM) insured Forty-Eight from October 31, 1972 to January 10, 1975. Illinois National Insurance Company (Illinois National) insured Forty-Eight from January 10, 1975 to January 12, 1976. Travelers Indemnity Company of Rhode Island (Travelers) insured Forty-Eight from January 12, 1976 to November 8, 1976. Liberty Mutual Insurance Company (Liberty Mutual) has insured Forty-Eight since that date.

The various policies issued by the above companies have varied in their coverage over the years.5 However, each of the policies uniformly defined what it covered, when coverage applied and the definitions of the various terms used.6 The reason is that the insurance industry uses standardized language in its general liability policies. Thus each of the policies taken out by Forty-Eight contained the same relevant language. This language was as follows:

The above-cited policy language causes little difficulty in the ordinary case. Asbestosis, however, presents thorny problems since it does not clearly fit within the above language. A worker who contracts asbestosis and sues Forty-Eight and/or other asbestos manufacturers must establish liability and injury in order to win a judgment. If the worker succeeds in his suit and Forty-Eight is directed to pay, then it is clear that the above-cited insurance coverage is triggered.

But which insurance company has to pay the judgment? At first glance, it would appear that the insurance company which provides coverage when asbestosis is diagnosed should pay. However, asbestosis is a slowly progressive, insidious disease. As more and more asbestos particles settle in the lungs over years of exposure, the disease worsens. At some point, asbestosis interferes with gas exchange in the lungs and clearly manifests itself. It is thus arguable that a worker's asbestosis "occurred" during the many years that the worker was breathing in tiny asbestos particles and accumulating them in his lungs.

This case principally concerns a dispute among Forty-Eight's different insurance carriers over the years as to which carrier or carriers is liable under the above-cited policy provisions. INA filed this diversity action in the district court, seeking a declaratory judgment on this issue.

I.

We are called upon in this case to construe uniform provisions in widely-used Comprehensive General Liability (CGL) insurance policies. We are presented with two different theories of construction.8

INA, Affiliated FM, Illinois National and Liberty Mutual, supported by several amici curiae, advocate the manifestation theory of liability. Under this theory, bodily injury in a case of asbestosis could not be deemed to have occurred until the asbestosis manifests itself. The date of manifestation is the date when the worker knew or should have known he has asbestosis, or the date that asbestosis is medically diagnosed, whichever came first. Accordingly, under the manifestation theory, those insurance companies on the risk when asbestosis manifests itself must pay any resultant judgment of liability. Simply put, the manifestation theory is that no "bodily injury" took place until asbestosis became apparent.

Forty-Eight and Travelers, supported by numerous amici curiae, advocate the exposure theory. They argue that when asbestosis manifests itself has nothing to do with when "bodily injury" took place. They emphasize that the medical testimony establishes that tissue damage starts to occur shortly after the initial inhalation of asbestos fibers and that the tissue damage worsens as the victim breathes in more and more asbestos fibers. The advocates of the exposure theory characterize asbestosis as a series of continuing injuries to the body which accumulate to cause death or disability. Under this theory, asbestosis is a "continuing tort" and all insurance companies which provided coverage from the time of the worker's initial exposure to time of the manifestation of the disease are jointly and severally liable to defend and to indemnify Forty-Eight if liability is found.

The district court adopted the exposure theory.9 The court first noted that many of the insurance companies that now advocate the manifestation theory had initially embraced the exposure theory. The court found this initial conduct instructive as to the proper meaning of the policy provisions.

The principal basis for the district court's position, however, was the medical evidence. The medical testimony established that "each tiny deposit of scar-like tissue causes injury to a lung". From this, the court reasoned that "each such insult-causing injury is an `occurrence' for the purpose of determining which coverage applies." 451 F.Supp. 1230, 1239 (E.D.Mich.1978).

Finally, the district court thought that the exposure theory best served the expectations of the contracting parties. The court emphasized that an injured worker who sues Forty-Eight makes out a prima-facie case by showing injury and exposure to Forty-Eight's products. The plaintiff in such an underlying lawsuit can recover even if he cannot pinpoint the exact time when each injury occurred. Under Borel, supra, all asbestos manufacturers to whose products a worker was exposed are jointly and severally liable for the resultant, cumulative injury. By analogy, the district court reasoned that the manufacturers' insurance coverage should parallel their liability, and that each insurance company should be jointly and severally liable to defend and indemnify the manufacturer. Otherwise, concluded the district court, the manufacturer's insurance coverage would be illusory.

All parties have appealed.

II.

