The clue came when Azula said in a soft voice that Azulon passed away, now why would she say he's passed away like that? That got me thinking...what's a way for someone to pass away suddenly when you're an old man? Heart attack. Here's what I think happend:
After Azula came to Zuko saying "Dad's going to kill you." Ursa questioned Azula and learned what happened after she left. Ursa rushes to Azulon, and pleads that Azulon doesn't banish Zuko(that's how Zuko would be sacrificed), but his decision was final. So, she saves her baby the only way a mother can, she bites him back. She challenges Azulon to Agni Kai, if she wins, Zuko doesn't get banished and Ozai is to??suceed Azulon as??Fire Lord, but if she loses, she'd be banished instead of Zuko and Iroh would still be next in line. Azulon even despite being older is more powerful than Ursa, but the strain of the battle is too much for Azulon's aging heart. But,(this is key to my whole theory) Agni Kai's are by law non-lethal events. If the other combatant is killed in battle by the other(directly or indirectly in this case) the??"winner"??is banished.
I originally had this in Spoilers & Speculation, but I want honest response on this and this seemed worthy of a seperate thread.
Edited 3 total times.