Assembly Bill 398 of the 2023 Legislative Session continues to be one of the most watched bills of the post-session. In concept, it is a simple bill but expansive in effect. AB398 would prohibit Nevada authorized insurance carriers from issuing or renewing a policy of liability insurance that reduces the stated limit of liability by the costs of defense, legal costs and fees and other expenses for claims; or otherwise limits the availability of coverage for the costs of defense, legal costs and fees and other expenses for claims.
Defense within limits (DWL) policies are primarily used in situations of unknown or significantly complex legal risk. Typically, businesses purchase these policies for professional liability or business judgment coverage like directors and officers exposure, errors and omissions and medical or legal malpractice. However, DWL policies will also be purchased by non-profit organizations to cover their external volunteer board members.
Only Louisiana and New Mexico have enacted similar defense within limits prohibitions; however, both either limit the application to certain lines or authorize the Commissioner to exempt lines by rule. Nevada’s new law did not make such exceptions.
The business community has expressed significant concerns since mid-June that this new law is both discouraging insurance carriers from renewing or writing new policies. The Division of Insurance (DOI) has stated that at least 10 carriers have withdrawn from the market representing over $17 million in premium and that premiums for available coverage have increased significantly.
In response, the DOI implemented an Emergency Regulation on July 13, just over a month after the bill became law. The Emergency Regulation and a proposed permanent regulationi offered a potential pathway for insurance carriers to comply with the mandate of AB398 by permitting the sale of policies offering separate, distinct amounts for liability and for defense. How such a separation of defense from the coverage available would work would appear conceptually difficult. For instance, if a policy offered $100,000 in liability coverage but the insured opted to have a zero-dollar defense, would the insured be solely responsible to defend any claim? How would the carrier protect its interest in limiting its exposure?
On August 10, the DOI started the process to codify the emergency regulation as a permanent regulation. The consensus of that workshop was that the regulation, or perhaps any regulation that limited the application of AB398, was positive. Notably, no potential language amendments were discussed regarding the proposed regulation.
In Nevada, there is a committee of the Legislative branch – the Legislative Commission – that must review agency regulations before they become effective 1. The Legislative Commission was rumored to have concerns with the concept of splitting the duty to defend from the duty to indemnify. These concerns were never raised publicly. Ultimately the DOI continued the rulemaking process but did not recommend adopting the Emergency Regulation on a permanent basis.
At the Legislation Commission meeting on September 28, a new regulation debuted, not previously discussedii. The “Legislative Commission” regulation addresses the application of AB398 in a fundamentally different manner – rather than guidance for compliance with AB398, this regulation would apply the “defense within limits” ban only to motor vehicle liability, homeowner liability, general commercial liability coverage and medical malpractice coverage. It is unclear how these specific lines were determined as we note that Nevada Revised Statutes contain a definition of liability insurance that is significantly more expansive 2.
There was no discussion by DOI staff about this regulation at the Legislative Commission meeting and no questions were raised by legislators. The Revised Proposed Regulation was approved using a seldom used procedure to “early review”3 a regulation. This action dictates to the Commissioner of Insurance that if the final Regulation is adopted in a substantially similar form, that regulation becomes permanent without additional Legislative Commission action. However, any major changes would require another Legislative Commission review.
Assemblyman Yeager did comment after the approval thanking “all of those involved in crafting this regulation” and noted that he wants to make sure that AB398 is applied in the way that the legislation was intended.
Assuming the regulation, which is scheduled to be adopted on October 30, 2023, conforms to the pre-approved version, it can be filed with the Secretary of State and become effective without delay.
Ultimately, the statute is now in effect and prohibits any licensed insurance company from writing a policy of liability insurance with defense within limits. The regulatory effort to narrow the effect of the statute is commendable but the question remains whether individual insurance carriers will consider a regulation sufficient authority to encourage them to continue to write “excluded” lines of liability insurance on a defense within limits basis.
Another question is whether those carriers that continue to write the lines excluded from the regulation will increase their rates to reflect the risk that the regulation may not bar a claim by an insured that the limits cannot be reduced.
It is doubtful whether anything short of a legislative fix will provide meaningful market relief. The Black & Wadhams team will continue to monitor developments, and report back as we learn more. Our recommendation is still that Nevada businesses should immediately consult with their insurance brokers and risk managers to determine if they have policies that will be affected by AB398.
1. See, Nevada Constitution, Art 3, Sec 1, Sub 2.
2. NRS 681A.020(1)(b)
i Section 1. Chapter 679A of NAC is hereby amended by adding thereto the provisions set forth as sections 2, 3 and 4 of this regulation.
Sec. 2. As used in section 1 of Assembly Bill No. 398, chapter 191, Statutes of Nevada 2023, at page 1110, and section 4 of this regulation, “policy of liability insurance” means a policy that:
1. Provides for casualty insurance of the type described in paragraph (b) of subsection 1 of NRS 681A.020; and
2. Is issued by a person who holds a certificate of authority pursuant to NRS 680A.060 or a license pursuant to NRS 694C.230 authorizing the person to offer casualty insurance of the type described in paragraph (b) of subsection 1 of NRS 681A.020.
Sec. 3. The provisions of section 1 of Assembly Bill No. 398, chapter 191, Statutes of Nevada 2023, at page 1110, do not apply to:
1. A risk retention group, as defined in NRS 695E.110.
2. Captive insurance that does not cover third-party liability.
Sec. 4. 1. If a policy of liability insurance subject to the provisions of section 1 of Assembly Bill No. 398, chapter 191, Statutes of Nevada 2023, at page 1110, limits defense coverage and is required to be filed for approval with the Commissioner: (a) The policy of liability insurance must make defense coverage available at the limit for defense coverage selected by the insured; and (b) The limit for defense coverage selected by the insured, including, without limitation, a limit of $0, must be included on the declarations page of the policy.
2. As used in this section, “defense coverage” means coverage for the costs of defense, legal costs and fees and other expenses for claims.
3. See, NRS 233B.0681
ii Section 1. Chapter 679A of NAC is hereby amended by adding thereto the provisions set forth as sections 2 and 3 of this regulation.
Sec. 2. As used in section 1 of Assembly Bill No. 398, chapter 191, Statutes of Nevada 2023, at page 1110, “policy of liability insurance” includes only a policy of casualty insurance that:
1. Provides insurance against legal liability arising from the ownership or operation of a motor vehicle, as defined in NRS 485.050;
2. Provides insurance against legal liability arising from the ownership of housing that is occupied by the owner as the primary residence of the owner;
3. Is a policy of commercial general liability insurance;
4. Is a policy of commercial automobile insurance; or
5. Provides insurance covering the professional liability of a provider of health care, as defined in NRS 41A.017.
Sec. 3. The provisions of section 1 of Assembly Bill No. 398, chapter 191, Statutes of Nevada 2023, at page 1110, do not apply to:
1. A risk retention group, as defined in NRS 695E.110.
2. Captive insurance that does not cover third-party liability.
3. A nonadmitted insurer, as defined in NRS 685A.0375.
Sec. 4. This regulation is hereby amended by adding thereto the following transitory language which has the force and effect of law but which will not be codified in the Nevada Administrative Code: The provisions of this regulation do not apply to a contract for liability insurance existing on October 1, 2023, but the provisions of this regulation do apply to a contract for liability insurance to which the provisions of section 1 of Assembly Bill No. 398, chapter 191, Statutes of Nevada 2023, at page 1110, are applicable pursuant to section 2 and 3 of this regulation, that is issued or renewed on or after October 1, 2023.
