Joshua Leach Questions Nevada Insurance Law in Law360 Article
On June 3, Nevada's governor signed A.B. 398, a law prohibiting insurers from issuing or renewing defense-within-limits liability policies in the state, effective Oct. 1. Thus, any liability policy issued or renewed in Nevada after that date must provide a defense outside of limits.
As context, liability insurers began adding defense-within-limits provisions to professional liability policies in the 1970s and 1980s, in response to the rising cost of malpractice claims against both lawyers and medical professionals.[1]
Previously, for occurrence-based policies, defense costs did not erode a policy's liability limit, leaving the limit intact to pay a judgment or settlement. As the cost of defending professional liability claims rose, the cost of the defense would frequently exceed the indemnity payments.
The rising cost of litigation — along with increasing litigation over latent defects and injuries, such as asbestos claims — created uncertainty for the commercial viability of certain insurance products.
Allowing defense costs to erode policy limits, coupled with claims-made provisions adopted around the same time, enabled insurance actuaries to more accurately price risk and limit exposure. This, in turn, ensured liability policies remained widely available to professionals at affordable prices.
Since their adoption, courts in most jurisdictions have enforced claims-made and defense-within-limits provisions in liability policies. Today, most professional liability, directors and officers and cyber insurance policies, among others, are written as claims-made, defense-within-limits policies.
Given the current cost of litigation, barring insurers from issuing defense-within-limits policies — and leaving insurers exposed to uncapped defense costs — could cause liability insurers to either withdraw certain products from the market or prohibitively increase premiums.
Nevada's recently passed bill prohibits insurers from issuing or renewing defense-within-limits liability policies. A.B. 398 amends Section 1, Chapter 679A, of the Nevada Revised Statutes 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:
- Reduces the limit of liability stated in the policy by the costs 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.
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.[2]
As Kevin LaCroix, executive vice president of insurance brokerage RT ProExec, notes, Quebec enacted a similar law that was widely blamed for causing a "hard market" for professional liability insurance, and was recently amended.[3]
When A.B. 398 was passed, it was unclear whether the new law applies to nonadmitted or surplus lines insurers — i.e., coverage lines that need not be filed with state insurance departments as a condition of being able to offer coverage.[4] The amended law, as currently drafted, is silent with respect to this issue.
Notably, NRS 679A.150 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."[5]
However, on July 21, the Nevada Division of Insurance issued, and the governor signed, an emergency regulation effective through Nov. 21, clarifying the applicability of A.B. 398.[6] 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 A.B. 398 applies only to "authorized insurers," as well as non-risk retention group captive insurers. This suggests that nonadmitted insurers and risk retention groups are exempted from application of A.B. 398.
Therefore, it now appears that after Oct. 1, it will still be possible to buy liability insurance in Nevada with a defense outside of limits from a nonadmitted insurer.
In addition, the Division of Insurance issued a guidance to insurers regarding A.B. 398.[7] 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 Division of Insurance has indicated that it will be working to develop permanent regulations.
Note that this remains a fluid situation that could — and likely will — continue to change as stakeholders weigh in. For instance, the plaintiffs bar and consumer advocates may lobby legislators and regulators to restrict the ability of liability insurers to limit coverage for defense costs.
Requiring insurers to pay defense costs outside of limits means more insurance funds remain available for judgments or settlements. Conversely, insurers seeking to manage their exposure and price policies at commercially reasonable rates will likely seek to limit the effect of the new law.
With few precedents, it is difficult to predict the impact of the new law and regulations on the Nevada legal market. Many admitted insurers have nonadmitted affiliates who may be able to continue selling defense-within-limits policies in Nevada — assuming Nevada allows it.
If nonadmitted insurers can continue to issue defense-within-limits policies in Nevada after Oct. 1, most professional liability insurance, cyber insurance and directors and officers insurance policies purchased in Nevada after Oct. 1 will be purchased from nonadmitted insurers.
It is unclear if capacity would be an issue if there is a sudden shift out of the admitted market and into the nonadmitted market — though we may be about to find out. This could affect prices, and the availability of policies.
This would also have the unintended, and ironic, effect of forcing many Nevada policyholders into the nonadmitted market — where insurers, by definition, are subject to less Nevada state regulation.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See Gregory S. Munro, Defense within Limits: The Conflicts of "Wasting" or "Cannibalizing" Insurance Policies, 62 Mont. L. Rev. (2001), issue 1, article 4.
[2] https://legiscan.com/NV/text/AB398/2023.
[4] https://www.irmi.com/term/insurance-definitions/surplus-lines-insurance.
[5] https://www.leg.state.nv.us/nrs/nrs-679a.html.
Read more at: https://www.law360.com/articles/1716059?copied=1