In each case where a plaintiff sues an asbestos manufacturer, a hearing could be held to determine at what point the build-up of asbestos in the plaintiff's lungs resulted in the body's defenses being overwhelmed. At that point, asbestosis could truly be said to "occur". From then on, all companies which insured the manufacturer would be treated as being "on the risk".10

The only problem with this Solomonian interpretation is that no one wants it. The principle reason is cost. If medical testimony as to asbestosis' origin would have to be taken in each of the thousands of asbestosis cases, the cost of litigation would be prohibitive. This appears to be especially true since many of the asbestosis cases are settled before trial. In addition, it is almost impossible for a doctor to look back and testify with any precision as to when the development of asbestosis "crossed the line" and became a disease.

The only thing on which all parties agree is that there is a need for us to arrive at an administratively manageable interpretation of the insurance policies—one that can be applied with minimal need for litigation. Reaching such a beneficial result is certainly desirable, but it greatly complicates our task. In the real world, there are few Solomonian possibilities. And, as we have just seen, those that do exist are often impractical. Thus, we must turn to the arguments advanced on appeal.

A.

As noted above, the medical testimony is not in dispute. Asbestosis is a slowly progressive disease. Injury, in the sense that there is tissue damage, occurs shortly after the initial inhalation of asbestos fibers. It was because of this early tissue damage that the district court concluded that the insurance companies would be liable from the date of a worker's initial exposure to asbestos. The district court thus equated the "bodily injury" which is covered by the insurance policies with the development of the tiny, scar-like tissue in the victim's lungs. Because each additional inhalation of asbestos fibers results in the build-up of additional scar tissue in the lungs, the district court deemed the "bodily injury" to occur whenever asbestos fibers were inhaled.

The medical testimony strongly supports the exposure theory. The appellants—who are proponents of the manifestation theory—seek to blunt the significance of this testimony. They agree that tissue damage takes place shortly after initial inhalation of asbestos fibers. However, they contend that this is irrelevant. Appellants argue that what should matter under the contract is compensable "bodily injury". They rely heavily on analogous insurance law cases. These cases will be discussed below.

We concede that appellants have a good argument. How one views "bodily injury" or "disease" depends on how one defines those terms. The doctors who testified openly stated that this was so. Dr. George Wright, for example, testified as follows:

Dr. Wright explained that a physician or biologist might not regard asbestosis as a disease so long as it was not diagnosable by x-ray or if the patient had no symptoms. In contrast, a histologist, who studies tissue systems, would regard asbestosis as a disease from the very beginning. Dr. Wright explained:

This "judgment call" is what is before us for review. As a matter of contract law, in this case, when did the disease of asbestosis occur?

Appellants urge that date of manifestation is the preferable interpretation of when bodily injury occurs. Appellants claim that this interpretation best serves the intent of the parties, which is to treat cumulative disease cases the same as ordinary accident cases. Otherwise, argue appellants, the limits and deductibles contained in the various insurance policies make no sense.11 Appellants emphasize that manifestation is the only theory that reasonably allows the operation of the insurance industry's claims machinery and administration of suits and coverage. In a nutshell, the proponents of the manifestation theory urge that we treat asbestosis the same as any other disease and that we not make any "special rules" for the cumulative disease situation which asbestosis presents.

We cannot agree. Cumulative disease cases are different from the ordinary accident or disease situation. First, the underlying theory of tort liability is that the asbestos manufacturers continually failed to warn the asbestos workers and that, as a result of this, continuous breathing of asbestos particles allowed asbestosis to progress to the point where it caused death or injury. The insurance policies before us are comprehensive general liability policies which are designed to insure the manufacturer against products liability suits. The contracting parties would expect coverage to parallel the theory of liability. Otherwise, as the district court noted, the manufacturer's coverage becomes illusory since the manufacturer will likely be unable to secure any insurance coverage in later years when the disease manifests itself.12

Second, a question might exist as to whether the microscopic tissue injury which occurs upon initial inhalation of asbestos should be defined as the occurrence of a "disease" or "bodily injury". However, there is universal medical agreement that the time when asbestosis manifests itself is not the time when the disease occurred. No doctor would say that asbestosis occurred when it was discovered. As Dr. Wright testified:

Third, although there are solid arguments to support the manifestation theory, we are bound to broadly construe the insurance policies to promote coverage. This is a diversity case and we must apply Illinois and New Jersey law. We adopt the district court's cogent discussion of this issue:

451 F.Supp. at 1237-38.

B.

Because of policy considerations and because of the medical testimony, we do not find controlling the analogous insurance cases urged upon us by the appellants.

