Philip J. Tacason | Lewis Brisbois
On June 3, 2023, Nevada Governor Joe Lombardo signed into law Assembly Bill (AB) 398, which prohibits insurers from renewing or issuing insurance policies that include provisions that reduces the limit of liability by the costs of defense. AB 398 states:
Section 1. Chapter 679A of NRS is hereby amended by adding thereto a new section to read 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.
Section 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.
Existing law allows Nevada insurers to issue liability policies that include defense-within-the-limits (DWL) provisions. These policies, also known as “self-eroding” or “burning limits” policies, are common in policies for professional liability, directors and officers (D&O) liability, and errors and omissions (E&O) liability. These cases are often complex and costly to defend. For many insurers, coverage for these lines of insurance is only available on a DWL basis.
AB 398 will completely prohibit Nevada insurers from issuing or renewing liability policies with DWL provisions. Naturally, this will require Nevada insurers to re-visit their underwriting and rating approaches. As a practical matter, Nevada insurers will likely require much higher premiums for professional liability, E&O, and D&O insurance coverage. Insureds who were previously qualified for coverage under a DWL basis may not be qualified for a defense-outside-the-limits policy.
Nevada Division of Insurance’s Emergency Regulations and Guidance re: AB 398
On July 21, 2023, the Nevada Division of Insurance (“Division”) submitted emergency regulations to clarify the applicability of AB 398. Governor Lombardo endorsed the statement of emergency, allowing the Division to adopt the emergency regulations. The emergency regulations will expire on November 21, 2023.
In a letter to Governor Lombardo, Nevada Insurance Commissioner Scott J. Kipper outlined several concerns with AB 398. Commissioner Kipper stated that, “[w]ithout providing clarity about the applicability of this statute, AB 398 has the potential to eliminate or greatly reduce the availability of certain policies of liability insurance and significantly increase their costs, which will affect all types of Nevada businesses (events, tourism, gaming, hospitality, retail, construction, technology, healthcare, etc.) [,] non-profit entities, and state and local governments.”
The emergency regulations define “policy of liability insurance,” as used in AB 398, to mean a type of coverage issued under casualty insurance and offered by an insurer authorized to offer the casualty line of authority for third-party liabilities. The regulations further clarify that AB 398 does not apply to risk-retention groups and captive insurance that does not cover third-party liability. The emergency regulations also require that a policy of insurance make defense coverage available at the defense coverage limit selected by the insured, if any. Any defense coverage limit selected, including $0, must be included on the declaration page.
The emergency regulations further recognize that insurers may not have sufficient time to price the changes to their products, or sufficient time to inform their policyholders that the insurer can no longer offer the product. This is because, under NRS 687B.410, if the insurer intends to withdraw from providing insurance for a particular class of insureds, the insurer must notify the Commissioner at least 60 days before providing the required notice of cancellation or non-renewal to the insureds. In its guidance to insurers regarding AB 398, the Division recognizes that, because of the timing of the effective date of AB 398 (October 1, 2023), no insurer could comply with the 60-day notice requirement when an insurer intends to withdraw from providing insurance for a particular class of insureds. The Division indicates it has no authority to modify the effective date for the requirements contained in AB 398.
The Division’s guidance to insurers regarding AB 398 clarifies that “liability insurance” as used in AB 398 is insurance against legal liability for the death, injury, or disability of any human being, or for damage to property, including liability resulting from negligence in rendering expert, fiduciary, or professional services. The Division further indicates that AB 398 does not require unlimited defense costs. For policies of liability insurance, other than liability policies which do not limit defense costs coverage, the insured may select a separate limit for defense costs, including a limit of $0.
The Division’s guidance also recognizes that cyber liability policies include both first-party indemnity to the insured and third-party liability coverage, often under the same per-occurrence and annual aggregate limits. The Division indicates that AB 398 does not preclude first-party indemnity and third-party liability from sharing the same policy coverage limit. The Division further states that defense costs may not erode the per-occurrence or annual aggregate limit of liability coverage.
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When AB 398 goes into effect, Nevada will be the first jurisdiction in the United States completely prohibiting insurers from issuing or renewing DWL policies. Two other jurisdictions in the United States have prohibited DWL policies, but importantly, have carved out exceptions for professional liability, D&O liability, and E&O liability. In 2021, Louisiana adopted a statute prohibiting such self-eroding policies, but provided that the state insurance commissioner shall waive this prohibition as to coverage for D&O liability, E&O liability, and professional liability except medical malpractice. New Mexico law also includes a prohibition on defense-within-the-limits policies, but expressly provides exceptions for coverage for D&O liability, governmental entity liability, E&O liability, professional liability (other than medical malpractice), in excess of $500,000.
Until 2022, one other jurisdiction in North America had completely prohibited insurance policies with DWL provisions. Civil Code of Quebec (CCQ) Articles 2500 and 2503 provide that: “[t]he proceeds of the insurance are applied exclusively to the payment of injured third persons,” and “[t]he insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him.”
These laws had been in place in Quebec since 1991, but recent large settlements and a landmark Quebec Court of Appeals case (SNC-Lavalin inc. (Terratech inc. et SNC-Lavalin Environnement inc.) c. Deguise, 2020 QCCA 495) led a number of stakeholders to lobby the Quebec government to amend the law. These stakeholders included Quebec-domiciled insurers and companies and the Insurance Bureau of Canada. The Minister of Finance then introduced a proposed amendment to Article 2503, which would allow the government to determine categories of insurance contracts and classes of insureds that may deviate from the general rules in Article 2500 and Article 2503. In April 2022, the Quebec government published a regulation which lists various types of insurance contracts and classes of insureds that may deviate from Articles 2500 and 2503. These liability contracts include those that cover prescription drug manufacturers and directors and officers. In addition, the regulation specifies several additional categories of insureds, who may opt out of Section 2503 if it subscribes to liability insurance contracts totaling at least $5,000,000. The Quebec legislature adopted this regulation in 2022.
To that end, the amendments to Quebec’s law allow for various exceptions to the general prohibition on DWL policies – much like the laws of Louisiana and New Mexico. Nevada’s AB 386, however, contains no such exceptions. When AB 398 becomes Nevada law, Nevada insurers and insureds will need to address the concerns that Quebec’s law faced before it was amended.
It is also worth noting that, as written, AB 398 applies to classes of insurers that normally are exempt from the provisions of the Nevada Insurance Code. These include fraternal benefit societies, hospital, medical, or dental service corporations, bail agents, risk retention groups, and captive insurers. Please refer to NRS 679A.160 for a list of insurers who are now subject to this prohibition.
All Nevada insurers, including the ones listed above, should review their existing liability policies, re-visit their underwriting for each of their existing DWL policies, and account for the new law accordingly. Insureds should be prepared for more stringent underwriting requirements, and as a result, higher premiums for liability coverage, particularly for professional liability, E&O liability, and D&O liability.
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