The Delaware Supreme Court recently granted a motion for interlocutory review, to address issues regarding self-insured retention provisions in Aearo Technologies LLC v. Ace American Ins. Co., No. 423, 2024 (Del. Dec. 2, 2024).
These issues were addressed by the Delaware Superior Court. Aearo Techs. LLC v. ACE Am. Ins. Co., No. N23C-06-255-SKR CCLD, 2024 WL 3495121, at *1 (Del. Super. Ct. July 16, 2024), reargument denied, No. N23C-06-255 SKR CCLD, 2024 WL 3936889 (Del. Super. Ct. Aug. 26, 2024), and cert. denied, No. N23C-06-255 SKR CCLD, 2024 WL 4347790 (Del. Super. Ct. Sept. 26, 2024).
Aearo entities manufactured products for first responders and military personnel. One such product was Combat Arms Earplugs. In 2008, 3M acquired Aearo, and continued manufacture of Combat Arms Earplugs. Aearo stopped production in 2015.
A few years after 2015 users of the Combat Arms Earplugs began to sue alleging hearing related injuries caused by use of the Earplugs. The number of claimants grew to 280,000. Federal claims were consolidated in a multi-district litigation, with a master complaint alleging negligence and strict liability against 3M and Aearo. Claimants filed approximately 2,000 lawsuits in Minnesota state court. The MDL court began bellwether trials. Ten of 27 bellwether trials resulted in verdicts for the plaintiffs. “Waiver orders” were issued and discovery was begun. Aearo filed for bankruptcy and moved to extend the bankruptcy automatic stay to 3M. The bankruptcy court denied the motion to extend the automatic stay. Then the bankruptcy court dismissed the bankruptcy without prejudice after an evidentiary hearing.
3M paid $372 million in defending the Combat Arms Earplugs lawsuits. Aearo paid $411,696.70. Aearo and 3M sued Aearo’s insurers seeking reimbursement of defense costs and the settlement. 3M and Aearo then settled the underling lawsuits for more than $6 billion. They amended the coverage lawsuit to add a claim seeking reimbursement of settlement payments.
Aearo was insured from 1998-2008 by the following insurers.
The Aearo general liability policies covered liability for damages because of bodily injury. These policies insured Aearo as an insured, but 3M was not an insured. The coverage under each policy applied after exhaustion of a $250,000 self-insured retention. Under the policies payment of defense costs applied to the “limits of insurance.” Payment of defense costs also generally applied to the self-insured retentions.
There were some exceptions and variations in policy language noted here:
2000-2001 - Twin City –
the self-insured retention “shall not be reduced by ... any payment made on your behalf by another.”
the obligation to pay the self-insured retention applies “fully and separately to each” policy period.
the policy will provide coverage only to the extent that the self-insured retention “has been exhausted solely by the payment of ‘claim expenses.” “Claim expenses” are “all expenses incurred by or on behalf of the insured with our [Twin City’s] written consent.”
2001-2002 - General Star
“No loss expenses or legal expenses shall be incurred on behalf of us without our prior consent.”
2002-2007 - Liberty Surplus
2002-2005 –
the self-insured retention “shall not be reduced by ... any payment made on your behalf by another.”
the obligation to pay the self-insured retention applies fully and separately to each policy period.
2006-2007
that “no insured will, except at that insured's own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”
3M and Aearo and certain insurers moved for partial summary judgment.
First, the court held that payments by 3M do not count toward the policies’ self-insured retentions. The policies required “you” [the named insured] or the “insured” pay the self-insured retention. 3M was not an insured. In addition, the Twin City, the 2002 through 2005 Liberty policies and (arguably) the ACE Policies expressly exclude payments made by another on the insured's behalf from counting towards the self-insured retention.
The court found that the General Star policy language was not as clear whether payment by the insured was expressly required. The General Star Policy provided that the:
Retained Limit applies to damage payments as well as “claim” handling and/or legal expenses … incurred by the insured in the investigation, negotiation, settlement and defense of any “claim” or “suit” to which this policy applies.
Unlike the other policies, the only relevant language in the General Star policy was that the “Retained Limit” applies to those defense costs “incurred by the insured.” The court opined that it is reasonable to infer that satisfaction of the retained limit requires payment of incurred defense costs; and to infer that payment must come from the insured. But as this issue was not briefed, the court did not decide it.
The court rejected 3M and Aearo’s argument that the requirement that 3M's funds be “transferred to Aearo and then, in the next moment, paid out in satisfaction of invoices for attorneys’ fees and other defense costs” was a “pointless formality.”
The court found that the purpose of requiring that the insured pay the retention is so that the insured can partially bear the costs of the risk that is being insured. 3M was not a policy holder, and so was not bound by the policies’ restrictions and requirements. The court found that this argument by 3M and Aearo is contrary to the plain language of the Royal Surplus, Twin City, Liberty and ACE Policies.
