Only the named insured can satisfy self-insured retentions in liability policies, Delaware’s top court ruled on Aug. 12 – parent company payments don’t count.
The decision came after a closely watched dispute between 3M Company and its subsidiaries, the Aearo entities, and their insurers. The core issue: who is allowed to pay the self-insured retention, or SIR, before insurance coverage kicks in when a company faces massive legal claims?
The background is familiar to many in the insurance industry. After acquiring Aearo in 2008, 3M continued to produce Combat Arms Earplugs, which later became the subject of over 280,000 lawsuits alleging hearing injuries. As legal costs mounted, 3M paid more than $370 million in defense expenses, while Aearo Technologies LLC paid about $411,000. In 2022, Aearo filed for bankruptcy, but the court found the company was not in financial distress and dismissed the case. Not long after, 3M and Aearo reached a $6.01 billion settlement to resolve the lawsuits.
Looking to recoup some of the costs, 3M and Aearo turned to their insurers – Twin City Fire Insurance Company, ACE American Insurance Company, and MS Transverse Specialty Insurance Company. The insurers, however, denied coverage. Their position was simple: the SIRs in the policies could only be satisfied by the “Named Insureds,” which were the Aearo entities, not 3M. Payments made by the parent company, they argued, did not count.
The Delaware Supreme Court agreed. The justices pointed to the language in the policies. The Twin City policy, for instance, defined the SIR as the amount “you or any insured must pay,” with “you” meaning the Named Insured. It also stated that the SIR “shall not be reduced by... any payment made on your behalf by another,” which included 3M. The ACE and Royal Surplus policies had similar requirements, making it clear that only the Named Insured’s payments would satisfy the SIR.
3M and Aearo argued that maintenance clauses – provisions designed to keep coverage in place if the insured went bankrupt – should allow coverage even if the SIR wasn’t paid by the Named Insured. The court disagreed, noting that the Aearo entities were not bankrupt or insolvent, and the clauses did not override the clear requirement that only the Named Insured could satisfy the SIR.
For insurance professionals, the ruling is a reminder that courts will enforce policy language as written. If the contract says only the Named Insured can pay, that’s what counts, regardless of who actually writes the check. The decision highlights the importance of reviewing policy details and ensuring all parties understand their responsibilities, especially in complex corporate structures.
The outcome is likely to prompt brokers, underwriters, and risk managers to take a closer look at how SIRs are structured in liability programs for large organizations. Without clear alignment between payment practices and policy requirements, companies could face significant uncovered costs – even after paying substantial sums out of pocket.
In the end, the Delaware Supreme Court’s decision underscores a straightforward principle for the insurance industry: details in the contract matter, and courts are prepared to hold all parties to them. For those managing risk, it’s a timely prompt to revisit the fine print before the next claim arrives.
