Delaware Supreme Court delivers split decision to insurers in 3M coverage row

The Delaware Supreme Court’s 3-2 Aearo Technologies LLC Insurance Appeals decision on August 12, 2025 affirmed a lower court ruling that payment of defense costs by a non-insured did not count toward the insured’s self-insured retention, and that the insured’s payment of the self-insured retention was a condition precedent to the insurer’s obligation to cover losses under the policy. The majority evaluated the policy language at issue, and applied Delaware’s contractarian approach of honoring the plain meaning of unambiguous policy language. The dissent debated the analysis of the policy language and suggested it more appropriate to remand for the trial court to weigh whether the failure to fund the self-insured retention was sufficiently material to constitute a condition precedent to the insured’s coverage obligation. While insurance contract disputes often turn on the precise verbiage at issue, this decision reinforces that the Delaware Supreme Court will apply the plain meaning of unambiguous policy terms when coverage is disputed.

The dispute arose after certain insurers denied demands by 3M Company and Aearo Technologies LLC for coverage, including reimbursement of their defense costs, for hundreds of thousands of bodily injury claims resulting from the companies’ allegedly defective earplugs. The relevant policies each included self-insured retention obligations of the insured Aearo for $250,000 per occurrence, subject to an aggregate maximum of $1.5 million. The Court noted that there was no record evidence of Aearo paying defense costs.  Instead, 3M and Aearo argued that non-insured 3M’s payment of defense costs on behalf of Aearo satisfied Aearo’s self-insured retention obligations under the at-issue policies. Not so according to the Court.

The Court discussed the underlying purpose of a self-insured retention to be a mechanism by which the insured shares risk with the insurer. The insurer’s coverage obligations do not trigger unless and until the self-insured retention is satisfied according to the Court. This is not to say that in all circumstances the insured itself must fund the self-insured retention. Rather, in this instance the Court evaluated the at-issue self-insured retention clauses and found that they unambiguously obligated the insured alone to satisfy the self-insured retention. The Court accordingly held that payments by 3M – a non-insured under the at-issue policies – did not satisfy Aearo’s contractual self-insured retention obligation.

The Court next addressed the alternative theory promoted by 3M and Aearo that failure to fund a self-insured retention should not result in a forfeiture of coverage; but rather, the insurers may offset the self-insured retention amount from their coverage payments. This argument turned on the language of the policies’ “maintenance clauses.” The Court held that an insurance policy maintenance clause serves the dual purposes of (1) not relieving an insurer of its coverage obligations if an insured is bankrupt or insolvent and (2) not requiring an insurer’s coverage obligations to drop down if an insured fails to pay its self-insured retention. Aearo did not claim financial inability to fund its self-insured retention, and for that reason alone the Court found the maintenance clauses were inapplicable. Moreover, 3M and Aearo provided no authority supporting their insertion of a set-off concept into the unambiguous language of the maintenance clauses. As such, the Court held that relying on the maintenance clauses as suggested by 3M and Aearo would render meaningless the condition precedent nature of a self-insured retention, which runs afoul of how Delaware Courts interpret contracts.

The dissent raised concerns with the majority’s analysis predicated on the axioms that conditions precedent must be stated with specificity to be enforceable and the law abhors a forfeiture. According to the dissent, the policies do not expressly condition the insurers’ obligations under the policies on the insured funding the self-insured retention. The dissent also noted that the maintenance clauses state that the insurers’ obligations remain enforceable if the self-insured retention is unfunded for reasons other than bankruptcy or insolvency, such as the insured simply refuses to pay. The dissent accordingly would have remanded to the trial court to determine if the non-payment of the self-insured retention was a no-harm-no-foul situation.

The Court replied that the dissent overlooked the fundamental purpose of a self-insured retention is to obligate the insured to share in the risk and assume the first-layer of coverage. The Court analogized to a primary and excess insurance relationship, such that failure of the primary coverage to be exhausted means the excess coverage is not triggered. The Court also addressed how the dissent misapprehended that a maintenance clause does not require an insured to drop down in coverage no matter why the self-insured retention is not satisfied.

Self-insured retention requirements and maintenance clauses are common elements of many policies. The language at issue in this case is typical of the verbiage used in many self-insured retentions and maintenance clauses. While the decision turned on the specific language of the at-issue policies, given the commonality of clauses and typicality of verbiage, we can take away that the Court’s analysis will have broad application to coverage disputes where the self-insured retention has not been funded as required by the policy.