“Burning Limits” Liability Insurance Policies Out in Nevada

Effective October 1, 2023, insurance policies issued or renewed in Nevada may not 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. It does not apply to policies existing on October 1, 2023, but it applies to the subsequent renewal of any such policies. Sometimes called “burning limits” policies, or “self-eroding limits,” “self-liquidating”, “depleting limits,” or “wasting limits” policies, these policies are common in professional liability or errors and omissions policies held by design professionals.

Background

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; that is, policies that 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 errors and omissions policies.

AB398 (which will be codified in NRS 679A), amended Chapter 679A of the Nevada Revised Statutes to provide as follows:

“Not withstanding 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:

1. Reduces the limit of liability stated in the policy by the costs of defense, legal costs and fees and other expenses for claims; or
2. Otherwise limits the availability of coverage for the costs of defense, legal costs and fees and other expenses for claims.”

Nevada is the first jurisdiction in the country to prohibit these burning limits policies. The new law applies to any insurance carrier 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.

Application

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.

Impact

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 errors and omissions and other insurance products in Nevada may be significantly impacted, with restructuring of programs to reduce insurance carrier risks. Many expect less predictable cost exposures to increase because of the new law. Some expect premium increases or insurance carriers to leave the Nevada market as some have left the California market.

Most certainly, the new law’s roll-out will affect litigation strategies, settlement negotiations, and judgment recoveries. With cost of defense uncovered by the policy, and the full policy limit exposed to a claim, prompt resolution of claims may increase as 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 defense costs which were otherwise previously covered within the policy limits. Strategies will definitely change without the balancing of maintaining sufficient coverage for settlement of judgment and having a funding source for broad application to a claim defense.

There remain many questions regarding the effect of the new law. Among those are whether governors, legislators, and insurance commissioners in other states will attempt to sponsor legislation emulating that of Nevada. Also of note is that, prior to the enactment of the new law, AB398 specifically precluded self-insured retentions from applying to defense costs, but this provision was struck prior to passage of the new bill. Although the new law still expressly prohibits provisions “otherwise limiting the availability of coverage for the costs of defense, legal costs and fees, and other expenses for claims,” the question remains as to whether self-insured retentions may be used for defense costs.

Only time, and inevitable litigation, will tell what the real ramifications of the new law will be. In the meantime, lawyers, risk managers and design professionals like architects and engineers are on notice that the winds are blowing differently in Nevada.

For any further analysis of how this decision will affect interests related to oil and gas production in California, or if you have any questions relating to this article, please contact William F. Bresee.

William F. Bresee is a Partner with Leech Tishman and West Coast Co-Chair of the firm’s Construction Practice group and leads the Energy & Natural Resources Industry Group. He is based in the Los Angeles office and can be reached at 626.796.4000 or wbresee@leechtishman.com.

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