Readers will recall that I recently posted about the new Nevada legislation requiring liability insurance policies issued in the state to provide for defense costs outside the limits – in other words, expressly requiring that liability insurers’ payment of defense costs will not erode the limit of liability. This new legislation caused a great deal of concern, both among insurers and insureds. On July 21, 2023, and in response to the concerns, the Nevada Department of Insurance, acting through the state’s Insurance Commissioner, adopted an Emergency Regulation to aid the implementation of the new statute. The Emergency Regulation itself, as well as the Insurance Commissioner’s July 20, 2023, letter to the Nevada Governor explaining the regulatory action, can be found here. In addition, the Department has also separately published Guidance to Insurers with respect to the Emergency Regulation, which can be found here.
Earlier this year, Nevada’s legislature adopted Assembly Bill 398 (AB 398), which is effective October 1, 2023, and which will disallow liability insurers from issuing or renewing a liability insurance policy that reduces the liability limit stated in the policy for defense costs, legal costs and fees, and other expenses.
In its recently filed Guidance, the Department of Insurance noted that the agency is “aware of concerns expressed by the insurance industry and many insureds regarding” AB 398. In his July 20, 2023, letter to the Nevada Governor, the Nevada Insurance Commissioner noted the department’s own concerns. The bill, the Commissioner said, “has the potential to eliminate or greatly reduce the availability of certain policies of liability insurance and significantly increase their costs.”
The insurance division, the letter goes on to state, “has grave concerns regarding carriers leaving the Nevada market altogether due to the impact of this new legislation,” which, if it were to happen, would create a “potential for a lack of adequate capacity remaining with the carriers that choose to continue selling liability insurance.” The new legislation will in addition “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.”
In order to “clarify the language” of AB 398 and “provide some necessary assurances to insurers to try to minimize disruption to Nevada insurance consumers,” the Department has adopted an “Emergency Regulation.” The Regulation aims to do three things; define what is a “policy of liability insurance”; identify the insurers to which AB 398 does not apply based on existing state and federal law; and provide further guidance on how defense costs coverage is required to be made available.
The accompanying Guidance clarifies that the “liability insurance” to which AB 398 applies includes insurance against legal liability resulting from negligence in rendering expert, fiduciary, or professional services. In his accompanying letter to the Nevada Governor, the Insurance Commissioner expressly identifies many lines of professional and management liability insurance to which the statute applies, specifically including Directors’ and Officers’ liability insurance; Errors and Omissions and other professional liability policies; cyber liability; employment practices liability; and fiduciary liability.
The Guidance also clarifies that while the liability insurers must now provide defense outside the limits of liability, “the law does not require unlimited defense costs.” Insurers may provide for a separate limit of defense costs, including a limit of $0. This allowance for a separate defense cost limit applies to each layer in a tower of liability insurance.
The Guidance also clarifies that the liability insurance policies may specify a self-insured retention or deductible amount that is applicable to the liability limit and/or the defense cost limit. However, the policy cannot be endorsed to provide for defense costs within the limit of liability.
The Emergency Regulation is effective as of July 21, 2023, but pursuant to statutory limitations, it is effective only for 120 days and cannot be renewed. The expiration date of the emergency regulation is November 21, 2023. The Insurance Department has indicated that it will be working to develop permanent regulations.
The separate Guidance document is meant to be an “organic” document that will be updated as the Department responds to questions as AB 398 is implemented. Anyone with questions about AB 398 or its implementation may submit questions to the Department at the following email address: email@example.com.
The Emergency Regulation and the Guidance highlight the fact that the law applies to liability insurance policies issued by “authorized insurers” (as well as non-risk retention group captive insurers). This emphasis suggests that nonadmitted insurers and risk retention groups are exempted from application of AB 398. If that is the case, it certainly seems as if professional and management liability insurance market in Nevada will broadly shift to the excess and surplus lines market.
Special thanks to a loyal reader for providing me with the links to the Emergency Regulation and the Guidance.