Current Month (August 2025)
Delaware Supreme Court Determines Whether Parent Company’s Defense Payments Triggered Subsidiary’s Insurance Policy Self-Insured Retention
By Shawn Garrett, Garrett, PLLC
On August 12, 2025, the Delaware Supreme Court issued its order in a case stemming from a controversy around whether an insurer must reimburse the defense costs paid by the parent company of an insured party, when the parent company was not specifically named in the policy. The court below determined that since each policy required the named insured to satisfy the self-insured retention (“SIR”) and the parent entity was not a named insured, payments made by the parent entity on behalf of the subsidiary did not satisfy the SIR and the insurers’ coverage obligations were not triggered. The SIR is the required amount of costs that an insured company must pay out of pocket before its coverage obligations are triggered.
The plaintiffs, Aearo Technologies LLC, Aearo Holding LLC, Aearo Intermediate LLC, and Aearo LLC (collectively, “Aearo”) developed and distributed a type of earplug known as the Combat Arms Earplugs (the “Earplugs”). 3M Company (“3M”) acquired Aearo in 2008 and continued to produce the Earplugs. Beginning in 2018, Aearo and 3M were jointly named in lawsuits alleging product defects in the Earplugs. Aearo and 3M filed this insurance coverage action seeking coverage for their defense costs in the lawsuits. Aearo paid $411,000 in legal fees, while 3M paid $370 million in legal fees. The parties sought recovery from three insurance policies naming Aearo as an insured. The policies were issued by Twin City Fire Insurance Company, ACE American Insurance Company, and MS Transverse Specialty Insurance Company. The common language at issue in each policy were the terms “you” and the satisfaction of the SIR in each policy.
Each policy defined the term “you” as the named insured in the policy. In their complaint, Aearo and 3M claimed that they were entitled to coverage of their defense costs due to 3M’s acquisition of the Aearo entities as well as 3M’s payment of defense costs on behalf of Aearo, satisfying the SIR in the policy. The insurers argued that their policies only covered the named insured: the Aearo entities.
In its analysis, the Supreme Court looked to the clear and unambiguous language in the policy. The Court held that the plain language of the policy required that Aearo satisfy the SIR. The Court analyzed each policy and rejected Aearo and 3M’s arguments that the requirement of Aearo to satisfy the SIR requirement itself was pointless. The Court strictly enforced the contract language, choosing to hold the parties to the language of their agreement in the policies. Additionally, the Court took the chance to reaffirm the principle that legal entities, such as Aearo and 3M, are separate and unique. This decision highlights the importance of identifying proper corporate structures following an M&A transaction.
