The End of Eroding Limits Policies in Nevada is Just the Beginning
Update: 11/6/2023: On Nov. 6, 2023, the Nevada Commissioner of Insurance adopted a regulation amending AB 398 to narrow its application. The amendment narrows the operative definition of “policy of liability insurance” to include specific policies, such as auto, homeowners, CGL, and professional liability for certain health care providers. The primary effect of this amendment is to put most errors and omissions and professional liability policies out of the law’s reach.
On June 3, 2023, Nevada Gov. Joe Lombardo signed into law AB 398 (the Act) which modifies the Nevada insurance code by restricting the types of liability policies that can be offered in the state.
The End of Eroding Limits Policies in Nevada
First, the Act prohibits liability insurers from issuing “eroding limits” or “burning limits” policies. These are insurance policies under which defense costs decrease policy limits. Most professional liability policies are eroding limits policies. As of Oct. 1, 2023, insurers in Nevada may no longer issue or renew any policy where policy limits are eroded by defense costs.
This change may result in higher premiums on these types of policies to compensate for the higher payouts they will now have to provide in Nevada.
What Else is on the Chopping Block?
Second, the Act prohibits liability insurers in Nevada from issuing a policy that “[o]therwise limits the availability of coverage for the costs of defense, legal costs and fees and other expenses for claims.” This language is ambiguous, but potentially wide-reaching.
For example, Nevada law already provides that insurers have an obligation to fully defend a claim even if it is only potentially covered. When a lawsuit includes multiple claims, some potentially covered and others not, insurers are already required to defend the entire lawsuit, including claims that are not covered . In some states, insurers have a right to seek reimbursement from their insured for costs incurred defending claims that were never potentially covered. The Nevada Supreme Court has not yet weighed in on whether Nevada recognizes an insurer’s claim for reimbursement. Under this new provision, however, it’s arguable that Nevada law does not recognize an insurer’s claim for reimbursement since liability policies in Nevada may not “otherwise limits the availability of coverage for the costs of defense, legal costs and fees and other expenses.”
The new law also could affect policies with self-insured retentions. Some policies with a self-insured retention require the insured to front defense costs up to a certain amount, after which the insurer begins to pay the defense costs. Self-insured retentions that require satisfaction before an insurer will begin funding its insured defense arguably violate the new law because they “limit the availability of coverage for the costs of defense.” In fact, a prior version of the Act explicitly disallowed insurers from providing or renewing policies where a self-insured retention applied to defense costs. While this was eventually left on the cutting room floor, it shows an application of the law to this area is possible. Additionally, while it is arguable that the lack of this provision in the final bill indicates that policies with self-insured retentions are not to be covered by this provision, courts generally avoid relying on legislative history due to its unreliability as an indicator of intent or meaning—suggesting it can still be argued.
It will be interesting to see how the courts interpret this broad language in the statute in the coming months and years, and we cannot definitely say how far courts will go in the types of policy provision they prohibit. What we can say, however, is that this section of the statute will certainly be litigated.
These unprecedented changes to the insurance code are relevant to policyholders and insurers alike. For insureds with eroding limits policies, prepare for the prospect of more coverage but at a potentially higher price. For insurers, we can almost certainly expect the industry to adopt a Nevada-specific endorsement which removes eroding limits language from policies in Nevada whilst keeping it in other jurisdictions. And, for both insureds and carriers, we can certainly expect a flurry of litigation seeking to delineate just what it means to “otherwise limit the availability of coverage…”
If you need any assistance interpreting or complying with any changes in the law brought about by AB 398, please contact Payne & Fears LLP.