State Sponsored Homeowner's Insurance and Bad Faith Breach of Insurance Contract Claims: The Applicability of Sovereign Immunity

By Douglas Scott MacGregor

Eight coastal states in the Southeastern United States are especially vulnerable to property damage from hurricanes. For homeowners in these eight states, the continuing threat of violent storms means homeowner’s insurance is a costly necessity. Over the last quarter of the 20th Century, the coastal populations of those states grew rapidly, as did property values. When major storms, including the infamous Hurricane Katrina, struck in 2003 through 2004, the damages were high. As a result, premiums have risen sharply and an increasing number of private insurers have refused to write policies in these states. This has forced many coastal homeowners to rely on government sponsored property insurance programs.

Six of the coastal states — Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina, and Texas — have some version of a state sponsored property insurance program.

Generally, these programs create an association made up of private insurers, and the association is an insurer of last resort. In Florida, however, Citizens Property Insurance Corporation, formed by the state, is the entity charged with providing insurance for residential and commercial property for those unable to procure insurance in the private market. It is considered a government entity. Thus, the question has arisen: can Citizens be sued for bad faith breach of an insurance contract, or is it immune?

In 2009, a Florida appellate court decided that not only is Citizens not subject to bad faith claims under the state’s statute requiring good faith settlement of claims, but under Citizens enabling legislation, only certain categories of suit are permitted to be brought Citizens, and bad faith claims are not among them. The Florida Supreme Court appears poised to address the issue.

If private insurers continue to refuse to write property insurance in coastal hurricane-prone areas, state governments may need to revise their property insurance programs and increase the role of the state. Even under current programs, the potential liability of state sponsored programs is likely to grow. In the current economic climate for states, state governments may find it increasingly necessary to insulate their programs from preventable costs. That may result in legislation that specifically bars bad faith claims against state sponsored property insurance programs as may be the case in Florida. Alternatively, states may seek to bring the programs under the umbrella of sovereign immunity and tort claims statutes that limit the amount of total damages and usually bar punitive damages completely. Thus, even if a bad faith action were permitted, its benefit would be greatly minimized.

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Douglas Scott MacGregor earned his law degree from the University of Florida, Levin College of Law and a Masters in Social Work from the University of South Florida. He has been an update author for the Appleman on Insurance Law treatise for over 10 years and has authored more than 15 books, mostly on real property issues.

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