Illinois Court: Homeowner Suit Against Flood Determination Firm May Proceed

August 19, 2011

A flood determination company may be sued by Illinois homeowners for failing to determine the couple’s home was in a flood plain, a state appeals court has found.

The Illinois Court of Appeals for the Third District reversed a lower court finding that the claim made by Jeffrey and Karen Kelcan against Landsafe Flood Determination Inc. (Landsafe) was barred by federal flood statutes.

The Kelcans owned a home in Watseka, Ill. In early 2007, they refinanced their home through Countrywide Home Loans Inc., which was required under the National Flood Insurance Act of 1968 (Flood Act) to determine whether or not the Kelcans’ home was in a special flood hazard area. If found to be in a flood zone, the Kelcans would have been required by the lender to buy flood insurance.

Countrywide hired Landsafe to investigate the home’s flood zone status and Landsafe determined it was not in a special flood hazard area, according to Justice Holdridge, who delivered the appeals court opinion. The Kelcans allege that Countrywide neither informed them of the determination nor required them to purchase flood insurance.

The Kelcans’ home flooded in 2008 during widespread flooding in Watseka. Although they had been required to purchase flood insurance by their previous lender, because Countrywide did not mandate coverage the Kelcans’ home was at that time uninsured for flooding.

The couple’s 2008 lawsuit alleges that Countrywide was negligent in not requiring the Kelcans to purchase flood insurance and that Landsafe was negligent in not determining the home was in a flood zone.

The Kelcans subsequently conceded that their action against Countrywide was barred by the Flood Act, which requires a federally insured lender to mandate flood insurance if the property in question is determined to be located in a flood zone.

The Justice Holdridge noted that previous court decisions in Illinois found that: a.) the Flood Act did not create a duty for lenders to inform borrowers of flood hazards; and b.) “borrowers cannot maintain a private cause of action that arises out of a lender’s failure to comply with the Flood Act.” The claim against Countrywide was dismissed.

The Kelcans did not agree to release Landsafe from the negligence claim. Justice Holdridge explained that the Kelcans “maintain that their negligence claim against Landsafe is based solely on the breach of a common law duty of care, and not the Flood Act. Further, they analogize their complaint to a professional negligence claim.”

The appeals court agreed that the Flood Act offered Landsafe, as a flood zone determiner, no protection from negligence claims.

Landsafe argued that without the Flood Act it “owed no duty of care” to the Kelcans, but the appeals court disagreed. The appeals court compared the flood determiner’s duty to that of a surveyor in a real estate transaction and said a flood zone determination directly impacts “the decision of the borrower to purchase flood insurance.” Landsafe had reason to believe that the Kelcans would rely on its flood determination, the court said.

“It is undesirable to force the Klecans to shoulder the burden of an erroneous flood determination,” Justice Holdridge wrote. The appeals court panel found that the Kelcans were foreseeable plaintiffs in this instance and that “a possible finding of liability will promote cautionary techniques in the flood determiner industry.”

The previous finding of the Iroquois County court was reversed and the case was remanded.

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