“Only the Named Insured May Exhaust the SIR” – Delaware Supreme Court’s Definitive Guidance in In Re Aearo Technologies LLC Insurance Appeals

1. Introduction

The Supreme Court of Delaware, sitting en banc, has delivered a landmark opinion in In Re Aearo Technologies LLC Insurance Appeals, Nos. 381 & 423, 2024 (Decided 12 Aug 2025). The dispute stemmed from a high-profile, multi-billion-dollar ear-plug litigation and bankruptcy saga involving 3M Company (“3M”) and its wholly-owned subsidiaries (the “Aearo entities”). At stake was who must satisfy a self-insured retention (“SIR”) in three commercial general liability (“CGL”) policies before excess insurers become obliged to defend and indemnify.

The Aearo entities and 3M contended that any member of the corporate family could exhaust the SIR, pointing to over USD 370 million that 3M had already spent defending the underlying lawsuits. The insurers—Twin City Fire, Royal Surplus (now MS Transverse), and ACE American—insisted that the contracts required payment by the Named Insureds themselves and that payments by a non-insured parent did not trigger coverage. The Superior Court sided with the insurers, and the Supreme Court has now affirmed, solidifying a new Delaware precedent on SIR exhaustion, corporate separateness, and the limited function of “maintenance” (or “savings”) clauses.

2. Summary of the Judgment

• SIR as Condition Precedent: Each policy’s SIR operates as a condition precedent; coverage is not triggered until the Named Insured pays the specified amount.
• Meaning of “You”: “You” and “your” refer solely to the entities listed as “Named Insureds” in the declarations; 3M is not included.
• Payments by Others Disallowed: Policy wording expressly excludes “payment made on your behalf by another” from reducing the SIR. Therefore, 3M’s defence-cost payments do not count.
• Maintenance Clauses Inapplicable: The clauses preventing “drop-down” in cases of insolvency/bankruptcy did not apply; Aearo was financially healthy and simply chose not to pay.
• Affirmance: Summary judgment for Twin City is upheld; similar legal conclusions regarding ACE and Royal Surplus are also affirmed, with fact questions on subsidiary payments left for trial.

3. Detailed Analysis

3.1 Precedents Cited and Their Influence

• RSUI Indemnity Co. v. Murdock, 248 A.3d 887 (Del. 2021) – Restated rules on plain-meaning contract interpretation; court relied on its “no ambiguity merely from disagreement” principle.
• Rhone-Poulenc Basic Chems. Co. v. American Motorists Ins. Co., 616 A.2d 1192 (Del. 1992) – Cited for insured’s burden to satisfy conditions precedent before coverage attaches.
• Cinergy Corp. v. Associated Elec. & Gas Ins. Servs., 865 N.E.2d 571 (Ind. 2007) and Walsh Constr. Co. v. Zurich Am. Ins. Co., 72 N.E.3d 957 (Ind. Ct. App. 2017) – Provided persuasive authority on SIR functioning and insured’s duty to exhaust.
• Playtex v. Columbia Cas. (Del. Super. 1992) – Quoted for “maintenance clause prevents drop-down” rationale.
• Thompson Street Capital Partners IV v. Sonova US Hearing (Del. 2025) – Raised in dissent regarding forfeiture; majority declined to extend its equitable excusal logic to insurance contracts.

3.2 Court’s Legal Reasoning

1. Contract Language Governs
   The Court began with the policies’ text. Each SIR definition said it must be “paid by you” (Twin City) or “actual payment by you” (ACE). Declarations defined “you/your” as the Named Insureds—not 3M. Royal Surplus added that the SIR “shall not be reduced by payment made on your behalf by another.” This wording left no room for “functional” or “economic-reality” arguments.
2. Corporate Separateness
   Relying on classic Delaware doctrine that parent and subsidiary are distinct, the Court refused to let 3M stand in the shoes of its subs absent veil-piercing or policy language permitting it.
3. SIR = Condition Precedent
   Drawing on treatises, Indiana authority, and common industry practice, the Court characterised SIRs as “large deductibles” borne first by the insured to lower premiums. Because an SIR is the “first layer” of risk, payment is a condition precedent that must occur before any duty to defend or indemnify arises.
4. Maintenance Clauses Narrow
   The Court construed the clauses as safety nets only when the SIR is unavailable due to insolvency, legal invalidity, or loss of lower-tier insurance, not as devices to convert non-payment into an insurer set-off. None of those triggering events existed; Aearo was solvent and had simply not paid.
5. No Disproportionate-Forfeiture Relief
   Responding to the dissent’s invocation of Thompson Street, the majority found the issue waived and, in any case, inappropriate to apply to clear insurance conditions precedent.

3.3 Anticipated Impact

• Transactional Planning: Acquirers must scrutinize legacy insurance programs. After Aearo, Delaware courts will not treat parent-company expenditures as satisfying subsidiary SIRs unless policies are amended post-acquisition.
• Coverage Litigation: Expect insurers to invoke the decision to resist “aggregation” arguments where multiple related entities share defence costs but only some are named insureds.
• Policy Drafting: Brokers and risk managers may seek explicit “horizontal exhaustion” or “named insured and affiliates” language to avoid this trap—especially in multi-defendant product-liability settings.
• Bankruptcy Strategy: The opinion narrows the utility of maintenance clauses as a shortcut to coverage; debtors must still fund SIRs (or obtain financing) unless truly insolvent.
• Delaware as Predictable Forum: Confirms the Court’s strict textualism and respect for corporate form, reinforcing Delaware’s attractiveness for complex coverage disputes.

4. Complex Concepts Simplified

• Self-Insured Retention (SIR): Think of it as a first-dollar layer of risk the insured agrees to absorb before insurance kicks in. Unlike a deductible (where the insurer pays then seeks reimbursement), the insured must write the cheque up front.
• Condition Precedent: A contractual “gate” that must swing open before the other party’s duties arise. Failure to satisfy it can forfeit benefits.
• Maintenance/Savings Clause: A protective rider stating that if the insured’s lower-level insurance or SIR disappears (often in bankruptcy), the excess insurer will still respond—but only to the same extent as if the lower layer were intact, preventing uninsured gaps.
• Named Insured vs. Additional Insured: The “Named Insured” is explicitly listed in policy declarations and bears primary obligations like paying the SIR. “Additional insureds” may have some rights but often fewer duties.
• Corporate Separateness: Legal doctrine that parent and subsidiary are distinct entities; liabilities and contractual duties do not automatically cross company lines.

5. Conclusion

The Delaware Supreme Court’s Aearo decision crystallises a pivotal principle: the party obligated to bear the first layer of risk is the one named on the policy, and no amount of well-intentioned parental spending can rewrite that bargain. By insisting on plain-text fidelity and corporate formalism, the Court provided insurers and policyholders with a clear blueprint:

1. When drafting or renewing policies, explicitly address who may satisfy SIRs—especially in corporate families.
2. Do not rely on maintenance clauses as a backdoor to coverage absent insolvency or true uncollectability.
3. Appreciate that courts view SIRs as conditions precedent; failure to fund them halts both defence and indemnity.

Although the dissent warned of potential forfeiture inequities, the majority’s firm stance enhances contractual certainty in the insurance market. Going forward, policyholders must either pay the SIR themselves or renegotiate policy wording; insurers can confidently underwrite on the assumption that Named Insureds bear the initial risk. In the evolving arena of mass-tort liabilities and complex corporate structures, Aearo will serve as the touchstone for SIR disputes in Delaware and likely far beyond.