It concludes by suggesting new ways of promoting local land use regulations that risk generating claims of taking. In the absence of insurance, a risk-averse government may choose not to adopt beneficial land-use regulations—or not enforce existing ones. The problem for local governments is that any land use regulation comes with some risk of litigation and potential liability.
THE NATURE OF INSURANCE AND MUNICIPAL RISK
Existing insurance mechanisms can help prevent local authorities from being indemnified for willful breach of the takeover clause. The topic of risk management and liability insurance for land use litigation is not a technocratic backwater of local authorities, but an untheorized and under-researched area that shapes local authorities' ability and willingness to regulate. This section examines the relationship between risk and insurance in general, the reasons why insurance is valuable to local governments in particular, and the tools used to address municipal risk management.
Municipal Risk and the Role ofInsurance
This model therefore predicts that local officials in smaller and poorer municipalities will indeed be quite averse to risks that could have a measurable impact on property taxes, while officials in larger and wealthier municipalities should be closer to risk neutral.'. 34;[A]mong [intergovernmental risk pools], the predominant alternative risk financing strategy chosen by managers is debt issuance.") Qualitative empirical work supports the idea that local officials are in fact highly sensitive and averse to risks so cause a relative disadvantage."
Municipal Risk Management Strategies and Practices
THE ABSENCE OF INSURANCE FOR REGULATORY TAKINGS
This section first identifies the fact that municipal insurance policies—everywhere except Minnesota, inexplicably—exclude coverage for statutory taking claims. It concludes by arguing that this has distributional consequences, with smaller local authorities being hit harder than larger ones. The Takings Clause of the Fifth Amendment and its state analogues prohibit the government from seizing property without paying just compensation.”4 6 Where the government exercises its eminent power to condemn property, there is no question that it must pay.
If the regulatory burden is high enough, it can rise to the level of takeover, even if there is no express use of a significant area.'4 7 Such regulatory takeovers can result from overly restrictive zoning, denial of subdivision permits, or variances. , burdensome environmental regulations, and many other local regulatory measures.'4 8 Most of these regulatory takeover claims will be evaluated under Penn Central's ad hoc balancing test, which weighs—in a relatively inscrutable way—the character of the regulation, the extent of the regulation's intrusion into a clear (or perhaps reasonable) investment-backed expectations and resulting diminution in value.”4 9 As it turns out, municipal insurance excludes coverage for both condemnation and regulatory takings.
The Inverse Condemnation Exclusion
The four corners of the complaint are evaluated against the four corners of the insurance policy, and coverage—the insurer's duty to defend—is determined on that basis.. language varies from policy to policy, regardless of the issuing company."); see also Christopher C. Where a claimant makes a number of claims, the duty to defend will be triggered if the insurance covers one of the claimants' claims.' 7 Often, plaintiffs suing municipalities will make a series of claims articulating multiple theories of liability. Almost every municipal insurance policy—whether private or as part of a risk pool—contains some version of the following exclusion from coverage: 16o.
Formally, inverse condemnation is an eminent domain proceeding brought by the property owner instead of the government (it is the "reverse" of a traditional condemnation initiated by the government).1 6 2 It is a claim by the property owner that the government is contested. regulation is in fact an exercise of eminent domain. Inverse condemnation is, for all intents and purposes, the exclusive means of bringing regulatory action claims against a municipality or the state. The inverse condemnation exclusion is even broader than it seems because some courts have expanded its reach to exclude coverage for land use litigation even beyond regulatory adoptions. manner related to "inverse condemnation, and thus creative pleadings by a property owner, or creative characterization of those pleadings by a municipality, are unlikely to avoid the breadth of the exclusion."69 For example, in Transcontinental Insurance Co.
The North River District Court held that inverse condemnation preclusion applies to all plaintiffs' claims previously brought by the plaintiff in the River Oaks case. The inverse condemnation exclusion may therefore go much further than the insurance exclusion for regulatory takings claims and may exclude insurance coverage for any land use litigation. While the breadth of the exclusion varies somewhat by country, it is also clear enough that at least the most important claims are for regulatory takeovers.
For discussion of the impact of these different approaches on plaintiffs' procedural decisions, see Serkin, supra note 169.
