Not really a bug, but it's a gameplay issue that seems somewhat problematic to me. Basically, allowing the sovereign to found a city again if all their cities have been taken means that you can just leave the enemy sovereign to go about founding new cities in choice locations, while following behind to immediately capture them when the AI leaves them undefended soon after. Even supposing the enemy sovereign did remain in the city until a defender is trained, you can just wait until he leaves and then defeat the single weak unit left to defend. Even then, the fact that the enemy managed to lose all its cities in the first place means it's essentially been defeated already - forcing the player to hunt down a sovereign that has no further meaningful contribution to game is tedious; allowing the player to farm as many free cities as you can afford to support is just a silly exploit.

I'm not sure that there's a really cut and dry solution to this problem, beyond the obvious and perhaps undesirable: just don't let the sovereign re-found their kingdom. You could possibly try to make the AI significantly smarter about when it's safe to found a city again, forcing him to flee far away from your land. If the sovereign were smarter about when it is safer to leave the city, that might also suffice; forcing him to stay in the city means that you would at least have to kill him in order to take it - then again, forcing the sovereign to stay put like that in his first city would unfairly penalise him during the early game exploration/goody-hunting phase.