Three Months That Almost Killed the Nevada Insurance Markets

As proclaimed in “Home Means Nevada to Me,” the official song of the state of Nevada, “It’s the place of a thousand thrills.”

This spring, the insurance industry got to experience a good swath of those thrills firsthand.

On March 24, a four-line bill was introduced in the Nevada Assembly: AB 398, which generally bars the inclusion of defense costs within the coverage limits of a “liability insurance” policy. Less than a month later, on April 21, the bill was passed by the Nevada Assembly. The Nevada Senate passed the bill on May 26, and the governor signed it into law on June 3. It was an efficient process—one committee hearing in each chamber and one vote in each chamber. Two-and-a-half months start to finish. This is definitely not how we legislate in D.C.

I started receiving emails about Nevada AB 398 on June 29. At first, just a few and then an onslaught. Many of us spent the next two weeks thinking of little else. Some feared the legislation would be broadly construed and apply to essentially any policy that includes a liability component (including personal automobile and homeowners insurance as well as a broad array of commercial coverages) issued by either an admitted or a non-admitted carrier. This would cripple the Nevada insurance markets.

“The Division has grave concerns regarding carriers leaving the Nevada market altogether due to the impact of this new legislation,” wrote Insurance Commissioner Scott Kipper in a July 13 letter to Gov. Joe Lombardo asking for his approval of emergency regulations interpreting AB 398. The Nevada commissioner further explained that the law, if not properly interpreted and applied, will lead to capacity shortages and dramatic premium increases for Nevada businesses.

Those emergency regulations, which the governor did indeed sign into law, dictate that AB 398:

• Does not apply to non-admitted insurance policies
• Applies only to lines of insurance defined specifically as “liability insurance” under the Nevada code
• Allows the establishment of separate “defense costs” limits (down to $0) provided that they do not diminish the core liability coverage limits and are separately stated and priced (if not $0) on the policy declaration page.

The Division of Insurance also issued an accompanying set of frequently asked questions in conjunction with its emergency regulation that largely reiterate the regulation itself but that do include three important additional clarifications.

First and foremost, the law’s reference to “policies of liability insurance” means the definition of such policies as currently defined in the Nevada insurance code. In the commissioner’s letter to the governor, he further noted:

“The types of liability policies that are expected to be impacted by AB 398 include, but are not limited to: Medical Malpractice; Errors and Omissions and other professional liability policies; Directors and Officers; Cyber Liability; Employment Practices Liability; Pollution and Environmental Impairment; Fiduciary Liability; Construction Defect; Products and Clinical Trial Liability; and Excess and Umbrella Policies.”

Second and relatedly, the law does not apply to any policy that does not insure third-party liability exposures.

And third, the law does not apply to risk-retention groups.

One of the more hotly debated issues was whether the law would be construed to apply to policies purchased from non-admitted carriers. I believe that there are strong statutory construction arguments which dictate that the law not apply to non-admitted policies, and we presented those arguments to the Division of Insurance. There are even stronger arguments, however, that applying AB 398 to non-admitted policies would be impermissible under both the due process clause of the United States Constitution and the McCarran-Ferguson Act.

In the seminal 1962 Todd Shipyards case, the United States Supreme Court, quoting from the McCarran legislative debates which relied in part on the prior Supreme Court holdings on which McCarran itself had relied, squarely stated that “a State does not have power to tax contracts of insurance or reinsurance entered into outside its jurisdiction by individuals or corporations resident or domiciled therein covering risks within the State or to regulate such transactions in any way.”

The states do, of course, retain oversight over the brokers who intermediate the non-admitted markets on behalf of their clients, and both the scope of that authority and its limitations provide the framework for the Non-Admitted and Reinsurance Reform Act (NRRA) that was enacted as part of the Dodd-Frank Wall Street Reform Act in 2009.

The Nevada AB 398 experience reminded me both of the regulatory tumult that undergirded the non-admitted space prior to the enactment of the NRRA and of the regulatory certainty of the NRRA directive that only the home state of the insured can regulate the surplus lines’ broker’s activities, which have allowed that market to become so robust.

The AB 398 emergency regulation became effective on July 21, and, in accordance with Nevada law, it will expire 120 days thereafter, or on Nov. 21. Under Nevada law, an emergency regulation cannot be extended; therefore, a permanent regulation must be put into place through a formal rulemaking process, which already is underway.

One reason that the Nevada legislature moves quickly when it is in session is that there is a long time between sessions. Unless the governor convenes a special session, which is much less likely now, the legislature will not get an opportunity to repeal AB 398 until it next meets in January 2025.