Monday, July 11, 2011

FYI: Ill App Ct Allows Negligence Claim Against Flood Determination Company

The Illinois Appellate Court for the Third District recently held that a
borrower's common law negligence action against a flood determination
company was not barred by the National Flood Insurance Act ("NFIA"), 42
U.S.C. § 4012a, that the flood determiner owed the plaintiff-borrowers a
duty of care in preparation of their flood determination, and therefore
that the plaintiff-borrowers could proceed with their common law
negligence claim against the flood determiner.

A copy of the opinion is available at:

The plaintiff-borrowers ("borrowers") refinanced their home through
Countrywide Home Loans, Inc. ("Countrywide"). As part of the refinancing,
Countrywide engaged its subsidiary, Landsafe Flood Determination, Inc.
("Landsafe"), to determine whether the borrowers' home was located in
special flood hazard area, as required by the NFIA. Landsafe determined
that the home was not in a special flood hazard area, and therefore
Countrywide did not require the borrowers to purchase flood insurance.
The borrowers' home was later damaged by widespread flooding in 2008 and,
after asking Countrywide for coverage, the borrowers learned that
Countrywide did not require them to purchase flood insurance. The
borrowers were otherwise uninsured.

The borrowers brought suit, alleging that Countrywide was negligent for
not requiring them to obtain flood insurance, and that Landsafe was
negligent when it determined their home was not in a flood zone. The
borrowers eventually conceded that their cause of action against
Countrywide was barred by the NFIA. However, they maintained that their
claim against Landsafe was not barred, but the trial court nevertheless
dismissed the borrowers entire complaint.

The borrowers appealed, and the appellate court reversed and remanded,
holding that the NFIA does not bar a state common law negligence claim
against a third-party flood determiner.

As you may recall, the NFIA "requires federally insured lenders of
mortgage real estate loans to determine if the borrower's property is
located in a special flood hazard area." 42 U.S.C. § 4012a(e)(1). In
addition, a "lender may delegate its flood determination duties to a
third-party flood determiner provided the flood determiner 'guarantees the
accuracy of the information.'" 42 U.S.C. § 4104b(d).

The Court first held that the NFIA "does not bar a common law negligence
claim brought by a borrower against a flood determiner." The Court
reasoned that the "plain language of the Flood Act authorizes lenders to
rely on a third-party flood determiner's findings without incurring
liability for the determiner's mistakes." See 42 U.S.C. §§ 4104b(d), (e).
"However, the Flood Act does not extend similar immunity to suits by
borrowers against flood determiners."

The Court next held that the borrowers could "maintain their common law
negligence complaint against Landsafe under Illinois law." Relying on six
factors set forth by the Illinois Supreme Court for determining whether a
duty exists where a relationship is not contractual, the Court held that
"Landsafe owed the Borrowers a duty of care in preparation of their flood
determination." See Rozy v. Marnul, 43 Ill.2d 54 (1969). In addition,
the Borrowers alleged that "Landsafe purportedly breached this duty when
it determined that the Borrowers' property was not located within special
flood hazard area," and that as a result of that breach, "the Borrowers
contend that they suffered damages in excess of $50,000."

Accordingly, the appellate court held that the borrowers' common-law
negligence action against the third-party flood determiner should not have
been dismissed.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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