Effective October 1, 2023, a recently adopted Nevada law (Assembly Bill 398) prohibits insurers from issuing liability policies containing provisions that reduce the limits of liability by costs of defense (Defense Within Limits or DWL). AB 398 was both broad and vague, and threatened to make many types of liability insurance unavailable or unaffordable for Nevada businesses and individuals.
In response to overwhelming requests for guidance, Nevada’s Division of Insurance (DOI) recently issued updated guidance interpreting the scope of AB 398. The guidance answers several open questions, including which policies are subject to the defense within limits prohibition, which carriers must comply, and how policies may be structured to include defense costs. Additional clarifications are expected.
The Guidance articulates that AB 398 applies to 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. Unfortunately, the guidance remains unclear as to application to other types of policies that include liability limits diminished by defense costs – such as property policies.
Authorized insurers are unequivocally within the bounds of this law. AB 398 does not apply to non-admitted insurers, surety and fidelity bonds, or captive insurance that does not cover third-party liability.
The guidance makes it clear that defense costs are to be included in liability policies with stand-alone limits and must be made available – even for policies of liability that do not limit defense costs coverage (e.g. automobile and commercial general liability policies). The defense cost limit can include self-insured retentions or deductibles.
Therefore, Nevada insureds should expect to see new liability policy forms that include a new, negotiated limit for defense costs wholly separate from other policy limits. With admitted insurers having to underwrite this new risk, the net effect on cost remains unclear in so far as how much insureds will see premiums increase.
The new guidance is temporary, expiring November 21, 2023. The insurance commissioner has indicated the guidance will be updated as additional questions arise. The DOI is also working on permanent regulations. The guidance did not specifically address whether AB 398 applies only to businesses where the first named insured on a policy has a Nevada address or whether the DWL prohibition applies to businesses headquartered elsewhere but with operations in Nevada. Nevertheless, it appears that only businesses with the first named insured having a Nevada address are impacted. Additional clarifying guidance has been requested.
Lockton continues to monitor the situation and is working with carriers, the state government, and others to ensure affected clients are able to have their coverage needs met in a cost-effective manner.