(Article from Insurance Law Alert, September 2025)
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Holding
Defense costs paid by a parent company do not satisfy the self-insured retention (“SIR”) in policies issued to its subsidiary. In re Aearo Technologies LLC Ins. Appeals, 2025 Del. LEXIS 309 (Del. Aug. 12, 2025).
Background
Aearo Technologies, the manufacturer and distributer of Combat Arms Earplugs, was acquired by 3M Company. A decade after the acquisition, 3M and Aearo were named as defendants in suits alleging personal injuries caused by defects in the earplugs. While the suits were pending, Aearo filed a voluntary petition for Chapter 11 bankruptcy, which was later dismissed based on a finding that the company was “financially healthy.” Thereafter, 3M and Aearo reached a global settlement of $6.01 billion for the underlying claims. 3M stated that it paid over $370 million in defense costs, and Aearo stated that it paid approximately $411,000 in defense costs.
Aearo and 3M sued Aearo’s insurers, seeking coverage for defense costs incurred by both companies, and a declaration that they satisfied the SIRs in the relevant policies. A Delaware trial court granted the insurers’ summary judgment motion, ruling that the express language of the policies required payment by Aearo, and that payments by 3M did not count toward exhaustion of the SIRs.
Discussion
While the language in each of the three policies at issue differed somewhat, they all included SIR provisions that required the exhaustion of a specific dollar amount before coverage could be triggered. The SIR in each policy defined the terms “you” and “your” to mean “the Named Insured,” which is Aearo on each policy.
The Delaware Supreme Court ruled that this language unambiguously requires payment of the SIRs by Aearo. Additionally, the court noted that other language in the SIR provisions of two policies expressly stated that the SIR is not reduced by payments made by other entities on Aearo’s behalf.
Aearo and 3M alternatively argued that even if Aearo was required to satisfy the SIRs, its failure to do so did not eliminate coverage, but rather merely reduced each insurer’s obligation by a setoff amount equal to the unpaid SIRs. Aearo and 3M relied on a Maintenance clause included in each policy, which generally provided that if Aearo becomes insolvent or bankrupt and unable to pay the SIR, the insurer will be liable only to the extent it would have been had the SIR remained in effect.
The court ruled that the Maintenance clause was inapplicable, noting that its purpose is not to protect the insured by creating a setoff if the insured fails to satisfy the SIR. Rather, the court explained, this provision is triggered when the insured is in financial distress and is intended to protect an insurer from having to “drop down” and expand its coverage obligations to amounts expressly allocated to the insured through the SIR.
Comments
The decision highlights an important distinction between SIRs and deductibles. Whereas the insured’s payment of a SIR serves as a precondition to coverage such that an insurer’s obligations do not arise until the limits of the SIR have been exhausted, a deductible “obligates the insurer to respond to a claim from ‘dollar one,’ . . . subject to the insurer’s right to later recoup the amount of the deductible from the insured.”