First, there are the statute of limitations cases. In the past, defendants have argued that since a disease "occurs" at or shortly after exposure to a foreign substance, that is the time when the statute of limitations should start running. The problem is that such a ruling would bar relief to many plaintiffs who were unaware that they were being injured until years later when the disease manifests itself. To avoid such an unfair result, most courts13 have adopted a manifestation rule:

Here, we find that the policy considerations are the opposite of those present in the statute of limitations cases. A manifestation rule would deny coverage to the insured manufacturer. Moreover, it is the injury and not its discovery that makes the manufacturer liable in the underlying tort suit. As noted above, such underlying liability should also trigger insurance coverage. We disagree with appellant's argument that identical language used in statutes of limitations and insurance policies must necessarily be interpreted identically. Linguistic uniformity should not dictate how contracts or statutes are interpreted. Statutes of limitation are meant to protect defendants against stale claims, nor bar injured plaintiffs who have acted in good faith. Insurance contracts are meant to cover the insured.14

Second, there are the worker's compensation cases. Assume that a worker is debilitated by a progressive disease like asbestosis. Where that worker has been exposed to asbestos while working for various employers over the years, which employer is liable for the worker's compensation coverage? Courts have generally adopted a "last employer pays" rule.15 This rule, however, is the general rule applicable in worker's compensation cases.16 The underlying rationale for the rule is "the overriding importance of efficient administration in this area." Travelers Ins. Co. v. Cardillo, 225 F.2d 137, 145 (2d Cir.), cert. denied, 350 U.S. 913, 76 S.Ct. 196, 100 L.Ed. 800 (1955). While such considerations are present here, they do not override the rules of contract interpretation we have already noted. Moreover, because all that is required to establish workers compensation liability is a work-related injury, administrative considerations are of greater significance in workers compensation cases than in liability insurance cases.

Third, and of most relevance, are health insurance cases. Under these cases, there is no coverage until a disease is diagnosable as such.17 Thus, in Metropolitan Life Ins. Co. v. Reynolds, 48 Ariz. 205, 60 P.2d 1070 (1936), a court found coverage for insanity which manifested itself during the policy period even though it was caused by syphilis contracted before there was insurance coverage. Similarly, Cohen v. North American Life & Casualty Co., 150 Minn. 507, 185 N.W. 939 (1921) also found coverage where the insured underwent surgery for a condition which had a cause which predated the policy period.

These cases certainly appear to provide support for the manifestation theory. We do not, however, view them as controlling here. On the contrary, we think that they support the exposure theory. The reason is that the health insurance cases rely on the same rules of construction that we think are applicable here: insurance policies must be strictly construed in favor of the injured and to promote coverage; similarly, a policy must be construed to favor the legitimate expectations of the parties.

In Metropolitan Life Ins. Co., supra, the court construed an insurance policy which provided coverage where the insured had become totally and permanently disabled, as the result of "bodily injury or disease occurring and originating after the issuance of said Policy ..." In Cohen, the court construed a similar insurance policy which provided coverage for a disability resulting from "a disease which shall originate and begin after this policy shall have been in continuous force for 30 days."

Both cases reached the same result for the same reasons. Health insurance policies protect the insured in case of disabling sickness. This is why people buy such policies in the first place. It would be unfair to the insured-and contrary to his expectations when he bought the insurance-to allow a hidden condition to defeat the coverage which he bought.18

In this case, we are faced with two possible constructions, one of which is likely to leave the manufacturer insured, the other of which leaves the manufacturer uninsured for all practical purposes. We think that Illinois and New Jersey courts would try to construe the contract language to embrace the exposure theory.

C.

We do not rely on judicial fiat. Initially, we note that Forty-Eight strenuously argues that the policy language is ambiguous. It points out that the insurance industry is divided between the manifestation and exposure theories and that some insurance companies which initially accepted coverage under the exposure theory only belatedly changed their position. It further emphasizes that words such as "bodily injury" and "occurs" are inherently ambiguous.

We think that a better view is that the contractual terms in issue here, "bodily injury" and "occurrence" are inherently ambiguous as applied to the progressive disease context before us. A cumulative, progressive disease does not fit the disease or accident situation which the policies typically cover. There is usually little dispute as to when an injury occurs when dealing with a common disease or accident. As can be seen, in this case there is considerable dispute as to when an injury from asbestosis should be deemed to occur. For this reason, we can apply the above-stated canons of construction and resolve doubts in favor of maximizing coverage.

Aside from this, however, we believe that the policy language itself is best construed along the lines of the exposure theory. We need only look at the definition of "bodily injury" in the policy. Bodily injury is defined as "bodily injury, sickness or disease ..." It is tautological that bodily injury can be "bodily injury" and is not necessarily just a "disease". The medical evidence is uncontroverted that "bodily injury" in the form of tissue damage takes place at or shortly after the initial inhalation of asbestos fibers. Thus, it requires only a straightforward interpretation of the policy language for us to adopt the exposure theory. Indeed, for insurance purposes, courts have long defined the term "bodily injury" to mean "any localized abnormal condition of the living body." See Appleman, Insurance Law and Practices § 355 (1965).

