Aearo Techs. v. Ace Am. Ins. Co.

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AEARO TECHNOLOGIES LLC, et al., Plaintiffs, v. ACE AMERICAN INSURANCE COMPANY, et al. Defendants.

C. A. No. N23C-06-255-SKR CCLD

Superior Court of Delaware

July 15, 2024

Submitted: July 9, 2024

Upon Plaintiffs' Motion for Partial Summary Judgment DENIED.

Upon General Star's Motion for Partial Summary Judgment GRANTED IN PART AND DENIED IN PART.

Upon Twin City's Motion for Partial Summary Judgment GRANTED.

David J. Baldwin, Esq., Peter C. McGivney, Esq., Zachary J. Schnapp, Esq., BERGER MCDERMOTT LLP, Wilmington, Delaware, Donald W. Brown, Esq., Gretchen A. Hoff Varner, Esq., COVINGTON & BURLING LLP, San Francisco, California, Anna P. Engh, Esq., COVINGTON & BURLING LLP, Washington, DC, Rani Gupta, Esq., COVINGTON & BURLING LLP, Palo Alto, California. Attorneys for Plaintiffs Aearo Technologies LLC, Aearo Holding LLC, Aearo Intermediate LLC, Aearo LLC, and 3M Company.

Garrett B. Moritz, Esq., R. Garrett Rice, Esq., ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware, Daren S. McNally, Esq., Barbara M. Almeida, Esq., Daniel B. Palmer, Esq., CLYDE & CO U.S. LLC, Morristown, New Jersey. Attorneys for Defendant ACE American Insurance Company.

Joseph B. Cicero, Esq., Gregory E. Stuhlman, Esq., Thomas A. Youngman, Esq., CHIPMAN BROWN CICERO & COLE, LLP, Wilmington, Delaware, Charles E. Spevacek, Esq., Alexander V. Tibor, Esq., MEAGER & GEER, P.L.L.P., Minneapolis, Minnesota. Attorneys for Defendants American National Fire Insurance Company and Great American Insurance Company.

John C. Phillips, Jr., Esq., David A. Bilson, Esq., PHILLIPS MCLAUGHLIN & HALL, P.A, Wilmington, Delaware, Cara Tseng Duffield, Esq., Lena Mirilovic, Esq., LAVIN RINDNER DUFFIELD LLC, Washington, DC. Attorneys for General Star Indemnity Company.

Kurt M. Heyman, Esq., Aaron M. Nelson, Esq., Brendan Patrick McDonnell, Esq., HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware, Leah Godesky, Esq., O'MELVENY & MYERS LLP, Los Angeles, California, Allen Burton, Esq., Jonathan Rosenberg, Esq., Charles Scibetta, Esq., Andrew Poplinger, Esq., Erin Valentine, Esq., O'MELVENY & MYERS LLP, New York, New York. Attorneys for Defendants Illinois National Insurance Company, American International Specialty Line Insurance Company, and National Union Fire Insurance Company of Pittsburgh, PA.

Philip Trainer, Jr., Esq. Marie M. Degnan, Esq. ASHBY & GEDDES, Wilmington, Delaware, Jodi McDougall, Esq., Terri A. Sutton, Esq., COZEN O'CONNOR, Seattle, Washington. Attorneys for Liberty Insurance Underwriters, Inc. and Liberty Surplus Insurance Corporation.

John D. Balaguer, Esq., BALAGUER, MILEWSKI, &IMBROGNO, Wilmington, Delaware, James H. Kallianis Jr., Esq., Andrew J. Candela, Esq., SKARZYNSKI MARICK & BLACK LLP, Chicago, Illinois. Attorneys for Defendants Steadfast Insurance Company and American Guarantee &Liability Insurance Company.

Joseph B. Cicero, Esq., Gregory E. Stuhlman, Esq., CHIPMAN BROWN CICERO & COLE, LLP, Wilmington, Delaware, Michael J. Smith, Esq., Bryan W. Petrilla, Esq., STEWART | SMITH, West Conshohocken, Pennsylvania. Attorneys for Defendant TIG Insurance Company.

Peter B. Ladig, Esq., Elizabeth A. Powers, Esq., Justin C. Barrett, Esq., BAYARD, P.A., Wilmington, Delaware, Suzanne C. Midlige, Esq., Michael E. Hrinewski, Esq., COUGHLIN MIDLIGE &GARLAND LLP, Morristown, New Jersey. Attorneys for Defendant Transverse Specialty Insurance Company.

David J. Soldo, Esq., MORRIS JAMES LLP, Wilmington, Delaware, Joshua D. Weinberg, Esq., Sean T. Kelly, Esq., RUGGERI PARKS WEINBERG LLP, Washington, DC. Attorneys for Defendant Twin City Fire Insurance Company.

MEMORANDUM OPINION AND ORDER

Sheldon K, Rennie, Judge

I. INTRODUCTION

This breach of contract case is assigned to the Complex Commercial Litigation Division of this Court. Plaintiffs Aearo Technologies LLC, Aearo Holding LLC, Aearo Intermediate LLC, and Aearo LLC (collectively, the "Aearo entities") and 3M (together with Aearo, "Plaintiffs") filed a declaratory judgment action against insurance companies that sold general liability policies (the "Insurers").^[1] In their complaint, Aearo and 3M seek declarations that the Insurers are obligated to pay for defense and indemnification costs in connection with underlying product liability lawsuits (the "Earplugs Lawsuits").

