How Nevada’s New AB 398 Defense Cost Rule Could Change the Cost of a Commercial Litigation Case in Nevada

Key takeaways

• AB 398 and its implementing regulations limit an insurer’s ability to use attorney fees and defense expenses to reduce the liability coverage available to pay claims.
• For Southern Nevada businesses, the change can alter the cost-benefit analysis of pursuing or defending commercial litigation, especially in high-stakes disputes with substantial legal fees.
• Policy language and carveouts still matter, so companies should not assume every liability policy in Nevada treats defense costs the same way after AB 398.
• AB 398 may influence settlement timing, insurer strategy, and how plaintiffs and defendants in Nevada business litigation structure demands, tenders, and risk-sharing agreements.

What did AB 398 and Nevada’s new insurance regulations actually change about defense costs?

AB 398 and the accompanying regulations approved by the Nevada Legislative Commission target a problem that had been worrying Nevada businesses for years: liability insurance policies where every dollar spent on lawyers reduced the amount left to pay a claim. These “defense inside the limits” structures meant that in a hard‑fought commercial case, a company could see its nominal $1 million limit eroded by hundreds of thousands of dollars in defense fees before a judgment or settlement was even on the table. For a plaintiff who eventually prevailed, the practical recovery might be a fraction of the headline policy limit.

The new framework limits insurers’ ability to handle defense in that way. The regulations define what qualifies as a defense cost, what cannot be used to eat into the liability limit, and which policies are subject to the rule. In short, for covered policies, legal fees, expert bills, and other defense costs may no longer shrink the amount of liability coverage available to satisfy a judgment or settlement. Nevada did not abolish all policy variation, and certain lines of coverage and sophisticated surplus lines policies may have different treatment, but for many standard liability policies protecting Nevada businesses, the change is significant. It affects how all sides should think about the real dollars potentially available in a business dispute.

• Defense costs in many Nevada liability policies can no longer reduce indemnity limits.
• The regulation clarifies which defense expenses fall within the protection.
• Certain specialized or exempt policies may still handle defense differently.
• Commercial litigants must now read insurance policies and regulations together when valuing cases.

How AB 398 could change what a Nevada business lawsuit really costs to defend

From the defense side of Business Litigation and Commercial Litigation, the most immediate effect of AB 398 is on predictability. Historically, a medium‑sized Las Vegas company facing a contract or business‑tort claim might watch its insurer spend heavily on motion practice and discovery, knowing that every defense invoice reduced the pot of money available to settle. If the case dragged on and the insurer’s counsel was aggressive with hourly billing, the insured could find itself facing uncovered exposure earlier than anticipated. That risk often pushed companies to settle early to preserve the remaining policy limit.

With defense‑outside‑the‑limits treatment now mandated for many policies, that erosion dynamic changes. The insurer may be obligated to fund a more robust defense while still preserving the full liability limit for potential resolution. That can reduce the insured’s fear that its coverage will vanish through defense spending alone. At the same time, companies should not assume litigation is now “cheap.” Defense costs still exist; they are just allocated differently between insurer and insured, depending on policy language, deductibles, and any self‑insured retention. For some commercial defendants, AB 398 may make it more financially feasible to fight a claim through summary judgment or trial, while for others it will simply shift cash‑flow timing rather than lowering total spend.

• Insurers may fund more extensive motion and discovery practice without eroding limits.
• Insured businesses can reevaluate whether early settlement driven by limit erosion still makes sense.
• Deductibles and self‑insured retentions remain key drivers of out‑of‑pocket defense spend.
• Commercial defendants should revisit budgeting models for multi‑year litigation in light of AB 398.

What AB 398 could mean for plaintiffs’ settlement leverage and commercial case valuation

For plaintiffs in Nevada commercial disputes, AB 398 changes how a policy limit is translated into realistic recovery potential. In the defense‑inside‑the‑limits world, a plaintiff’s counsel had to discount the nominal policy limit by the likely defense burn. A $1 million limit might effectively feel like $600,000 or $700,000 once the defense team finished with depositions, expert discovery, and trial preparation. Settlement demands often reflected that reality, particularly in cases filed in the Eighth Judicial District Court where commercial litigation costs can escalate quickly.

Under the new framework, if a policy is subject to AB 398’s restrictions, a plaintiff may be dealing with closer to the full stated limit as indemnity. That does not mean plaintiffs can or will always collect that amount. Coverage defenses, exclusions, and disputed tender obligations still exist. But the plaintiff’s valuation model can be different when defense spend no longer directly drains the limit. In some cases, that may support higher demands or a willingness to litigate further before compromising. In others, if the insurer uses its separate defense obligation to vigorously contest liability, plaintiffs may face longer timelines or trial risks that offset the benefit of preserved limits.