We do not find persuasive appellants' contention that "bodily injury" means "compensable bodily injury." The manufacturer here paid for protection from bodily injury resulting in liability. It should make no difference when the bodily injury happens to become compensable. Put another way, we see nothing in the policy which requires that the underlying plaintiffs' cause of action accrue within the policy period. There exists a clear distinction between when bodily injury occurs and when the bodily injury which has occurred becomes compensable.

Although the problem presented by this case is one of first impression for an appellate court, the parties were aware of the potential problems which cumulative tort cases might present throughout the contract period. The etiology of asbestosis has been known since at least the 1930's. Although Borel was not decided until 1973, it was certainly foreseeable that asbestos manufacturers might be held liable for failing to warn workers of the danger of asbestos. "But though the application is novel, the underlying principle is ancient. Under the law of torts, a person has long been liable for the foreseeable harm caused by his own negligence. This principle applies to the manufacture of products as it does to almost every other area of human endeavor." Borel, supra at 1103.

The policies themselves show that the insurance industry contemplated the problem presented by cumulative trauma cases.19 Since 1962, each of the policies in question has included in its definition of "occurrence" a provision referring to continuous or repeated exposure to conditions which result in injury.20 There is strong evidence that coverage of diseases such as asbestosis was contemplated. Indeed, appellants openly admit that this is true. There is no similar provision in the policies restricting coverage to when asbestosis manifests itself. The insurance industry doubtless did not foresee the extent of the liability problem asbestosis cases would present. However, that in itself is no basis for construing the contract the way the appellants want.

In sum, we think that the exposure theory adopted by Chief District Judge John Feikens is the superior interpretation of the contract provisions.21 "Bodily injury" should be construed to include the tissue damage which takes place upon initial inhalation of asbestos. That is both a literal construction of the policy language and the construction which maximizes coverage. It is also the construction which, we think, best represents what the contracting parties intended.

The thrust of the appellants' arguments is that we should apply a uniform manifestation rule in all cases, including this one, and not be concerned with medical intricacies. We see no evidence that this is what the parties meant.

III.

Although victorious below, Forty-Eight urges that we modify the district court opinion in three respects. We shall discuss these questions seriatim.

A.

The district court, as discussed above, adopted the exposure theory for purposes of liability and prorated liability among all of the insurance companies which were on the risk while the injured victim was breathing in asbestos. For those years that Forty-Eight did not have insurance, the district court treated the manufacturer as self-insured and responsible for a pro rata share of the cost of indemnification. Thus, if insurer A provided 3 years of coverage, insurer B an additional 3 years, and the manufacturer was uninsured for the remaining 3 years, liability would be allocated at 1/3 for each of the three concerns.

The district court applied an identical rule apportioning the costs of defending the underlying suits. To the extent that the manufacturer was uninsured, it has to bear its pro-rata share of the costs of defense.

Forty-Eight agrees that it must bear its share of the liability risk for those years in which it had no insurance-that is, before October of 1955. However, Forty-Eight vehemently argues that the district court was wrong in prorating the cost of defending the law suits against it.

Forty-Eight argues that the insurer's obligation to defend is very broad-broader than its obligation to indemnify. Under the very wording of the insurance policies, the insurance companies had a duty to defend based on the allegations in the complaint, even if the allegations are groundless, false, or fraudulent ..." See Maryland Casualty Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24 (1976).

Forty-Eight argues further that the duty to defend is sufficiently broad so that it arises when one count of the complaint is within policy coverage and other counts are not. In many such cases, courts have not permitted apportionment of defense costs between the insurer and the insured.22 From these cases, Forty-Eight argues that so long as any insurance company had a duty to defend, it (Forty-Eight) should not be liable for any costs of defense, even if part or most of the underlying lawsuit concerned periods of time when Forty-Eight was uninsured.

We cannot agree. We fully accept the legal principles and cases on which Forty-Eight relies. What Forty-Eight ignores is the rationale on which its authorities are based. An insurer must bear the entire cost of defense when "there is no reasonable means of prorating the costs of defense between the covered and the not-covered items." Nat'l. Steel Construction Co. v. Nat'l. Union Fire Ins. Co., 14 Wn.App. 573, 543 P.2d 642, 644 (1975). Thus, in the typical situation, suit will be brought as the result of a single accident, but only some of the damages sought will be covered under the insurance policy. In such cases, apportioning defense costs between the insured claim and the uninsured claim is very difficult. As a result, courts impose the full cost of defense on the insurer.23