3M and Aearo argued that the “savings” clause applied where the Self-Insured Retention is not exhausted. For example, one policy provided: “… If the ‘self-insured retention’ becomes invalid, suspended, unenforceable or uncollectable for any reason, including bankruptcy or insolvency, we [the insurer] shall be liable only to the extent we would have been had such ’self-insured retention’ remained in full effect.” But the court noted that 3M and Aearo had not shown that any of the policyholders were unable to pay the self-insured retention due to lack of availability, collectability, invalidity, or suspension.
Next the court held that there were genuine issues of material fact as to exhaustion of the self-insured retention.
That leaves the question of what payments Aearo made to satisfy the Self-Retention Amount, and whether there is a genuine issue of material fact that those payments satisfy the Self-Retention Amounts under any of the Policies.
Further, while Aearo asserted that it paid $411,696.70, the insurers disputed whether Aearo even made the payments, as there was no supporting documentation of those payments, and Aearo had made contrary representations to the bankruptcy court. In addition, 3M and Aearo did not identify to which policy period these payments applied, as several of the policies required that the payments apply separately to each policy period. As to the $372 million in defense costs paid by 3M, this was input into 3M’s matter management system, approved by 3M’s legal department and paid by 3M. But there was no showing if these expenses were incurred jointly so that this was also a genuine issue of material fact. Even if these expenses were incurred jointly, most of the policies required that Aearo, not 3M, pay the defense costs to satisfy the self-insured retentions.
Aearo also had not eliminated any issue of material fact that defense costs were incurred after Aearo obtained the written consent of the insurers. Aearo had not provided evidence showing that it sought consent for payments of any defense costs that it incurred. There were also issues of material fact as to whether Aearo provided adequate notice before Aearo made a number of strategic litigation decisions, including selection of defense counsel, joint representation of Aearo with 3M and strategies related to the 26 bellwether trials.
Third the court held that coverage determinations must be decided on a lawsuit-by-lawsuit basis, and not as to all injury actions as an undifferentiated mass.
The General Star Policy provides coverage for “damages because of ‘bodily injury’ ... to which this insurance applies.” “This insurance applies to ‘bodily injury’ ... only if the ‘bodily injury’ ... occurs during the policy period.” Not all claims alleged bodily injury during the General Star policy period, nor did all of the claims name Aearo as a defendant.
3M and Aearo argued that if any one lawsuit alleged bodily injury occurring within the General Star policy period, all lawsuits in the MDL court and Minnesota court, including those that allege bodily injury occurring outside the policy period, were covered. The court disagreed. Cases that hold a duty to defend extends to covered and non-covered claims concern claims or liability theories, but those court opinions concerned single lawsuits alleging multiple claims, not the mass of lawsuits aggregated here. The plain language of the General Star Policy does not apply to suits alleging bodily injury outside the General Start policy period. The court granted summary judgment to General Star on this issue.
However, the court denied General Star's motion that there was no coverage for the defense costs incurred by 3M. It found a genuine issue of material fact exists as to whether those expenses were jointly incurred by 3M and Aearo. And if those expenses were jointly incurred, the record did not establish to what extent those costs should be equitably allocated. Finally, the court ruled that it was premature to determine such allocation given the material issues as to the satisfaction of various conditions precedent such as: the self-insured retention, consent to defense expenses clause, and other notice requirements.
The court noted that under the “Larger Settlement Rule”:
An insurer must pay all costs associated with a settlement or defense, without allocating any costs to the uninsured parties or matters if: (i) the settlement [or defense] resolves, at least in part, insured claims; (ii) the parties cannot agree as to the allocation of covered and uncovered claims; (iii) the allocation provision does not provide for a specific allocation method (e.g., pro rata or alike); and (iv) the defense or settlement costs of the litigation were not higher “than they would have been had only the insured claims been defended or settled.”
The court found an issue of material fact existed as point (iv) above (whether expenses were not higher than they would have been had the insured claims been defended or settled). General Star argued that the claimants were primarily interested in pursuing 3M in the Earplugs Lawsuits and that Aearo would have successfully maintained bankruptcy protection but for 3M’s support.
Fourth, Twin City moved for partial summary judgment. Twin City argued that it had no duty to reimburse the defense and indemnity costs. Its “Named Insured” was Aearo Corporation which had not made any payment for expenses that satisfied the self-insured retention. (A different Aearo entity made those payments). Twin City argued it had no obligation to cover sums in excess of the self-insured retention. 3M's payments also do apply to the self-insured retention because its policy states that “any payment made on your [Aearo Corporation] behalf by another, including any payment from any other applicable insurance” do not reduce the Self-Insured Retention.86 The court agreed and granted Twin City’s motion.
The interlocutory review may resolve important issues about whether self-insured retentions can be satisfied by third parties, or must be satisfied by the insured; whether the self insured retentaion is determined on a claim-by-claim basis when there are multiple claimants, or if the policyholder can aggregate all claims together; and allocation of defense expenses and indemnity between parties when only one of those parties is an insured.
