Follow-up: Nevada Prohibits “Defense Inside the Limits” Liability Insurance Provisions

The Nevada Department of Insurance hosted a regulatory workshop on a permanent regulation (R0923) related to the recently passed AB 398 (Nev. 2023), which prohibits defense within limits policies, to replace the emergency regulation currently in place.

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On August 10, 2023, the Nevada Department of Insurance hosted a regulatory workshop on a permanent regulation (R0923) related to the recently passed AB 398 (Nev. 2023), which prohibits defense within limits policies, to replace the emergency regulation currently in place. The regulations are designed to communicate concerns of the insurance industry (both from insurers and policyholders) to the lawmakers, as well as to provide clarification and guidance on the applicability of the law. The workshop was not intended to be a Q&A session on the law, itself, but a chance to express concerns on the regulation. The workshop was hosted by Nick Stosic, Deputy Commissioner with the Nevada Department of Insurance.

The regulation helps clarify the types of insurers and insurance policies subject to the new law prohibiting defense within the limits policies. The law applies to “policies of liability insurance” which Is statutorily defined to mean “a type of coverage, as defined in NRS 681A. 020.1(b), issued under casualty insurance and offered by an insurer authorized pursuant to NRS 680A.060 and NRS 694C.230 to offer the casualty line of insurance for third-party liabilities. In short, the new statute is intended to encompass all types of liability insurance, including traditional, captive, and others. The only type of insurer expressly exempted is risk-retention groups due to federal preemption.

However, according to the language of the regulation, as well as additional guidance available here, the law applies only to policies issued by “authorized insurers,” which are defined to mean an insurer “authorized to transact insurance or reinsurance in this State under a subsisting certificate of authority issued by the Commissioner.” NRS 679A.030.  The law also applies to non-risk retention group captive insurers, which are defined as ““any pure captive insurer, association captive insurer, agency captive insurer, rental captive insurer and sponsored captive insurer licensed pursuant to [NRS Chapter 694C]. The term includes a pure captive insurer who, unless otherwise provided by the Commissioner, is a branch captive insurer with respect to operations in this State.” NRS 694C.060. The new law does not appear to apply to unauthorized and/or nonadmitted insurers, which by statutory definition would also exempt surplus lines insurance.  See NRS 685A.039 and NRS 685A.0375.  In short, if an insurer is authorized to transact insurance in Nevada or is a captive insurer (other than a risk retention group), its liability policies are governed by this new law.

As a result of AB 398, a policy of liability insurance must now include defense costs outside of the limits of liability and defense coverage must be available, but the law does not require unlimited defense costs. For policies of liability insurance, other than liability policies which do not limit defense costs coverage (such as typically found in automobile and CGL policies), a separate limit for defense costs may be selected by the insured, including a limit of $0. Insurers may also require self-insured retentions or deductibles on both liability coverage and defense costs.  The law also does not preclude insurers from excluding particular risks, only that those risks covered not be subject to eroding liability limits. This allows insurers control of the risk they are undertaking as well as to allow businesses to select the risk for which they wish to purchase coverage.

Clarification was also provided on whether an insurer that sets a defense costs limit can, after the limit is exhausted, erode the liability limit to continue providing a defense. The answer is no - the legislature’s legal team was clear that defense costs cannot erode liability limits in any way. Thus, insurers will be faced with the prospect of withdrawing the defense from their insureds once the defense costs limits are exhausted or be forced to continue to defend outside of limits, making the separate defense costs limit pointless.

This permanent regulation goes into effect in October 2023, before the emergency regulation is set to expire in November 2023, leaving no gaps in regulatory guidance.