How AB 398 interacts with other Nevada rules that affect commercial litigation cost

AB 398 does not operate in a vacuum. Nevada’s court‑annexed arbitration scheme under NRS 38.250, 38.255, and 38.258, recently adjusted to a $100,000 per‑plaintiff threshold for cases filed on or after January 1, 2026, also affects the structure and cost of civil disputes. While many large commercial cases exceed that threshold and proceed directly in district court, business disputes under that level may be shunted into mandatory arbitration before a full‑blown trial. Arbitrator and short‑trial fee awards are themselves capped by statute, which can limit one component of litigation cost even where AB 398 is in play.

At the same time, other recent Nevada Supreme Court decisions on attorney fee shifting under offers of judgment and the treatment of contingency fees underscore that fee exposure on both sides is more nuanced than a simple hourly tally. For defendants and insurers, fee shifting risk interacts with AB 398’s defense‑cost structure to shape overall exposure. For plaintiffs, the possibility of recovering fees in some commercial cases, coupled with insured defendants who now may have more indemnity capacity, can meaningfully influence strategy. Businesses in Southern Nevada that routinely litigate vendor, lease, franchise, or partnership disputes should understand how these rules interact rather than treating each development as isolated.

• The $100,000 arbitration threshold channels some lower‑value commercial claims into a different cost structure.
• Statutory caps on arbitration and short‑trial fees can limit specific categories of expense.
• Offer‑of‑judgment rules can still create significant fee‑shifting risk in appropriate cases.
• AB 398 alters how much of an insurer’s spend counts toward indemnity exposure versus separate defense obligations.

Practical planning steps for Southern Nevada businesses and in‑house counsel after AB 398

For Clark County and Southern Nevada businesses, the implementation of AB 398 is a prompt to review insurance and litigation planning rather than a reason to relax. Many companies rely on a mix of commercial general liability, errors and omissions, directors and officers, and specialty policies. Each may respond differently to AB 398 and its regulations, and exceptions for certain lines or markets can matter. In‑house counsel and risk managers should work with brokers to identify which policies are subject to the new defense‑cost protections and which may still permit some form of defense inside the limits. It is also worth understanding how defense obligations coordinate when multiple policies are triggered by the same commercial dispute.

On the litigation side, businesses should revisit how they budget for a substantial contract claim or business‑tort case. AB 398 may change the amount of out‑of‑pocket defense cost a company expects in the first year versus later years, and it can influence how comfortable management is taking a case through trial in the Eighth Judicial District Court or federal court. For plaintiffs pursuing claims against insured counterparties, the law reinforces the importance of early coverage investigation and thoughtful demand structuring aimed at policy limits that are no longer being consumed by hourly defense burn in many situations. An experienced Business Litigation team can help interpret these moving parts, but the starting point is awareness that Nevada has materially changed one of the levers that used to drive settlement pressure.

What it changes for someone filing now

1. Ask your broker or coverage counsel to confirm whether the defendant’s or your own liability policy in a pending business dispute treats defense costs outside the limits under AB 398.
2. When drafting a demand letter in a Nevada commercial case, adjust your valuation to reflect that, for many policies, the nominal policy limit may be closer to the actual indemnity capacity.
3. If you are a Southern Nevada business considering suit, factor in that your counterparty’s insurer may no longer face rapid limit erosion, which can reduce early settlement pressure and extend timelines.
4. Review your own litigation budget to distinguish between insurer‑funded defense spend and amounts you will owe due to deductibles, self‑insured retentions, or uncovered claims.
5. In cases near the $100,000 mark, evaluate whether court‑annexed arbitration under NRS 38.250 may interact with AB 398 to change how fees, costs, and insurance proceeds are allocated.
6. Discuss with your Commercial Litigation counsel whether to time any offer of judgment or settlement proposal to account for an insurer’s separate defense obligation and un‑eroded limits.
7. For ongoing long‑running disputes, revisit settlements that were previously unaffordable because defense‑inside‑the‑limits language would have left too little indemnity after years of fees.
8. Update internal risk‑management policies and contract templates to reflect how insurance-backed dispute resolution will work under Nevada’s post‑AB 398 environment, including requirements that counterparties maintain compliant coverage.

If a commercial dispute is what brought you here, see how O'Reilly Law Group approaches Commercial Litigation matters, or request a consultation at 702-382-2500.

This article is general information about Nevada law as of its publication date and is not legal advice about any particular situation. Reading it does not create an attorney-client relationship. Attorney Advertising. Prior results do not guarantee a similar outcome. To discuss a specific matter with O'Reilly Law Group, call 702-382-2500 or request a consultation online.

Sources

• Lawmakers adopt new insurance regulations meant to ease businesses' fears, The Nevada Independent
• Nevada Doubles Mandatory Arbitration Threshold to $100,000: What AB 3 Means for Civil Lawsuits, NatLawReview
• Nevada Statutes, Chapter 215, AB 3 (83rd Legislature, 2025), Nevada Legislature
• Nevada Supreme Court Limits How Much of a Fee Award Follows an Offer-of-Judgment Win, Litigators for Justice