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Nevada Outlaws Self-Eroding Liability Insurance Policies

07.06.23 | INSIGHTS

By Andrew B. Downs
Shareholder, 415.352.2716

Nevada has enacted a statute which prohibits liability insurers from issuing self-eroding, or defense within limits, policies. Nevada is the first state to prohibit self-eroding policies completely. The statute applies to policies issued or renewed on or after October 1, 2023.

AB 398 is very simple. It prevents any insurer (including entities such as captives who usually are carved out of many Nevada statues) from issuing or renewing any policy of liability insurance that “Reduces the limit of liability stated in the policy by the costs of defense, legal costs and fees and other expenses for claims.”

The Nevada legislature did remove a provision from the statute that would have precluded Self-Insured Retentions from applying to defense costs. However, subsection 2 of the statute also prohibits provisions which “Otherwise limits the availability of coverage for the costs of defense, legal costs and fees and other expenses for claims.” What that means is unclear. The proponents of the bill (the lobbying arm of the plaintiffs’ bar) argued this means that policies also cannot exclude coverage for defense expenses (legislative hearing video).

Most professional liability, management liability (D&O), and fiduciary liability policies as well as some ocean marine policies commonly provide for defense costs paid to reduce the limit of liability. The enactment of this statute is likely to make it more difficult and expensive for Nevada policyholders to obtain professional liability, management liability and similar policies.

The simplicity of the statute leaves many questions unanswered, including whether it applies to policies issued elsewhere to policyholders domiciled outside of Nevada who happen to be sued in Nevada. The insurance industry opposed this bill because of the probable adverse impact on the cost and availability of professional liability, management liability, and similar coverages.

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