Nevada Bans Burning Limits Policies Starting October 1, 2023

On June 3, 2023, the Nevada governor signed AB398, a law prohibiting insurers from issuing or renewing defense within limits liability policies in the State of Nevada, effective October 1, 2023. Thus, any liability policy issued or renewed in Nevada after October 1, 2023, must provide a defense outside of limits.

Despite this being a significant development for the Nevada insurance market, there has been little written about it in the legal press. AB398 (link) amends Section 1. Chapter 679A of Nevada Revised Statutes (NRS) as follows:

Notwithstanding any other provision of law, an insurer, including, without limitation, an insurer listed in NRS 679A.160, shall not issue or renew a policy of liability insurance that contains a provision that:
  1. Reduces the limit of liability stated in the policy by the costs of defense, legal costs and fees and other expenses for claims; or
  1. Otherwise limits the availability of coverage for the costs of defense, legal costs and fees and other expenses for claims.
Sec. 2. The provisions of this act do not apply to any contract for liability insurance existing on October 1, 2023, but apply to any renewal of such a contract.

As one commentator notes (link), Quebec enacted a similar law which was widely blamed for causing a “hard market” for professional liability insurance and was recently amended.

It remains an open question whether the new law applies to non-admitted or surplus lines insurers. The amended law, as currently drafted, is silent with respect to this issue. NRS 679A.150 (link) states: “No person shall transact a business of insurance in Nevada, or relative to a subject of insurance resident, located or to be performed in Nevada or elsewhere, without complying with the applicable provisions of this Code.” This suggests that the ban is a blanket prohibition applying to all policies to be performed in Nevada (barring a challenge to the law).

***August 8, 2023 Update***

On July 21, 2023, the Nevada Department of Insurance (the “Division”) issued, and the governor signed, an Emergency Regulation effective through November 21, 2023, clarifying the applicability of AB398 (link). As the Division explains in an accompanying letter to the Governor:

The Division has grave concerns regarding carriers leaving the Nevada market altogether due to the impact of this new legislation. As carriers leave the state, there is a potential for a lack of adequate capacity remaining with the carriers that choose to continue selling liability insurance in this state. Additionally, this new legislation will most likely lead to significant increases in the costs of insuring businesses and, without clarification, the Division is projecting even higher costs for liability insurance.

To address these concerns, the Emergency Regulation clarifies that AB398 applies only to “authorized insurers” (as well as non-risk retention group captive insurers). This suggests that non-admitted insurers and risk retention groups are exempted from application of AB398. Therefore, it now appears that after October 1, 2023, it will still be possible to buy liability insurance in Nevada with a defense outside of limits from a non-admitted insurer.

In addition, the Department of Insurance issued a Guidance to Insurers regarding AB398 (link). The Guidance reiterates that “a policy of liability insurance must now include defense costs outside of the limits of liability and defense coverage must be available.” But it goes on to clarify that the law “does not require unlimited defense costs.” Policies may provide for a separate limit for defense costs, including a limit of $0. Policies may also include self-insured retention or deductibles on liability coverage or defense costs.

The Emergency Regulation is effective as of July 21, 2023, and is effective through November 21, 2023. The Insurance Department has indicated that it will be working to develop permanent regulations.

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