Nevada is taking a chance on a new law that’s upping the ante in the state’s admitted liability insurance market. The Silver State recently became the first to comprehensively ban widely used ‘defense within limits’ provisions from admitted liability insurance policies. Such provisions subtract defense costs from an insured’s available limits, effectively eroding coverage.
Under the law, authorized insurers doing business in the state are prohibited from including such provisions in new or renewal policies beginning Oct. 3, 2023. Assembly Bill No. 398, which was approved by the governor in June, does not apply to policies currently in force.
The one-page law bars authorized insurers from including a provision that:
- Reduces the limit of liability stated in the policy by the cost of defense, legal costs and fees, and other expenses for claims; or
- Otherwise limits the availability of coverage for the costs of defense, legal costs and fees, and other expenses for claims.” 1
Insurers have historically used defense within limits provisions to manage their exposures in professional and management liability lawsuits, which can be difficult and expensive to defend, particularly for claims arising under Directors and Officers (D&O) or Errors and Omissions (E&O) policies. In some cases, defense costs can exceed the actual settlements.
AB 398 APPLICATIONS
While AB 398 does not apply to surplus lines policies, it is expected to impact liability policies providing coverage for financial losses resulting from Errors & Omissions (E&O), Directors & Officers (D&O), Cyber, Malpractice, Employment Practices Liability (EPL), Fiduciary, and Construction Defect, to name a few. The law also applies to authorized insurers and certain Captives and Risk Retention Groups (RRGs).
In response to AB 398, the Nevada Division of Insurance has filed an Emergency Regulation proposed to clarify the application of the law. The Nevada Division of Insurance has submitted the Emergency Regulation due to the potential for AB 398 to eliminate or greatly reduce the availability of certain policies of liability insurance and significantly
increase costs. The purpose of the Emergency Regulation is to seek clarification of which policies of insurance are subject to the bill by (i) defining “policy of liability insurance,” (ii) identifying the insurers to which AB 398 does not apply based on existing state and federal law, and (iii) providing further guidance on how defense coverage is required to be made available.
The initial Nevada Division of Insurance 2023 Assembly Bill 398 Guidance to Insurers document is available here.
ADDITIONAL INSURANCE IMPLICATIONS UNCLEAR
Many questions remain about the impact of the new Nevada law, which seems very likely to lead to higher costs and tighter capacity for insureds domiciled in Nevada. Among other considerations, it’s unclear how the law will apply to umbrella and excess policies. The impact on multi-state risks with Nevada exposure also remains uncertain as well as sub-limited coverages such as sexual abuse and molestation (SAM). However, it is likely that Nevada will adhere to the Non-Admitted and Reinsurance Reform Act (NRRA), meaning the laws and regulations for the insured's home state govern the surplus lines policy transaction.6 Some carriers have stated that they will only offer 1-year extensions if the account is effective October 1, 2023, or later. Policy cancellations or rewrites completed by September 30, 2023, may also be agreeable to some carriers.
While there is no direct comparison in the United States, Quebec has long had a comparable law, Article 2503, that requires insurers to assume defense costs beyond the policy limits. Ultimately, soaring defense costs led some insurers to exit the Quebec liability market and others to raise premiums by significant multiples. After growing settlements led to higher insurance prices for Quebec-domiciled companies, the provincial government softened those provisions to allow the government to exempt certain categories of insurance policies and classes of insureds.2
SIMILAR STATE LAWS
Among U.S. states, Louisiana and New Mexico have similar, but far more targeted laws with many exemptions, particularly for D&O and E&O policies. The Louisiana law applies to personal lines and medical malpractice but waives the prohibition for professional liability other than medical malpractice along with D&O, E&O, pollution, and cyber risk liability as well as other liability policies.
New Mexico exempts coverage such as aircraft and nuclear liability and allows a number of exemptions for coverage whose limits exceeds $500,000, including pollution, D&O, E&O, and professional liability other than medical malpractice. For commercial liability, that threshold increases to $5 million, excepting motor vehicle or medical malpractice liability.
Since Nevada's AB 398 does not come into force until October 2023, the impact will remain uncertain for some time and may depend on actual claims as well as resulting litigation. However, looking toward the final quarter of 2023, policyholders and retail agents should be aware of how the law may impact coverage renewal decisions and new policies. Further guidance is expected to continue to develop, and the Nevada Division of Insurance will make updates regarding AB 398 available online at: https://doi.nv.gov/. Experienced liability brokers can be key allies when it comes to navigating a more uncertain marketplace. Reach out to your CRC Group producer today for assistance.
- Chris Norman, Esq. serves as General Counsel for Starwind Specialty, CRC Group’s Special Programs Division and one of the largest program management operations in North America.
- Quebec relaxes rules to insurance provisions over duty to defend, Law in Quebec, first published in The Lawyer’s Daily, Sept. 13, 2021. See: https://lawinquebec.com/duty-to-defend/
- New regulations applying to the defense outside the limits section within Civil Code of Quebec, Elizabeth Adamson, Willis Towers Watson, June 27, 2022. See: https://www.wtwco.com/en-ca/insights/2022/06/new-regulations-applying-to-the-defense-outside-the-limits-section- within-civil-code-of-quebec
- Nevada prohibits ‘defense inside the limits” liability insurance provisions, The D&O Diary, Kevin LaCroix, June 28, 2023. See: https://www.dandodiary.com/2023/06/articles/uncategorized/nevada-prohibits-defense-inside-the-limits-liability-insurance-provisions/
- Louisiana State Legislature RS 22:1272. See: https://legis.la.gov/legis/Law.aspx?d=1240103
- N.M. Code R 184.108.40.206 -Exemptions to general prohibition. See: https://www.law.cornell.edu/regulations/new-mexico/13-11-2-9-NMAC
- NRRA & the Home State Rule, LSA, May 14, 2020. https://www.ilsainc.com/home-state-rule-surplus-lines/#:~:text=NRRA%20%26%20 the%20Home%20State%20Rule&text=Under%20the%20Non%2DAdmitted%20and,payments%20for%20non%2Dadmitted%20insurance.