As insurers pull out of Florida^[i] amid market volatility, Nevada recently became the first state to prohibit insurers from issuing or renewing liability insurance policies with “eroding limits” provisions. Eroding limits policies are those in which amounts paid by an insurer to defend a claim against the insured are considered part of the loss. Payments under the eroding policy reduce the limits of liability available under the policy to pay a settlement of judgment for damages. These types of policies are known as “self-eroding” or “burning limits” policies. They are common in policies for professional liability, directors and officers, and errors and omissions liability.

The new Nevada law (AB 398) was only recently signed on June 3, 2023 and takes effect on October 1, 2023, adding the following sections:

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.[ii]

The first section eliminates the self-eroding nature of all policies issued after October 1. It is possible some insureds may seek early renewals or policy changes prior to October 1 to ensure a subsequent twelve months of similar self-eroding coverage/premiums. After the law takes effect, many insurers may require significant increases in premiums or possibly consider an exit to the Nevada market in certain key sectors.

The second section generally prohibits limitations on the availability of coverage for the costs of defense and related fees/expenses. This portion of the new law is broad as to the nature of the limitation and the extent to which it may apply to self-insured retentions and insurers claims for reimbursement. Many corporations are self-insured and require the insurer to provide for defense costs up to a certain amount after which the insurer begins to pay defense costs. Self-insured retentions (SIR) that require depletion before an insurer begins funding the defense arguably may violate the new law as a limitation on the availability of coverage for costs of defense.

With regards to reimbursement, some states allow insurers to seek reimbursement from their insured for costs incurred in defending claims that were ultimately not covered by the policy. Under the new law, it could be argued this provision bars an insurer from seeking reimbursement in Nevada. Due to preexisting law and potentially this new provision, Nevada insurers routinely seek declaratory relief actions in disputed coverage situations. The new provision may further entice insurers to seek declaratory relief with regards to coverage issues earlier in the claims process.

The future implications of the law remain uncertain. Governor Lombardo signed an emergency regulation to clarify the law, which was proposed last month by Nevada Insurance Commissioner Scott J. Kipper.^[iii] Commissioner Kipper stated that,

Without providing clarity about the applicability of this statute, AB 398 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 (events, tourism, gaming, hospitality, retail, construction, technology, healthcare, etc.) non-profit entities, and state and local governments.[iv]

Industry professionals await disclosure of the provisions of the emergency regulation and will likely monitor its proposed effects on the insurance market in Nevada.

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Sources

^[i]https://www.usatoday.com/story/money/personalfinance/2023/07/19/florida-home-insurance-aaa-farmers-policy-reduction/70427062007/#:~:text=Three%20major%20companies%20have%20voluntarily,told%20the%20Palm%20Beach%20Post.

[ii] AB 398.

^[iii] https://doi.nv.gov/uploadedFiles/doi.nv.gov/Content/News_and_Notices/EmergencyRegulation_LCB_E002-23A.pdf

[iv] Emergency Regulation of the Division of Insurance of the Department of Business and Industry, LCB File No. E002-23A (Jul. 21, 2023).