II. FACTUAL AND PROCEDURAL BACKGROUND^[2]

A. Earplugs Lawsuits

The Aearo entities developed products for first responders, military personnel and other works.^[3] One product was the Dual-Ended Combat Arms Earplugs Version 2 ("Combat Arms Earplugs").^[4] In 2008, 3M acquired Aearo, and continued production of the Combat Arms Earplugs.^[5]

In 2015, the sale of Combat Arms Earplugs was allegedly discontinued.^[6] A few years later, claimants began filing lawsuits alleging hearing related-injuries in connection with the product.^[7] The number of claimants grew to 280,000, resulting in the establishment of multi-district litigation (the "MDL") in April 2019.^[8] A master form complaint was filed in federal multi-district litigation, comprised of negligence and strict liability claims against 3M and Aearo.^[9] Claimants filed up to 2,000 lawsuits in Minnesota state court.^[10]

In June 2019, 3M sent letters to Twin City Fire Insurance Company ("Twin City"), General Star Indemnity Company ("General Star"), Liberty Surplus Insurance Corporation ("Liberty"), and ACE American Insurance ("ACE") regarding the Earplugs Lawsuits for potential coverage of defense and indemnity costs.^[11] 3M and Aearo sought coverage from 2000 to 2008 under "Aearo's legacy insurance program."^[12]

Meanwhile, the MDL court instituted a bellwether selection process to resolve the flood of lawsuits.^[13] 10 trials out of 27 designated plaintiffs resulted in plaintiff verdicts.^[14] Working through the remaining lawsuits, the MDL court then issued "wave" orders, working up to several hundred cases per wave for trial.^[15] By the summer of 2022, 1,200 cases were in active discovery.^[16]

Around this time Aearo Technologies, Inc. and related entities^[17] initiated bankruptcy proceedings in the U.S. Bankruptcy Court for the Southern District of Indiana.^[18] Aearo moved to extend the automatic stay to 3M-a non-debtor.^[19] The bankruptcy court denied the motion^[20] and, after conducting a five-day evidentiary hearing, dismissed the bankruptcy without prejudice a year later.^[21]

Shortly after the dismissal, Aearo and 3M initiated this action on June 28, 2023, seeking coverage for hundreds of millions in defense costs paid in connection with the Earplugs Lawsuits.

On August 29, 2023, 3M and Aearo entered into a settlement, resolving the underlying lawsuits for more than $6 billion.^[22] On November 20, 2023, Aearo and 3M filed an amended complaint, seeking coverage for the settlement in addition to the defense costs.

Aearo and 3M now move for partial summary judgment seeking a declaration that they are covered for all defense costs paid in connection with the Earplugs Lawsuits.^[23] 3M has allegedly paid approximately $372 million defending the Earplugs Lawsuits.^[24] Aearo Technologies LLC has allegedly paid only a small fraction, $411,696.70.^[25] Twin City and General Star also move and join one another's motion for partial summary judgment seeking declarations that no coverage is owed.^[26] ACE, Liberty and Royal Surplus Lines Insurance Company ("Royal Surplus") join the motions.

C. Relevant Policy Provisions

Aearo purchased multi-tier general liability insurance coverage from September 1998 to September 2008. The Insurers issued these policies to a combination of entities, including Aearo Corporation, Aearo Company, Aearo Technologies Inc., and Aearo Holding Corp.^[27] Aearo claims these entities are now Aearo LLC, Aearo Technologies LLC, Aearo Intermediate LLC, and Aearo Holding LLC, respectively.^[28]

There are several policies at issue in the parties' motions. Royal Surplus issued a two-year policy from September 1998 to September 2000 (the "Royal Surplus Policy").^[29] Twin City issued a single policy from September 2000 to November 2001 (the "Twin City Policy").^[30] General Star issued a policy from November 2001 to September 2002 (the "General Star Policy").^[31] Liberty issued five policies from September 2002 to September 2007 (the "Liberty Policies").^[32]ACE issued a policy from September 2007 to September 2008 (the "ACE Policy") (collectively, the "Policies").^[33]

The Policies provide coverage for damages because of bodily injury.^[34] Coverage only applies after exhaustion of the Policies' Self-Insured Retention.^[35]The Self-Insured Retention under each policy is $250,000.^[36] Payments of defense costs apply to the "limits of insurance.^[37] They also generally apply to the Policies Self-Insured Retentions-but with a few notable exceptions.^[38]

Under the Twin City and the 2002 through 2005 Liberty Policies, payments of defense costs from third parties do not apply to the Self-Insured Retention. Those policies provide that the Self-Insured Retention "shall not be reduced by . . . any payment made on your behalf by another."^[39] Further, the obligation to pay the Self- Insured Retention applies "fully and separately to each 'policy period.'"^[40]

Under the Twin City, the 2006-2007 Liberty and General Star Policies, payments made without the written consent of the Insurers do not count towards the Self-Insured Retention. The Twin City Policy provides in part that Twin City will provide coverage only to the extent that the Self-Insured retention "has been exhausted solely by the payment of 'claim expenses.'"^[41] "Claim expenses" are "[a]ll expenses incurred by or on behalf of the insured with our written consent."^[42] The General Star Policy provides that "[s]hould any 'claim' or 'suit' to which this policy applies appear...