Exploring Nevada’s “Defense Within Limits” Laws

Defending a complex commercial lawsuit can be costly. However, liability insurance policies can provide defense coverage and offset this expense. Typically, liability policies adopt one of two approaches to fund defense costs: defense within limits and defense outside limits. Professional liability policies, including directors and officers and errors and omissions policies, generally provide defense within limits while commercial general liability policies generally provide defense outside limits.

Recent legislation in Nevada attempts to eliminate the availability of defense within limits typically offered by professional liability policies. While the new law has been modified through regulation and is now not as broad as passed by the legislature, it nevertheless could impact the professional liability insurance market in Nevada. Through this statute, Nevada joins several states with similar statutes that risk managers nationwide must consider when purchasing coverage for their organizations.

Defense Within Limits Vs. Defense Outside Limits

Under a defense within limits policy, the payment of defense expenses and attorneys’ fees erodes the policy limits. For example, if a policy provides $1 million in limits, but defense expenses total $300,000, only $700,000 in limits will remain available to pay any settlement or judgment. Insurers’ total exposure is pre-determined and does not exceed the stated limits. In return, insurers set premiums based on their pre-determined maximum exposure. This structure encourages prompt settlement of meritorious cases to minimize erosion of limits by payment of defense costs.

By contrast, under a defense outside limits policy, the payment of defense expenses and attorneys’ fees does not erode the policy limits. Therefore, no matter how protracted and expensive litigation proves to be, the insured will still have the full policy limits available to fund any settlement or judgment. In return, insurers set premiums based on the likelihood of exposure above the stated limits.

Nevada’s Statutory Change

Nevada Assembly Bill 398 was adopted on June 3, 2023 and became effective on October 1, 2023. It prohibits insurers admitted in Nevada from issuing or renewing policies that allow defense within limits. Assembly Bill 398, now codified as NRS 679A.210, was unique nationwide in the extreme breadth of its application, and its passage triggered an immediate response from the state insurance regulatory body. On July 21, 2023, before the law came into effect, the Nevada Commissioner of Insurance Scott Kipper wrote Nevada Governor Joe Lombardo expressing “grave concerns regarding carriers leaving the Nevada market altogether due to the impact of this new legislation.”

The Division of Insurance of the Nevada Department of Business and Industry acted swiftly, first issuing temporary emergency regulations before the new law came into effect followed by permanent regulations effective November 6, 2023. These regulations clarified and limited the scope of Assembly Bill 398. Under the current regulations (which have been adopted into the Nevada Administrative Code but not yet codified), the prohibition on defense within limits provision only applies to commercial general liability policies, healthcare professional liability policies, and auto and homeowners’ policies.¹ Professional liability policies outside of healthcare policies are unaffected. Furthermore, the regulation exempts risk retention groups, captive insurance companies that do not cover third party liability and nonadmitted insurers.² Together, the updated regulations limit the impact of Assembly Bill 398.

Similar Regulations in Other States

Rather than representing a possible sea-change in insurance regulation nationwide, the modified Nevada Assembly Bill 398 is now much more in line with the other state laws and regulations limiting the application of defense within limits policies. Other states imposing limits on defense within limits policies include Arkansas, Louisiana, Minnesota, New Jersey, New Mexico and New York.³ Like Nevada’s current regime, the prohibition on defense within limits policies within these states are limited in application.

For example:

• Louisiana’s statute exempts certain policies from the prohibition on defense within limits, including most professional liability policies.⁴
• New Mexico’s prohibition on defense within limits policies does not apply to many coverages with limits of liability over $500,000 nor to any commercial policy with limits over $5 million (except motor vehicle liability policies and medical malpractice policies).⁵
• New York’s statutory scheme allows for many types of policies, including professional liability and pollution liability policies, to allow eroding limits as long as they provide a minimum of $500,000 in per-occurrence limits.⁶

It remains to be seen whether another state will attempt to enact a statute as universally broad as Nevada’s Bill 398 as originally drafted.

The Impact on Businesses and Risk Managers

Even though Nevada’s defense within limits ban is not as comprehensive as passed by the legislature, it nevertheless may impact Nevada’s insurance market for policyholders. This disruption is unfortunate, as the policyholders in professional liability lines are often sophisticated commercial buyers who likely already have very large retentions and are not in need of the marketplace protections that small commercial buyers and individual consumers may need.

The new requirements could lead to increased insurer costs that will ultimately be passed onto policyholders in the form of higher premiums. For example, restrictions on defense within limits policies necessarily impact the cost-controlling benefits those policies were designed to impose. Plaintiff s’ bars, recognizing this fact, could be emboldened to needlessly extend litigation to force favorable settlements. These extra costs will inevitably be borne by policyholders in the future.

Furthermore, the uncertainty created by the potential for uncapped defense costs could cause insurers to leave the state entirely, leading to reduced coverage availability for Nevada insureds. Risk managers for Nevada-based companies should expect and preemptively address these challenges with their teams by creating endorsements setting sublimits for defense costs, switching to nonadmitted insurers, and setting the expectation with leadership for higher premiums.

For companies with a nationwide footprint, the patchwork of differing state prohibitions and limitations on this issue will increase the complexity (and thus the cost) of binding
insurance coverage in compliance with the various statutory requirements. Risk managers must be mindful of these differing state requirements and coordinate with their insurance advisors to ensure that their policies contain state-specific endorsements where appropriate.

Special thanks to Aaron Campbell for his contributions to this report.

Republished with permission. The full article, "Exploring Nevada’s “Defense Within Limits” Laws" appeared in RIMS Legislative Review on January 15, 2025.

Notes: 

¹ NAC R029-23 §2.
² NAC R029-23 §3.
³ A.C.A § 23-79-307(5)(A), LSA-R.S. 22:1272, M.S.A. § 60A.08 Subd. 13, N.J.A.C. 11:13–7.3, N.M. Admin. Code 13.11.2.8, 13.11.2.9, 11 NYCRR 71.2-71.3.
⁴ LSA-R.S. 22:1272.
⁵ N.M. Admin. Code 13.11.2.8, 13.11.2.9.
⁶ 11 NYCRR 71.2-71.3.