These considerations do not apply where defense costs can be readily apportioned. The duty to defend arises solely under contract. An insurer contracts to pay the entire cost of defending a claim which has arisen within the policy period. The insurer has not contracted to pay defense costs for occurrences which took place outside the policy period. Where the distinction can be readily made, the insured must pay its fair share for the defense of the non-covered risk.24

In this case Forty-Eight's own exposure theory, substantially adopted by the district court, establishes that a reasonable means of proration is available. Forty-Eight has urged that indemnity costs can be allocated by the number of years that a worker inhaled asbestos fibers. By embracing the exposure theory, we have agreed. There is no reason why this same theory should not apply to defense costs. The different insurance companies will pro-rate defense costs among themselves. It is reasonable to treat Forty-Eight as an insurer for those periods of time that it had no insurance coverage.25 Were we to adopt Forty-Eight's position on defense costs a manufacturer which had insurance coverage for only one year out of 20 would be entitled to a complete defense of all asbestos actions the same as a manufacturer which had coverage for 20 years out of 20. Neither logic nor precedent support such a result.

B.

Forty-Eight also argues that liability for asbestos-caused injuries should not be permitted for any time period unless it can be shown that its products were involved. Although the district court used the term "joint and several liability", we read its decision as implicitly adopting this position.

In an underlying asbestosis suit, the plaintiff must show that Forty-Eight's products injured him in order to be able a maintain a cause of action against Forty-Eight.26 Under Borel, Forty-Eight would be jointly and severally liable along with the other asbestos manufacturers. 493 F.2d at 1094-96. However, in allocating the cost of indemnification under the exposure theory, only contract law is involved. Each insurer is liable for its pro rata share. The insurer's liability is not "joint and several", it is individual and proportionate. Accordingly, where an insurer can show that no exposure to asbestos manufactured by its insured took place during certain years, then that insurer cannot be liable for those years. The reason is simple: no bodily injury resulting from Forty-Eight's products, took place during the years in question. The same thing would be true if an insurer could show that a worker used an effective respirator during certain years. Again, no "bodily injury" would have taken place.

We think that this is implicit in the district court's opinion and only state it here for clarity. However, the burden of disclaiming coverage will be on the insurer for the year or years in question.27

C.

Finally, Forty-Eight urges that we modify the district court's proration formula. Forty-Eight argues that the formula should reflect not only the injury caused by asbestos during the policy years when the worker breathed in asbestos fibers, but also the injury which developed afterward. Thus, if three insurance companies were on the risk for a 9 year period of exposure, under Forty-Eight's formula the first insurer would be on the risk for the first 3 years plus the remaining 6 while the disease progressed. The second insurer would be on the risk for 3 years plus the following 3 years. The final insurer would be on the risk only for the final 3 years. Thus liability would be apportioned 9/18 for the first insurer, 6/18 for the second, and 3/18 for the third. Under the district court's formula, of course, each insurer would be liable for 1/3 of the costs.

We cannot accept this interesting formula because of the explicit language of the policies which define "occurrence" as "an accident, including continuous or repeated exposure to conditions". (emphasis added) Moreover, this proposed formula would place different obligations upon insurers who are in the same position. The extent of the insurer's liability would turn on the accident of when an insurer provided coverage. We reject this anomalous result.

Conclusion

Because the insurance industry did not fully appreciate the extent of potential liability for asbestos-caused injuries, we have this impossible problem before us. There is no truly satisfactory solution we can make. Each theory has its flaws and anomalies.28 Judge Feikens struggled with this case, as we have, and thought that the exposure theory was preferable. Although his opinion has been challenged by virtually every party and amicus on one ground or another, we think that he reached the right result for the right reasons.29

The judgment of the district court is affirmed.

APPENDIX A

                                                         One Person
    Policy Name                           One Person     More Than
    and Number         From       To      One Accident   One Accident  Aggregate

    Ins. Co. of North America

       9LB21567      10/31/55   10/31/58     100,000        300,000      300,000
       9LB24403      10/31/58   10/31/61     100,000        300,000      300,000
       LB24688       10/31/61    6/17/62     100,000        300,000      300,000
       LB24688 (End)  6/18/62   10/31/64     500,000        500,000      500,000
       LB24913       10/31/64   10/31/67     500,000        500,000      500,000
       ALB25120      10/31/67   10/31/72     500,000        500,000      500,000

    Affiliated FM Insurance Co.

       GLA71255      10/31/72    1/22/73     500,000        500,000      500,000
       GLA72342       1/22/73   12/31/73     500,000        500,000      500,000
       GLA71886      12/31/73    1/10/75     400,000        400,000      400,000

    Illinois National Insurance Co.

