In today’s ever-evolving business landscape, protecting your enterprise from unforeseen risks is paramount. Executive and Professional Liability insurance is a cornerstone of safeguarding businesses and their leaders against potential corporate and personal financial perils arising from lawsuits and claims. However, a recent development in the insurance industry has raised significant concerns, as the Nevada Legislature passed AB 398, imposing a ban on Defense Inside the Limits (DIL) policies. This bold move has sparked widespread discussions within the insurance realm, particularly impacting essential coverage areas such as Directors and Officers (D&O) Liability, Employment Practices Liability Insurance (EPLI), Professional Liability, Cyber Liability, and Fiduciary Liability. In this blog post, we’ll dissect the rationale behind this ban, the potential ramifications for businesses and insurers alike, and the complex challenges it introduces for policyholders operating within the Silver State.
Understanding Defense Inside the Limits (DIL) Policies
Before we delve into the implications of the Nevada ban, let’s establish a firm understanding of DIL policies. In traditional DIL policies, defense costs incurred during legal proceedings are drawn from the total policy limit. Each dollar spent on defense reduces the remaining aggregate by an equal amount, potentially constraining a policyholder’s capacity to manage future claims, or the existing claim, effectively. DIL, while common, balances the business risks with the ability to control runaway litigation costs.
Quebec, Canada is the only jurisdiction to attempt to prohibit DIL policies. As a result of this ban of DIL policies, carriers either refused to write the coverages or charged so much premium as to make them unaffordable, leaving businesses with the undesirable choices of operating without insurance or closing due to the lack of coverage – a predicament that resonates even more profoundly in high-risk industries like medicine. Can you imagine performing surgery without Medical Malpractice Insurance? Ultimately, because of business pressure, Quebec abandoned the DIL prohibition.
Nevada’s Ban on DIL Policies
In a concerted effort to safeguard the interests of policyholders and foster fair and comprehensive coverage, Nevada lawmakers passed AB 398, enacting a progressive law that prohibits the use of DIL policies. Effective October 1, 2023, insurers are mandated to separate defense costs from the policy limit. This revision ensures policyholders have unhindered access to their full limits for damages and indemnification. This directive does not apply to risks underwritten through captives or Risk Retention Groups.
Impact on Directors and Officers (D&O) Liability Insurance
Directors and Officers (D&O) Liability Insurance is a cornerstone of protection for boards and corporate leaders facing claims of wrongful acts in the course of their duties. However, Nevada’s DIL may significantly affect the companies’ abilities to secure such coverage. Insurers are likely to refuse to write D&O coverages or other Management or Professional Liability coverages without a means to cap their exposures. Defense Costs Outside the Limits might embolden management to contest or plaintiffs to pursue frivolous or risky claims, potentially leading to a surge in Nuclear Verdicts, (e.g., judgments exceeding $10 million) and rising litigation costs.
Navigating Employment Practices Liability Insurance (EPLI)
Employment Practices Liability Insurance (EPLI) provides a vital shield for businesses against claims stemming from employment-related issues like discrimination, harassment, wrongful termination, and others. However, Nevada’s ban on DIL policies might impede businesses’ abilities to secure this coverage effectively. Insurers may become reluctant to fund unlimited defense costs for claims that could have been resolved with minimal or no damages. Defense Costs Outside the Limits may make EPLI unprofitable, forcing carriers to withdraw from writing risks in Nevada.
Affecting Professional Liability Insurance (E&O) Coverage
Professional Liability Insurance, also known as Errors and Omissions (E&O) Insurance, is an imperative safeguard for professionals rendering services to third parties, protecting them from potential claims of negligence, errors or omissions in their duties. The Quebec precedent illustrates the potential repercussions if carriers cease to offer coverage without a mechanism to cap defense costs and damages. Professionals could be left with the unenviable choice of working without insurance or ceasing operations.
Unfolding Challenges Across Multiple Lines
Other lines of coverage, encompassing Cyber Liability, Technology E&O, and Fiduciary Liability, are poised to be significantly affected by this legislation. Carriers could opt to withdraw from these markets or substantially hike premiums, making insurance impractical for businesses.
Navigating the Landscape
As we navigate this shifting landscape, it’s clear that the Nevada Legislature’s ban on DIL policies will ignite an array of consequences. While the intention to preserve aggregates for damages and settlements is evident, the prohibition on DIL policies may trigger the law of unintended consequences. Carriers must adjust their underwriting strategies, potentially exiting the market altogether if the risk becomes too great. Clients may encounter challenges in obtaining coverage with reasonable terms and premiums, ultimately leading to the difficult choices of paying higher premiums, operating without insurance, or even shuttering their operations.
The Nevada Insurance Commissioner is already taking action in response to AB 398, highlighting the necessity of Executive and Professional Liability policies that incorporate defense costs within the limits. To note, AB 398 affects a wide-mix of entities including casinos, hospitality, utilities, non-profits, hospitals, lawyers, accountants, doctors, technology, cities, counties, and other businesses.
As the insurance landscape continues to evolve, vigilance regarding legislative shifts becomes paramount. Executives and business owners must remain informed to make well-calibrated decisions concerning their insurance coverage requirements. At Liberty, we’re committed to navigating these complexities alongside you, ensuring your enterprise remains resilient in the face of emerging challenges.
For more information on Liberty’s Executive Liability offerings, please reach out to Bill Holden, SVP (Executive Liability Practice Leader), The Liberty Company Insurance Brokers.