HNRK Coverage Corner

On August 12, 2025, a divided Delaware Supreme Court held, in a 3–2 split, that the payment of defense costs by the Named Insured’s corporate parent do not satisfy a CGL policy’s self-insured retention (“SIR”) unless the parent is specifically listed as a Named Insured or the policy language otherwise allows it.  In In re Aearo Technologies LLC Insurance Appeals, C.A. No. N23C-06-255 (Del. Aug. 12, 2025), the court found that the SIR was a condition to precedent to coverage and adopted a strict reading of the policy language that the insured argued elevated form over substance.   

Background

During the late 1990s, Aearo Technologies, Aearo Holding LLC, Aearo Intermediate LLC, and Aearo LLC (together, “Aearo”) developed and distributed Combat Arms Earplugs (the “Earplugs”).  In 2008, 3M Company (“3M”) acquired Aearo and continued to produce the Earplugs for several years.  In 2018, former users of the Earplugs began bringing lawsuits against 3M and Aearo alleging hearing-related injuries.  The lawsuits were consolidated into a multidistrict litigation, consisting of over 280,000 lawsuits.  As you can imagine, the defense costs were large: more than $370 million, the overwhelming majority of which was paid by 3M, not Aearo itself.  

The Delaware Supreme Court’s decision concerned policies from three insurers, Twin City Fire Insurance Company (“Twin City”), ACE American Insurance Company (“ACE”), and MS Transverse Specialty Insurance Company, f/k/a Transverse Specialty Insurance Company, f/k/a Royal Surplus Lines Insurance Company (“Royal Surplus”), each of which issued a commercial general liability insurance policy (the “Policies”) to an Aearo entity prior to the 3M acquisition. 

The Policy Language

Each of the Policies had a $250,000 per occurrence SIR (up to an aggregate of $1.5 million).  We focus here on Twin City, whose policy included the following language:

the amount you or any insured must pay as damages and “claim expenses” . . ., before [Twin City] pays anything. Your obligation to pay the [SIR] . . . shall not be reduced by . . . [a]ny payment made on your behalf by another, including any payment from any other applicable insurance.

Decision at 8.  “You” and “your” referred to the “Named Insured,” which under the Twin City policy was Aearo LLC.  Id. at 9. 

The Court’s Analysis

The Supreme Court began with policy language and found that it unambiguously required “you” to satisfy the SIR—and “you” was Aearo, not 3M.  Id. at 20.  The Court explained that this conclusion was bolstered by the language quoted above, which states that the SIR would not be reduced by “payments made on your behalf by another.”  Here, the Court explained, “another” included Aearo’s corporate parent, 3M, because it was not a “Named Insured.” Id.

The Court rejected with the insured’s argument that this reading would result in “unintended and pointless requirements,” explaining that unambiguous contract language reflects the parties’ intent.  Id. at 22.  The Court further highlighted the principle that distinct legal entities—such as 3M and Aearo—are presumed to be separate and “absent specific circumstances not present here, we will not disregard that distinction.”  Id. 

The Court also held that the SIRs were conditions precedent to coverage and that the insurers’ coverage obligations were not triggered “unless and until” Aearo—not 3M—satisfies the SIR of the policy for which it seeks insurance.  Here, the Court distinguished SIRs from deductibles and held that because the former are conditions precedent to coverage, the insurers had no obligation to cover the loss until the SIR is satisfied.

The Court rejected an additional argument advanced by Aearo and 3M: that, pursuant to maintenance (or non-drop down) clauses in the policies, the SIR amounts functioned as a setoff but not a total bar to coverage.  The Twin City maintenance clause read in part: 

If the [SIR] becomes invalid, suspended, unenforceable or uncollectable for any reason, including bankruptcy or insolvency, we shall be liable only to the extent we would have been had such [SIR] remained in full effect.

Id. at 28 n.90.  The Court reasoned that these types of clauses are aimed at situations where the policyholder is in financial distress or has failed to maintain a lower-level policy.  The Court acknowledged that an SIR could be characterized as a lower-level policy, but nevertheless held that reading the maintenance clause as providing a setoff would “render meaningless the condition precedent nature of the SIRs.”  Id. at 30-31. 

A Dissenting View 

In a notable dissent, Justice LeGrow, joined by Justice Traynor disagreed with the majority’s analysis.  The dissent reasoned that the SIRs were ambiguous (in view of, for example, the maintenance clauses) and should not be construed as conditions precedent, especially where doing so would lead to the forfeiture of coverage.

The dissent also argued that even if the SIRs were conditions precedent, a recent Delaware Supreme Court decision—Thompson Street Capital Partners IV, L.P. v. Sonova United States Hearing Instruments, LLC—held that a forfeiture can be excused if the condition was not a material part of the parties’ bargain.  Thompson Street was decided after the Supreme Court briefing in Aearo was complete; in the dissent’s view, this case should have been remanded for the Superior Court to consider the effect of Thompson Street.