       GLA953273      1/10/75    1/12/76     300,000        300,000      300,000

    The Travelers Indemnity Co. of Rhode Island
       650-862A376-4-
         TRI-76       1/12/76   11/08/76     500,000        500,000      500,000

    Liberty Mutual Insurance Co.
       LGI-632-004010-126   11/08/76    1/01/78   1,000,000      1,000,000    1,000,000

APPENDIX B

                                                                          RELATION
          POLICY     INSURING               POLICY PERIOD/                TO OTHER
INSURER   PERIOD     AGREEMENT              TERRITORY                     INSURANCE      DEFINITIONS

INA     10/31/55-    To pay on behalf of    This policy applies only      Excess over    Bodily injury ... shall be
        10/31/58     insured ... for        to such injuries and          other valid    construed to include
                     damages because of     damages occurring during      and            sickness, disease ...
                     bodily injury ...      the policy period ....        collectible
                     caused by accident                                   insurance

INA     10/31/58-
        10/31/61      Same                  Same                          Same           Same

INA     10/31/61-
         6/18/62      Same                  Same                          Same           Same

INA      6/18/62-
        10/31/64      To pay on behalf of   Same                           Same          Bodily injury ... shall be
       (endorsement)  insured ... for                                                    construed to include
                      damages because of                                                 sickness, disease ...
                      bodily injury ...
                      caused by occurrence
                                                                                         Occurrence means either
                                                                                         an accident happening during
                                                                                         the policy period or a continuous
                                                                                         or repeated exposure
                                                                                         which ... causes injury during
                                                                                         the policy period

INA    10/31/64-
       10/31/67      To pay on behalf of    This policy                   Excess over    Bodily injury means bodily
                     insured .... as        to occurrences which          other          injury, sickness, disease ....
                     damages because of     take place during the         collectible
                     bodily injury          policy period                 insurance      As respects property damage
                                                                          with any       liability, occurrence means
                                                                          other insurer  either an accident happening
                                                                                         during the policy period or a
                                                                                         continuous or repeated
                                                                                         exposure to conditions which
                                                                                         unexpectedly and unintentionally
                                                                                         causes injury to or
                                                                                         destruction of property
                                                                                         during the policy period

INA       10/31/67-  To pay on behalf of    This policy applies only      Primary        Bodily injury means bodily
          10/31/70   insured ... as         to bodily injury ...          contains       injury, sickness or disease ...
          (renewal   damages because of     which occurs during the       formula
          through    bodily injury ...      policy period                 where other    As respects property damage
          10/31/72)  caused by an                                         insurance      liability occurrence means an
                     occurrence                                           applies on     accident, including injurious
                                                                          same basis     exposure to conditions, which
                                                                          ...            results, during the policy
                                                                                         period, in property damage
                                                                                         neither expected nor intended
                                                                                         from the standpoint of
                                                                                         the insured

Affiliated 10/31/72-  Will pay on behalf    This policy applies only      Same           Bodily injury means bodily
           1/22/73   of the insured... as  to bodily injury ...                         injury, sickness or disease ...
                      damages because of    which occurs during the
                      bodily injury ...     policy period ...                            Occurrence means an accident,
                      caused by an                                                       including injurious
                      occurrence                                                         exposure to conditions, which
                                                                                         results during the policy
                                                                                         period in bodily injury
                                                                                         neither expected nor intended
                                                                                         from the standpoint of the
                                                                                         insured

Affiliated 1/23/73-  Will pay on behalf     This policy applies only      Same           Bodily injury means bodily
          12/31/73   of the insured ...     to  bodily injury ...                        injury, sickness or disease,
                     as damages because     which occurs within the                      which occurs during the
                     of bodily injury ...   policy territory                             policy period...
                     caused by an
                     occurrence

                                                                                         Occurrence means an accident,
                                                                                         including continuous or
                                                                                         repeated exposure to conditions
                                                                                         which results in bodily
                                                                                         injury ...

Affiliated 12/31/73- Will pay on behalf     This policy applies only      Same           Bodily injury means bodily
           1/10/75   of the insured ...     to bodily injury ...                         injury, sickness or disease ...
                     as damages because     which occurs within the                      which occurs during the
                     of bodily injury ...   policy territory                             policy period...
                     caused by an
                     occurrence
                                                                                         Occurrence means an accident,
                                                                                         including continuous or
                                                                                         repeated exposure to conditions
                                                                                         which results in bodily
                                                                                         injury ...
Illinois 1/10/75-
         1/12/76     Same                   Same                          Same           Definition of bodily injury
                                                                                         same as above

                                                                                         Definition of occurrence
                                                                                         same as above

Travelers 1/12/76-   Same                   This policy applies           Same           Definition of bodily injury
         11/ 8/76                           during the policy                            same as above
                                            period as described
                                            in such sections

Liberty   11/8/76-   Same                   This policy applied only      Same           Definition of bodily injury
Mutual                                      to bodily injury ...                         same as above
                                            which occurs within the
                                            policy territory                             Definition of occurrence
                                                                                         same as above

MERRITT, Circuit Judge, dissenting.

