We recently posted about Nevada becoming the first state to prohibit defense-within-limits provisions in liability insurance policies. Defense-within-limits provisions—resulting in what is called “eroding” or “wasting” policies—reduce the policy’s applicable limit of insurance by amounts the insurer pays to defend the policyholder against a claim or suit.
In response to uncertainty and industry concern about the potential effects the new law may have on the state’s insurance marketplace, Nevada’s Division of Insurance issued an Emergency Regulation and Guidance to Insurers on the new law to minimize disruption to the marketplace. After noting that the new law “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, non-profit entities, and state and local governments,” Nevada’s Division of Insurance addressed three issues relating to the new law in the Emergency Regulation:
- The meaning of the term “policy of liability insurance,” as used in the new law.
- The insurers to which the new law does not apply.
- How defense coverage is required to be made available.
A letter from the Insurance Commissioner to the Governor accompanying the Emergency Regulation, and a separate Guidance to Insurers document which was issued by Nevada’s Division of Insurance, provided clarification on each of these issues.
Policy of Liability Insurance. With respect to the new law’s use of the term “policy of liability insurance,” “liability insurance” is “a form of casualty insurance, defined in NRS 681A.020(1)(b) as 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 term liability insurance, therefore, encompasses many policies that commonly include defense-within-limits provisions.
Scope of Legislation. Regarding the scope of the new law, it does not apply to risk-retention groups and “captive insurance that does not cover third-party liability.” However, the Insurance Commissioner’s letter acknowledges that the new law is expected to impact a broad range of liability policies, including “Medical Malpractice; Errors and Omissions and other professional liability policies; Directors and Officers; Cyber Liability; Employment Practices Liability; Pollution and Environmental Impairment; Fiduciary Liability; Construction Defect; Products and Clinical Trial Liability; and Excess and Umbrella policies.”
Defense Coverage. On the final issue of required defense coverage, the guidance document reiterates that “a policy of liability insurance must now include defense costs outside of the limits of liability and defense coverage must be available.” But it goes on to clarify that the law “does not require unlimited defense costs.” Policies may provide for a separate limit for defense costs, including a limit of $0. Policies may also include self-insured retention or deductibles on liability coverage or defense costs.
The Emergency Regulation is effective for 120 days from its effective date of July 21, 2023, and it cannot be renewed. Unless modified or rescinded, the Emergency Regulation should remain in effect past October 1, 2023, when Nevada’s new law goes into effect.
This is an evolving area of law that the entire insurance industry, but especially Nevada policyholders and insurers doing business in the state, are sure to monitor.