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Digital EditionDelaware Court Rules Corporate Parents Can’t Fund Subsidiaries’ Insurance Retentions
The Delaware Supreme Court has affirmed a lower court ruling that a corporate parent cannot satisfy its subsidiary’s self-insured retention (SIR) obligations, providing a crucial clarification on policy language and corporate separateness in insurance contracts.
In a decision with significant implications for large corporations and their insurance programs, the court held in its August 12 decision that because parent company 3M Company was not a “Named Insured” on its subsidiary Aearo Technologies’ policies, the hundreds of millions of dollars that 3M paid in defense costs did not trigger the insurers’ coverage obligations.
The dispute, In Re Aearo Technologies LLC Insurance Appeals, stems from the massive products liability litigation over Combat Arms Earplugs, which were developed by Aearo Technologies before its acquisition by 3M in 2008. Facing more than 280,000 lawsuits, 3M and Aearo incurred enormous legal expenses.
3M stated it paid more than $370 million in defense costs, while Aearo Technologies LLC paid approximately $411,000. Aearo and 3M sought coverage for these costs under several commercial general liability policies issued to Aearo entities by Twin City Fire Insurance Company, ACE American Insurance Company, and Royal Surplus Lines Insurance Company. Each policy contained an SIR, a specific amount the insured must pay before the insurer’s duty to pay begins.
Aearo and 3M argued that 3M’s payments should satisfy the SIRs, contending that requiring the subsidiary to pay when the parent was funding the defense was a pointless formality. They also argued that even if the SIRs were not properly satisfied, the policies’ “maintenance clauses” preserved coverage, entitling the insurers to only a setoff equal to the SIR amount.
The insurers countered that the policies were unambiguous. They argued the SIR is a condition precedent to coverage that must be paid by “you,” a term explicitly defined in the policies as the “Named Insured,” which was Aearo, not 3M. Since the Named Insured had not exhausted the SIR, the insurers claimed their coverage obligations were never triggered.
The majority of the state Supreme Court sided with the insurers, focusing on a strict interpretation of the contract language. The court found the policies clearly required the “Named Insured” to pay the SIR and explicitly prohibited payments made “on your behalf by another.” Because 3M was not a Named Insured, its payments did not count.
The court reinforced the principle of corporate separateness, declining to disregard the distinction between 3M and its Aearo subsidiaries. It also affirmed that an SIR functions as a condition precedent to coverage, meaning the policyholder must first satisfy its retention before an insurer is required to respond to a loss.
The court rejected the argument that the maintenance clauses created a setoff, explaining they are intended to prevent coverage from “dropping down” in the event of an insured’s bankruptcy or insolvency, neither of which applied to the financially healthy Aearo.
Ultimately, the court affirmed the summary judgment in favor of the insurers. The decision underscores the critical importance of precise policy language, particularly the definition of “Named Insured,” and serves as a reminder that courts will respect the distinct legal status of parent and subsidiary corporations when determining which entity is responsible for satisfying the initial layer of risk.
Two justices dissented, arguing the majority incorrectly treated the self-insured retentions as conditions precedent. Justice LeGrow, joined by Justice Traynor, contended that Delaware law requires conditions precedent to be clearly and unambiguously stated, and that the maintenance clauses created ambiguity about the parties’ intent.
The dissent argued that Delaware’s aversion to contract forfeitures should have led to a different interpretation, and that even if conditions precedent existed, the case should be remanded to consider whether forfeiture should be excused given the circumstances.
View the full decision here. &