As the Court states in its thoughtful opinion, this is an unusual case with far-reaching effects on injured workers, the insurance industry and asbestos manufacturers. The case presents an issue that probably deserves legislative consideration and resolution.

Asbestosis is a disease that progresses through three stages: the "exposure" stage, the "discoverability" stage, and the "manifestation" stage. It begins with exposure to asbestos fibers and remains latent or undiscoverable in the first stage; later it reveals itself as a network of scars on the lung tissue discoverable by X-ray; and then in the advanced stage of the disease it becomes "manifest" to the victim and diagnosable through physical symptoms such as shortness of breath, fatigue, clubbing of the fingers, or secretion of mucoid sputum. The question is: When does the coverage of a liability insurance carrier begin for the disease of asbestosis?

There is a better solution to the problem than either of the extremes proposed by the litigants, i.e., the "manifestation" theory and the "exposure" theory. Our Court, and also District Judge Feikens in a comprehensive opinion, reported at 451 F.Supp. 1230 (E.D.Mich.1978) have adopted the exposure theory. In my view, a carrier's coverage should begin with the second or discoverability stage.

A. THE "EXPOSURE" RULE

The exposure theory, although appealing on first reading, is at odds with insurance and tort law and fairness. This rule is not satisfactory because some asbestos may be safely inhaled without the disease ever developing. With more exposure, some harm may later develop but remain latent for a significant number of years. Insurance law does not impose liability or coverage until some identifiable harm arises. An indemnifiable act does not occur at the time of the negligent act, but at the time the legally recognizable harm appears. Thus if a worker were tortiously exposed to asbestos and no "bodily injury, sickness or disease" arose for x number of years, then the only insurers liable are those whose policies were in effect x years after exposure. See Mann v. Mann, 133 Ill.App.2d 552, 273 N.E.2d 40 (1971); Great American Ins. Co. v. Tinley Park Recreation Com., 124 Ill.App.2d 19, 259 N.E.2d 867 (1970); Muller Fuel Oil Co. v. Insurance Co. of North America, 95 N.J.Super. 564, 232 A.2d 168 (1967); see generally Annot., 57 A.L.R.2d 1385, 1389; Remmer v. Glens Falls Indemnity Co., 140 Cal.App.2d 84, 295 P.2d 19 (1956) (where land negligently graded and mudslide occurred 5 years after grading, insured event is at time of slide, not time of negligent grading).

The words "bodily injury, disease or sickness" are not specifically defined in the policies. Accordingly, they should be given their normal common law or traditional insurance law meaning. At the time of initial exposure, a victim could not successfully bring an action against the manufacturer because at that time he has suffered no compensable harm. Assuming harm may eventually arise in the future, the common law generally views future damage as too speculative until the victim can at least prove a probability of harm. See, e.g., Jeffrey v. Chicago Transit Authority, 37 Ill.App.2d 327, 185 N.E.2d 384 (1962); see generally W. Prosser, Handbook of The Law of Torts § 30, at 143 (4th ed. 1971).

A similar principle guides both property insurance cases (see cases cited in the preceding paragraphs) and health insurance cases. See, e.g., Broccolo v. Horace Mann Mut. Cas. Co., 37 Ill.App.2d 493, 186 N.E.2d 89 (1962); Craig v. Central Nat. Life Ins. Co., 16 Ill.App.2d 344, 148 N.E.2d 31 (1958); Kissil v. Beneficial Nat. Life Ins. Co., 64 N.J. 555, 319 A.2d 67 (1974); see generally Annot., 53 A.L.R.2d 686, 688-89 (1957) (no disease unless diagnosable with reasonable medical certainty). In both lines of cases, latent conditions that are not discoverable with a reasonable certainty do not amount to an event or condition that triggers indemnification liability. In this case to detect the scarring caused by any one of an initial batch of inhaled fibers might require many random samplings of tissue from numerous different parts of the lung. Obviously this is neither a practical nor reliable process.

B. THE "MANIFESTATION" RULE

The insurance companies other than Travelers argue that we should adopt the manifestation rule. This rule would impute liability to the insurer only when the disease actually "manifests" itself through physical symptoms such as shortness of breath or through other symptoms that are actually medically diagnosed as indicia of asbestosis.

There are several difficulties with this rule. Such a rule construes the ambiguities of the words "disease" and "occurrence" most favorably to the insurer rather than the insured. In addition, the rule would most likely result in no coverage at all in the future. Insurance companies know which particular manufacturers over the years have generated a large risk pool of victims whose disease may become manifest. Carriers, knowing that they would otherwise have to pay the full unprorated amount of a number of asbestosis claims, would most likely refuse to insure such manufacturers.

