Nevada recently joined two other states in banning insurance policies that erode with defense costs.  However, the Nevada law is both broader and more ambiguous than the others.  How will this law and the seemingly growing movement to outlaw eroding limits policies affect you?  Potentially, in many ways.

 The Nevada statute, Nevada Revised Statute 679A, is very short and states 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:

1.    Reduced 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.

In the design and construction industry, liability policies where defense costs erode liability policy limits are legion.  Most professional liability policies issued to architects, engineers, and other design professionals contain eroding limits.  Some commercial general liability policies have sub-limits with eroding limits if certain risk transfer clauses are not included in subcontract agreements.

Eroding policies are a double-edged sword.  On one side, they allow insurers to underwrite policies for expensive and sometime risky endeavors while still charging reasonable premiums.  On the other side, defense costs on expensive and risky endeavors can be very large which tend to reduce the liability policy limits that would otherwise be available to settle a claim or pay a judgment.

The Nevada statute differs significantly from statutes passed in two other states, Louisiana and New Mexico.  In Louisiana, the Insurance Commissioner has authority to exclude certain types of coverages from the statute, including professional liability, directors and officers liability, and employment practices liability insurance.  In New Mexico, the statutory prohibition of defense-within-limits policies specifically excludes certain types of policies, including but not limited to professional liability, directors and officers liability, and employment practices liability policies with policy limits in excess of $500,000, or to any policy with limits in excess of $5 million.

Nevada’s statute also presents a problem of scale that neither the Louisiana nor the New Mexico statutes do.  Owing to its favorable business climate, Nevada is home to many national corporations, increasing the likelihood that the prohibition on defense-within-limits policies may spill across state borders and create insurability problems elsewhere.

Assuming Nevada Legislature does not amend the statute to exempt professional liability policies, the law will likely have a few immediate and significant impacts on the construction industry.  Insurers may impose self-insured retention requirements, per claim deductible amounts, or renewal premiums, or all of the above on professional liability policies issued to architects and engineers.  Insurers may also opt not write certain lines of business in Nevada. Design professionals, facing higher insurance premiums and greater uninsured liability, may choose to join the already sizeable percentage of design professionals who do not carry professional liability insurance.

One impact is certain, however.  Nevada will keep insurance coverage lawyers very busy interpreting the ambiguous second part of the statute, prohibiting “limits” on the availability of coverage for the costs of defense, and guiding owners, developers and construction contractors through this new insurance minefield.

The attorneys in our Austin and Dallas offices have significant experience representing many different participants in the construction industry, including owners, developers, design professional and general contractors.  We are available to answer any questions you may have about how the Nevada law may impact your business or existing projects.  Please contact us at info@gstexlaw.com.

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