Effective October 1, 2023, insurers are prohibited from issuing or renewing liability policies, to Nevada residents, that reduce the limits of liability by the amount of defense costs and expenses paid.  To my knowledge – and other commentators have said this as well – this is the first such law in the country to disallow so-called eroding or wasting policies.

For the most part, this is not a significant issue for commercial general liability policies, which almost always provide defense costs supplemental to limits.  But for professional liability – E&O policies, which often provide that defense costs reduce the limit available to pay damages, this is quite a significant law.

To be specific, Nev. Rev. Stat. § 679A – newly created – provides 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.        

I looked and could not find any legislative history describing the rationale for this new law.  Obviously, it is a significant benefit for insureds -- and plaintiffs, suing insureds, who often watch as perhaps their only source of recovery dwindles with every dollar paid to defense counsel.  As a result, gone now will be the incentive for plaintiffs to consider earlier settlements to eliminate the impact of eroding policies on recoverable insurance proceeds.

As for that second provision, that an insurer shall not issue or renew a policy of liability insurance that contains a provision that "[o]therwise limits the availability of coverage for the costs of defense, legal costs and fees and other expenses for claims," I'm not sure what the statute is getting at. It's a vague provision and seems to offer room for various interpretations. No doubt it will be fleshed out by courts as policyholders no doubt give it a wide-reaching interpretation. 

So, yes, a significant benefit for insureds.  But it has to come at a cost.  Surely premiums for what had been eroding professional liability – E&O policies will increase – and probably noticeably.  How could they not?  And might some insurers no longer issue such policies in Nevada?  

UPDATED – August 7, 2023

In an effort to answer some of these questions about Nev. Rev. Stat. § 679A, I contacted Nevada Assemblywoman Elaine Marzola (D – Dist. 21, Clark County), chair of the Assembly’s Commerce and Labor Committee, which sponsored Assembly Bill 398 that led to the new law.  I’ll let you know if she responds.

Nevada Isn’t The First State After All

I noted above that, to my knowledge, and other commentators have said the same, Nev. Rev. Stat. § 679A is the first law in the country to disallow eroding or wasting policies.  It turns out that Nevada is at least the fourth such state.

I was contacted by Oklahoma’s go-to coverage lawyer John Lennon, of Pierce Couch Hendrickson Baysinger & Green in Oklahoma City, who informed me that a provision in Oklahoma’s Administrative Code has long precluded the issuance of policies with defense costs within the limit of liability.  Okla. Admin Code 365:15-1-15 provides as follows:

“No insurance policy or contract shall be made, issued or delivered by any insurer or by any agent or representative thereof, that includes defense expenses within the limit of liability. The Insurance Commissioner may waive this requirement based upon factors such as noncompetitive market or type of insurance coverage. If the Insurance Commissioner waives this requirement, the Declarations page of the policy shall include a conspicuous notice indicating that the contract contains defense expenses within the limit of liability and advising the policyholder to read its provisions.”

The Ok. code provision looks like it goes back to at least 2002 [but I did not dig deeper to confirm that. Regardless, it’s been on the books for a long time.]

Thank you John. I always appreciate it when Coverage Opinions readers reach out to add additional information about an article. 

My own Googling revealed that Louisiana [RS 22:1272] and New Mexico [N.M. Code R. § 13.11.2.8] also have provisions that prohibit defense costs from eroding limits, subject to various provisions and exceptions that are beyond the scope to discuss here.]  If any readers are aware of more states, please let me know.  

Nevada Division Of Insurance Issues Guidance On Nev. Rev. Stat. § 679A And The Governor Signs An “Emergency Regulation”

While I have not been able to locate any legislative history of Nev. Rev. Stat. § 679A to ascertain the reasoning for it, the Nevada Division of Insurance recently issued guidance on its implementation.  The DoI noted that it is aware of “concerns expressed by the insurance industry and many insureds” regarding the new law.

Indeed, on that point about concerns, in a July 20 letter, Nevada Insurance Commissioner Scott Kipper requested that Nevada Governor Joe Lombardo issue an “emergency regulation” to “provide some necessary assurances to insurers to try to minimize disruption to Nevada insurance consumers.” 

Commission Kipper’s letter to the governor stated: “The Division has grave concerns regarding carriers leaving the Nevada market altogether due to the impact of this new legislation. As carriers leave the state, there is a potential for a lack of adequate capacity remaining with the carriers that choose to continue selling liability insurance in this state. Additionally, this new legislation will most likely lead to significant increases in the costs of insuring businesses and, without clarification, the Division is projecting even higher costs for liability insurance.”

The “emergency resolution” is brief.  It addresses the types of liability policies that are subject to the law and provides this: “A policy of liability insurance that is required to be filed for approval with the Division must 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.  This provision does not apply to policies that do not limit defense costs coverage.”

More about the defense limit below.

Here are some highlights from the Nevada DoI’s Guidance on § 679A:

The Department of Insurance states that, while defense costs must now be outside the limits of liability, defense costs need not be unlimited (as typically is the case with automobile and general liability policies).  The guidance states that a policy can offer a separate limit of defense costs, including $0.

I’ve been thinking about how this may play out.  Say a Nevada architect obtains a $1,000,000 professional liability policy.  While defense costs do not erode the limit, they also do not have to be unlimited and can be subject to an amount offered by the insurer.  Suppose the architect, for reasons of affordability, chooses to purchase a policy that offers $250,000 in defense costs.  He or she is sued. It is an actively litigated case and the architect has some viable defenses.  And, before not too long, the defense limits are exhausted.  But the litigation still has a long way to go.  And, as I mentioned, the architect has some viable defenses. 

Except the architect cannot afford to defend itself.  And, at that point, as long as it is confident that its liability will not exceed $1,000,000, it has no incentive to.  So, while the insurer no longer has a defense obligation, it also has a $1,000,000 policy exposed.  Since it is going to require the insurer’s payment of defense costs to assert the architect’s defenses, are defense costs for the insurer really exhausted?

This is one of several challenging scenarios I can envision with exhaustion of defense costs but not limits.

More from the Nevada DoI’s guidance:

This one speaks volumes about the potential impact of § 679A: The Department is already providing guidance to insurers on the procedure for withdrawing coverage.  Curiously, the department notes that, because of the effective date of § 679A [October 1, 2023], it is not actually feasible for insurers to comply with the notice requirements for cancellation and non-renewal.  [At least not initially is how I read that.] 

Also on the subject of timing, the DoI states: “The Division of Insurance has no authority to modify the effective date for the requirements contained in AB 398. We understand the challenges this creates for the industry to provide modified contract language based upon the bill’s requirements. Division staff will prioritize reviewing new policy language impacted by this bill.”

This is significant.  Various changes to policy language – some obvious and some not so -- will be required for a policy to go from providing defense within limits to outside limits or having a set defense limit.     

Nev. Rev. Stat. § 679A does not prohibit insurers from issuing policies that include self-insured retentions or deductibles for both liability limits and/or defense costs.

The guidance addresses a few other things, including the handling of a shared limit for both first and third-party coverage and coverage issued on a “tower” basis.

I’ll keep on top of this and report anything new…