Evolving industry practices may affect how you structure insurance policies. In 2023, Nevada became the first state to ban “burning limits” provisions for several types of liability insurance. By understanding how this affects your own issuance process, you can continue to provide consistent coverage while maintaining compliance.
Understanding Nevada’s prohibition on “burning limits”
Traditionally, a burning limits policy allows insurers to subtract the cost of legal defense from the policyholder’s total coverage limit. This arrangement has allowed insurers to manage exposure to high-cost litigation.
However, Nevada now prohibits insurers from implementing these practices for many liability policies. Instead, as an insurer, you must treat defense obligations separately from policy limits. This is intended to provide policyholders with enough coverage for settlements.
What happens when your policyholder faces a lawsuit?
When a lawsuit arises, you may be responsible for funding your policyholder’s defense on top of the full policy.
Litigation that involves extensive investigation can generate significant defense costs. Given these circumstances, it is important to evaluate claims with both defense costs and potential payouts in mind. This requires you to approach litigation strategically to ensure compliance and avoid disputes with your policyholders.
Maintaining ongoing compliance
As best practice, periodically review policy forms and endorsements whenever updates are made. Regular reviews can help confirm that you are not reintroducing language suggesting burning limits where they are not allowed. You may also build compliance checks into your policy issuance and renewal processes. These checks reduce the risk of outdated language appearing.
Moreover, keep clear records when modifying procedures. Documentation can also serve as a reference point when facing questions about coverage interpretation.
Adapting to regulatory changes
Nevada’s ban on burning limits policies may require a shift in how you manage claims and litigation strategies if you haven’t made them yet. However, it can also serve as an opportunity to improve claims oversight.
Staying informed about new regulatory policies can help protect your organization in the long run. By ensuring compliance, you can deliver reliable coverage to policyholders.