In addition, the medical evidence indicates that asbestosis is a harmful, discoverable disease before it reaches the advanced or "manifestation" stage. The health insurance cases hold that a disease may exist if it is diagnosable with reasonable medical certainty. They do not require that the disease must be diagnosed as such in order to determine the beginning date of coverage.

C. THE "DISCOVERABILITY" RULE

Asbestosis is a discoverable disease long before it reaches the advanced stage of manifestation. We should adopt the discoverability rule. This rule is more consistent with the medical evidence and the case law since it is tied statistically to the development of a diagnosable disease. X-ray evidence, although sometimes only a harbinger of outward disability, is legally sufficient to constitute "disease" under the health insurance cases.

The health insurance cases turn on the concept of latency. A condition which is not latent is a disease, and latency is defined in terms of being discoverable with reasonable medical certainty. Thus the initial microscopic scarring, observable solely by taking a lung biopsy (i.e., cutting into the lung itself), is a latent condition because of the unreliable and extraordinary measures necessary for medical detection. But X-rays are a relatively reliable, commonplace means of medical diagnosis. Once asbestosis is detectable by X-ray it is therefore not latent.

It would be reasonable for the insured to expect that once X-ray pathology becomes evident the "disease" "occurs" (given the ambiguity of these words) under the insurance contract at that time. See Keaton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv.L.Rev. 961, 973 (1970) ("[T]he principle of honoring reasonable expectations, though only occasionally recognized explicitly, is a better explanation of results in many cases than a strained rationale such as that ... of resolving ambiguities against the insurer.") Under the common law notion of harm, moreover, the possibility of impending manifestation, if not already a reality, is far less speculative at the time of X-ray diagnosis than at initial exposure. One expert testified that once X-ray pathology becomes evident, the condition tends to worsen without further exposure.

In order to make the discoverability rule judicially and administratively manageable, I must draw a somewhat arbitrary line. The typical victim will not bring suit against a manufacturer until the disease has manifested itself. At this point it will be impractical if not medically impossible for anyone to determine retrospectively when asbestosis was first "discoverable" by X-ray. Yet an insured does not expect his claim to be defeated because of the difficulty of ascertaining the precise date the disease became discoverable.

Although it is not entirely satisfactory, I can find no better rule than a rule that the "disease" of asbestosis "occurs" ten years from the date of first exposure. Every further exposure will be an additional compensable injury. Liability would thus be prorated by length of policy term among all insurers whose policies were (1) in force ten years beyond initial exposure to any manufacturer's product and (2) also in force during a specific interval in which the victim was exposed to a product of Forty-Eight. In the unlikely event that asbestosis manifests itself before the tenth anniversary of initial exposure, the insurer whose policy is in effect at manifestation would be liable.

This ten year rule relieves the insurance companies from liability for periods during which the disease is in its latent stage. The rule prevents insurance companies from defeating coverage entirely or from shifting losses to another when they know, as a matter of statistical probability, that great numbers of victims have diagnosable asbestosis and are on the verge of manifesting the disease and filing a claim.1

The ten year rule represents a compromise. I believe, however, that this compromise is supported by the medical evidence. On deposition, Dr. George Wright testified

According to the deposition of Dr. Henry Anderson:

Because the ten year average may be predicated on "heavy exposure," I could have selected a greater number. Presumably lighter periodic exposure would result in a lengthier latency period. But the medical evidence in the record supports no better compromise. I must choose some number, and I am inclined to choose one that serves to promote coverage.

A rule that is occasionally overinclusive provides compensating public benefits that an underinclusive rule lacks. It better spreads losses that the parties claim were unforeseen by the industry as a whole. As a rule of construction it also tends to reduce the costs of future accidents by placing the burden of liability on insurers best able to evaluate the risks of hazardous activity and best able to deter or minimize the ultimate tort costs of that activity. See generally G. Calabresi, The Cost of Accidents (1971) (accident costs minimized by placing ultimate liability on "least cost avoider"). The more "early" insurers that are liable upon a victim's exposure, the more likely it is that the potential harm will be discovered and the public warned. If an insurer sees that the product poses some risks, he may raise premiums accordingly. This may ultimately cause the manufacturer to remove the product from the market or to give better warnings in order to lower insurance premiums. This in turn reduces accident costs. On the other hand, imposing liability on only "later" insurers provides less incentive for early insurers to police the insured. The insured might be lulled into irresponsibility because he will not be assessed the present costs of future harm.

Accordingly, I would reverse the judgment below and adopt the "discoverability" rule outlined above.