Nevada Prohibits “Defense Inside the Limits” Liability Insurance Provisions

AB 398 (Nev. 2023) (to be codified in NRS Chapter 679A) prohibits insurers from reducing its policy limits by the costs of defense, legal costs, and fees and other expenses for claim, or otherwise limiting the availability of coverage for said costs.

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This law will apply to all policies issued or renewed as of October 1, 2023. Nevada is the first, and so far only, state to issue such a restriction. The bill reads:

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:   

1. Reduces  the  limit  of  liability  stated  in  the  policy  by  the costs  of  defense,  legal  costs  and fees  and  other  expenses  for claims; or  
2. 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.

A prior version of the bill would have also specifically precluded self-insured retentions from applying to defense costs, but that was removed prior to passage. However, as the law does apply broadly to “otherwise limiting the availability of coverage for the costs of defense, legal costs and fees and other expenses for claims,” such a limitation involving self-insured retention may still be encompassed within the statute, at least arguably. Although the legislative history shows that this limitation was removed, a court does not consider legislative history unless the statute, itself, is ambiguous on its face.

This law will apply to any insurer that insures risk in Nevada, and will likely require Nevada-specific endorsements so that eroding limits provisions remain in effect in all other jurisdictions. As for the self-insured retention issue, based on the overbreadth of the second “otherwise limits” section of the new law, it is likely that the new law will become the subject of litigation, wherein an insured whose policy contains such a limitation challenges it under the new law.