Nevada Businesses Brace for Ban on ‘Eroding Limits’ Liability Policies

A new Nevada law that takes effect Oct. 1 prohibits liability insurance policies with “eroding limits,” potentially increasing the cost of premiums and reducing availability, insurance experts say.

Such policies, also called “wasting,” “burning” or “defense within the limits” policies, include the cost of defending lawsuits as part of the loss. Such provisions are common in professional liability, cyber liability, errors and omissions, employment practices liability, directors and officers, construction defect, pollution and excess policies.

Nevada Insurance Commissioner Scott Kipper acknowledged during a telephone interview Friday that his office did not completely understand the ramifications of Assembly Bill 398 until after Gov. Joe Lombardo signed the measure into law on June 3. He said since then, his office has has heard backlash from resort owners, professional engineers, municipalities and nonprofit organizations.

“We realized that the impact was much more apparent after we looked at this a little harder,” Kipper said. He added later: “The rate increases are potentially substantive.”

Kipper’s office is proposing an emergency regulation to clarify that the law does not apply to non-admitted lines, risk retention groups or captive insurance that does not include third-party liability. The proposal must be reviewed by the Legislative Counsel’s Office before final adoption and will remain in effect only 120 days, Kipper said.

Kipper said the Nevada state legislature won’t have an opportunity to amend the law until it meets again in 2025.

Mark Sektan, a vice president for the American Property Casualty Insurers Association said during an Aug. 10 workshop on the proposed legislation that the state legislature should hold a special session to repeal or amend the law. Sektan had warned lawmakers before they adopted AB 398 that the bill will lead to rate increases and make insurance more difficult to obtain.

Business groups said during the workshop that the new law was already having a devastating impact on insurance prices and availability.

“Our member agents are already seeing a swath of non-renewals, cancellations, carriers threatening to pull out of the market and double- digit price increases,” said Rachael Rizzi, a board member for Nevada Independent Insurance Agents.

Kanani Espinoza, a lobbyist for the Nevada chapter of the American Council of Engineering Companies, said AB 398 will increase premiums for professional liability policies by 80%.

Virginia Valentine, president of the Nevada Resort Association, said data submitted by just 14 of the organization’s 70 members showed that their premiums will increase by “tens of millions of dollars.” She said two if its members already received cancellation notices.

Ty M. Maynarich, an attorney with the Tyson Mendes law firm in Las Vegas, said in a blog post that the new law’s impact extends beyond prices and availability. He said policies that require the insureds to deplete self-insured retentions may violate the new law as a limitation on the coverage for costs of defense. He said insurers may seek declaratory relief more often to address coverage issues early in the claims process.

Louisiana and New Mexico have similar statutes, but Nevada’s new law is much broader, Maynarich said during a telephone interview. Louisiana’s law, first passed in 2021, was amended in 2022 to allow the state insurance commissioner to waive the eroding-limits prohibition on commercial vehicle and commercial general liability policies. New Mexico’seroding limits bill does not apply to most policies that provide coverage of $500,000 or more, or $5 million for motor vehicle or medical malpractice liability.

Mark Habersack, risk manager for Resorts World in Las Vegas, said the Nevada law looks a lot like a law passed by the Canadian province of Quebec, which wreaked havoc on the insurance industry.

Kevin M. LaCroix, an attorney and executive vice president for specialty insurer RT ProExec, said in a blog post said the Quebec law created a hard insurance market in the province and was later amended.

“As anyone might expect, insurers generally – and not unreasonably – were not interested in taking on what would in effect be an unlimited defense cost exposure for claims that are notoriously expensive to defend,” he said.

Nevada may be stuck with the eroding limits ban for some time, unless lawmakers follow Sektan’s advice and hold a special session. Kipper said the state legislature normally meets every other year and is not scheduled to be in session again until 2025.

There is one consolation: The Nevada Insurance Department posted on its website a “guidance” memorandum that says liability policies can include a separate limit for defense costs, “including a limit of $0.” Also, the memo says the law does not prohibit insurers from issuing policies that include self-insured retentions or deductibles on liability coverage and/or defense costs.

The memo says the Insurance Department has no authority to modify the effective date of the new law.

“We understand the challenges this creates for the industry to provide modified contract language based upon the bill’s requirements,” the guidance says. “Division staff will prioritize reviewing new policy language impacted by this bill.”