On June 3, 2023, the Nevada legislature enacted a law prohibiting insurance companies from issuing or renewing policies of liability insurance that contain defense-within-limits provisions, or so-called “burning limits” policies. Sometimes referred to by different names, including “depleting limits,” “wasting limits,” “self-eroding limits,” or “self-liquidating” policies, such policies essentially contain provisions that reduce the policy’s applicable limit of insurance coverage by amounts the insurer pays to defend the policyholder against a claim or suit. Such policies are very common in architect/engineer E&O policies.
AB398 (which will be codified in NRS 679A), amended Chapter 679A of the Nevada Revised Statutes to provide as follows:
“Notwithstanding any other provision of law, an insurer, including, without limitation, an insurer listed in NRS 679A.160, shall not issue or renew a policy of liability insurance that contains a provision that:
- Reduces the limit of liability stated in the policy 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.”
NRS 679A.NEW
The new law goes into effect on October 1, 2023. It applies to insurance policies issued or renewed on or after that date. It does not apply to policies existing on October 1, 2023, but it applies to the subsequent renewal of any such policies.
Burning limits provisions sometimes find their way into the cross section of liability policies but are more commonly included within professional liability and other errors and omissions and management liability policies. These burning limits policies mitigated the insurers’ risk and may have been used by insurers to reduce premiums and make coverage less expensive. In the absence of such an option, the cost and availability of E&O and similar insurance policies in Nevada is bound to be affected. It will be interesting to see what insurers do to mitigate the increased, less predictable costs exposure because of the new law. Will premiums simply increase? Will insurers restructure certain liability insurance products to mitigate the increased risk? Will some insurers leave the Nevada market altogether?
Nevada is the first jurisdiction in the country to prohibit these burning limits policies. The new law applies to any insurer that insures risk in Nevada and will likely require Nevada-specific endorsements so that depleting limits provisions remain in effect in the insurers’ other jurisdictions.
It will also be interesting to see the new law’s effect on litigation strategies, settlement negotiations, and judgment recoveries. Will it encourage or discourage prompt resolution of claims? On the one hand, the policy limits are preserved for settlements and judgments. On the other hand, there may be reduced incentive for claimants to settle early in litigation to avoid the risk of eroding coverage limits by defense costs. At a minimum, from the perspective of defense counsels, the new law will yield the benefit of eliminating the inherent conflict of having to weigh vigorous defense strategies against the erosion of the client’s coverage.
It bears noting that a prior version of AB398 would have also specifically precluded self-insured retentions from applying to defense costs, but that was removed prior to passage of the bill. The law, as enacted, still expressly prohibits provisions “otherwise limiting the availability of coverage for the costs of defense, legal costs and fees, and other expenses for claims,” So, it is arguable that the new law, even in its final form, still dictates that self-insured retentions may not be applied to defense costs.
Only time, and inevitable litigation, will tell what the real ramifications of the new law will be.
