William S. Bennett | SDV Insights
Nevada’s legislature recently passed a groundbreaking law imposing two prohibitions on insurers. First, the law prohibits insurers from issuing or renewing any liability insurance policy with an “eroding limits” provision. While the first section of the law will have the most immediate effects, the statute goes further, generally prohibiting insurers from limiting the availability of coverage for the costs of defense, legal costs and fees, and other claim expenses. This second section leaves a great deal to interpretation, with the potential to massively expand policyholder rights, and may throw the traditional structure of liability insurance policies into question.
Nevada Statute §679a provides 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.
The first prong the statute dictates that an insurer shall not issue or renew a liability insurance policy containing any provision that reduces the policy limits through payment of defense fees, legal costs and fees, or other claims expenses. In other words, insurers cannot issue liability insurance with “eroding limits” or “defense within limits,” as such policies are typically labeled.
While the practice of issuing insurance with defense costs that do not erode the policy limits is already commonplace in some lines of liability insurance, such as general liability and automobile liability insurance, it is extremely uncommon in others, including, most notably, professional liability insurance. This is where we anticipate this legislation’s impact will be most significant.
Using construction as an example, professional liability insurance typically plays a completely different role in the construction dispute resolution process than other lines of liability insurance. This is driven in large part by the fact that nearly all professional liability insurance traditionally count defense costs toward exhaustion of the policy limits. Thus, while a primary general liability insurer may be stuck defending its insured against a construction defect lawsuit for years while the case inches towards resolution, spending uncapped amounts doing so, a professional liability insurer knows that it will not, in any event, be forced to spend more than its total limits of liability. Nevada Statute § 679a changes that. Like their general liability counterparts, professional liability insurers will now be forced to defend indefinitely while the case works towards resolution. We anticipate this will drive professional liability insurers to play a more proactive role in contributing their limits towards global settlement discussions, as they will now be incentivized to minimize their defense spending.
The second prong of the statute is also notable. The language of this section is very broad. A liability insurer cannot limit the availability of coverage for defense costs, which raises many questions. Is a limitation on the availability of coverage for defense costs an exclusion? Clearly, it is. However, decades of case law interpreting how an insurer’s duty to defend applies would be discarded if the statute was read that broadly, and it would likely throw the entire liability insurance marketplace into turmoil. Nevertheless, we expect lawyers will try to make all manner of aggressive arguments regarding what constitutes a permissive limitation on the availability of coverage for defense costs under a liability insurance policy because the statute’s wording invites them to do so. It will be interesting to monitor how these arguments play out in the Nevada courts. If aggressive interpretations of the statute are upheld, this could turn out to be one of the most significant shifts in the insurance marketplace, throwing the decades-old standard structure of insurance policies into question, albeit solely in Nevada.
The legislative history for the bill provides minimal guidance as to its intended effects, although there are two exhibits to its history reflecting both support for and opposition to the bill. While the Henderson Chamber of Commerce wrote to the legislature to voice support on behalf of its small business membership, the Vice President of the American Property Casualty Insurance Association wrote to the legislature, noting that Nevada would be the only state prohibiting defense-within-limits policies and pointing out that, for some lines of coverage (i.e. Cyber, D&O, and Professional lines), the only coverage available is typically defense-within-limits. The APCIA made the case that this will make it prohibitively expensive or simply not possible for insureds to obtain coverage for some of these lines, which may be true. The Nevada legislature overwhelmingly voted to pass the bill.
The statute clarifies that the act does not apply to any policy existing on October 1, 2023, but will apply to any renewal of such a policy. Accordingly, policyholders should expect to receive the benefits of this statute effective as of any policy placed October 1, 2023, or later.
It is clear, at this point, that all liability insurance policies issued in Nevada will now be required to provide defense outside of the limits of liability. It remains to be seen what the ultimate effect of the second prong of this new statute will be. Policyholders with policies issued in Nevada or with the potential to be issued in Nevada should monitor how this statute is applied in the coming years, as it has the potential to create massive shifts in the liability insurance marketplace in many ways, ranging from the cost of insurance to the expected scope of coverage and structure of liability insurance policies.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.