Takings Risk and Regulatory Incentives
Municipal officials must decide whether the action creates more benefits than costs." Here, the benefits can be the preservation of open space and environmental protection or less beneficial goals such as exclusion or protectionism." On the cost side of the ledger are some quantifiable, such as lost property tax revenue if development doesn't happen. And some are speculative—or risky—such as the possibility of regulatory takeovers, lawsuits and liability. The option to litigate has an expected value to the municipality, calculated from the cost of the obligation discounted by its probability, plus litigation costs.186 Imagine that the government predicts that a takeover claim for the cut will cost the government $4 million, but that the appropriate estimates the probability of losing only 10 per cent.
But for a risk-averse municipal official, a 10% chance of a $4 million loss would outweigh the cost side of the ledger. To give an idea of the potential costs, land use litigation in Minnesota accounts for approximately 22% of all liability costs, of which 85% comes from litigation costs.'8 8 Land use litigation is certainly a broader category than taking litigation alone. , but remember that in many states the inverse condemnation exclusion applies to both.'"8. In other words, these claims are generally not about paying damages to someone, but rather about paying for the legal defense of the city.").
It excludes coverage for: "Liability arising out of or in any way related to any action of the principles of eminent domain, penalty proceedings or "inverse penalty", by whatever name. internalize all costs of its regulations of use of land. This deduction simply reflects the reality of the doctrine and the underlying normative perspective that most regulatory burdens should not require compensation.
Distributional Effects of the Reverse Condemnation Exclusion In addition to concerns about the willingness of local authorities to.
Distributional Effects ofthe Inverse Condemnation Exclusion
ADDRESSING THE INVERSE CONDEMNATION EXCLUSION
If the absence of municipal liability insurance imposes all the costs listed above, why does takeover insurance not yet exist. This section explores these possibilities and, after identifying and rejecting some of the reasons for the absence of insurance, argues that states should subsidize some types of regulatory action by providing insurance against potential litigation arising from it. See id at 341 ("Insurance policies commonly contain an 'intentional' tort exclusion, and the standard explanation for this exclusion is that the intentional tort is within the insured's control in a way that makes insurance inadvisable." (quoting ROBERT E.
240 For a discussion of the role of insurance in police misconduct cases, see Rappaport, supra note 9. holding that takings claims are concerned exclusively with the regulation's impact on plaintiffs' property rights and not with intent. government). It may be that only those governments that perceive a real risk of takeover litigation will be likely to purchase insurance.262 Their perception of risk will be based on a combination of the regulatory environment and local developer litigation.
Insurance companies can address both adverse selection and moral hazard problems with better information and more fine-grained risk assessments or experience assessments.2 6 3 For example, by charging worse drivers more, the size of cross-subsidies in the insurance pool will decrease. For an argument that bundling different coverages minimizes adverse selection, see French, supra note 150, at 11 ("The risk of adverse selection is reduced... when all of the most common types of loss risks are bundled into the same policy."). Of course, the fact that there are so few debt collection lawsuits can pose an additional challenge if local officials are generally unaware of the risk.
At least anecdotally, competition for municipal insurance policies often does not drive the quality of coverage provided.
State Insurance as Municipal Subsidy
There is therefore a real concern that local governments will invest too little in those activities.28 4 State subsidies help to align local incentives with the interests of the state as a whole. There is an additional reason that liability may entail a smaller expected loss for the state than for a local government. Therefore, the risk of liability may decrease when the state intervenes, regardless of relative risk aversion.
How much will the state have to subsidize the regulatory action to encourage the local government to act. Now the state will have to pay more, and potentially a lot more, to get local governments to act. It is quite clear that the state can provide a valuable subsidy to local regulatory action by assuming some or all of the risks of litigation and liability.
The proposal here would allow the local government to request the state to take out insurance by denying the permits. From the state's perspective, the decision whether to extend protection to local government will depend entirely on the state's assessment of the value (or harm) of the development. In essence, giving the state discretionary powers to shield local governments from liability is simply upstream of policy.
But risk aversion provides a new reason why local governments may forgo regulatory actions that would, in fact, make the state's citizens better off.
