Citizens Property Insurance Immunity from Bad Faith Insurance Violations and the State Action Doctrine

For some reason, one of my favorite non-insurance-related classes in law school was none other than constitutional law. Although the field of constitutional law is one that I enjoy reading and learning about, it is not often that first-party property insurance overlaps with constitutional law issues.

While there are situations in which both fields can and will overlap in practice, there often comes a time in which a certain insurance principle and the philosophy behind it will relate to or appear analogous to constitutional law principles.

In a recent discussion among several of my colleagues regarding Citizens Property Insurance Corporation, we discussed the Civil Remedy Notice immunity that Citizens, for one reason or another, was given. For those unfamiliar with this immunity that Citizens claims to avoid having a Civil Remedy Notice filed against the company, you can read more about the topic in Why Should Citizens Do Wrong and Get Away with It.

Chip Merlin, the author of the post, makes a great point when questioning why Citizens (the largest insurance company in Florida) should be shielded from liability for unfair claims handling and bad faith insurance practices:

I can think of no valid reason, but this is the sad and current situation. Citizens Property Insurance Corporation can thumb its nose at its customers without penalty, claiming immunity from consumer protection laws to which every other insurer in this state must comply. Why should Citizens have this advantage over every private insurance company in this state? It does not take a rocket scientist to figure out that an insurer that takes premiums from its customers and then delays or denies full benefits at the time of the claim can make a lot more money than by being honest and treating customers in good faith.

This topic made me think of one of the most popular constitutional law principles in federal constitutional claims: The State Action Doctrine. The State Action Doctrine is as follows:

The Bill of Rights in the U.S. Constitution, as a general rule, only regulates and restricts government action. It does not cover private individuals, organizations, or businesses. This means that a person can only bring a claim for a violation of their constitutional rights against a ‘state actor.’ Much of the time, the State Action Doctrine for federal constitutional claims offers clear guidelines as to who may be a defendant in a case alleging constitutional rights violations. Many exceptions exist, however, thanks to years of decisions from the U.S. Supreme Court. A private individual or business could become a state actor in certain circumstances, or the state could be held jointly liable for actions by a private individual or business.

The State Action Doctrine seems simple on its face. The provisions of the U.S. Constitution and its amendments apply to the government and those acting on its behalf, but not to private individuals or entities.1

In constitutional law class, this doctrine often comes up when learning about Due Process and the protections of the United States Constitution. Several cases that are taught to explain the State Action Doctrine involve private actors, such as a homeowner’s association, engaging in discriminatory practices against constitutionally protected classes of people. As this area of the law developed, the fact that an entity was technically a private entity, and not a governmental entity or actor, no longer allowed for the private actor to be afforded an absolute immunity from liability for violations of the U.S. Constitution.

Several cases began popping up in which it was argued that private companies that receive extensive funding from the government should be deemed a state actor rather than a private actor. Eventually, many court decisions later, a new rule of law was developed:

The mere fact that a private organization receives most of its funding from the government does not make it a ‘state actor.’ The organization may be deemed a state actor, and the state itself may be held liable, when the state ‘has exercised coercive power or has provided such significant encouragement…that the choice must in law be deemed to be that of the State.’ Blum v. Yaretsky, 457 U.S. 991, 1004 (1982).

If you take a look at the Citizens Property Insurance Corporation website, you will see in the “About Citizens” section the following:

Citizens was created by the Florida Legislature in August 2002 as a not-for-profit, tax-exempt, government entity to provide property insurance to eligible Florida property owners unable to find insurance coverage in the private market. Citizens is funded by policyholder premiums; however, Florida law also requires that Citizens levy assessments on most Florida policyholders if it experiences a deficit in the wake of a particularly devastating storm or series of storms.2

While the motivation to create an entity like Citizens is respectable, the characteristics that make up the company are far too similar to most other property insurance companies in Florida that are not shielded under the guise of being a government entity.

So, like Chip, I would like to pose a question: Why can Citizens – an insurance company whose main “state-like” characteristic that is used for its “state actor” classification is rooted in statewide funding through assessments – avoid the longstanding rule of law applied in Blum v. Yaretsky?

Not only that, but if you look at the company website, Citizens also has an entire section in which it uses its “good faith” purpose to explain its mission – found in the section titled “Purpose-Driven Mission”:

A Purpose-Driven Mission

Citizens Property Insurance Corporation plays a crucial role in Florida’s property insurance marketplace by providing property insurance protection to people who are in good faith entitled to obtain coverage through the private market but are unable to do so. As one of Florida’s leading insurers of Florida homes and businesses, we strive to ensure that our customers receive service that is comparable to private-market standards.

Citizens is a not-for-profit company whose employees are driven first and foremost by our mission of service to the people of Florida. In addition to providing a quality product and service, we strive to be good stewards of the premium funds entrusted to us and are committed to modeling the highest level of ethical behavior.

Our purpose-driven mission informs every action and decision we make, and we are proud of the valuable service we provide to our customers and the Florida marketplace.3

If Citizens can publicly advertise its efforts of good stewardship and its commitment to “modeling the highest level of ethical behavior,” then why can’t those statements be put to the test?

The Florida Insurance Civil Remedy Statute was designed to prevent insurance companies’ wrongful conduct and improper claims handling. I see no reason why a company that openly presents itself as the staple of good faith, with a commitment to the highest level of ethical behavior, should be given immunity from the system that was designed to quite literally test the validity of that statement.
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1 https://www.irglobal.com/article/the-state-action-doctrine-for-federal-constitutional-claims/#:~:text=The%20mere%20fact%20that%20a,significant%20encouragement%E2%80%A6that%20the%20choice
2 https://www.citizensfla.com/who-we-are#:~:text=Citizens%20was%20created%20by%20the,coverage%20in%20the%20private%20market
3 https://www.citizensfla.com/who-we-are#:~:text=Citizens%20was%20created%20by%20the,coverage%20in%20the%20private%20market