National Flood Insurance Act of 1968

The National Flood Insurance Act of 1968, 42 U.S.C. Sec. 4012a (2006) (the “Flood Act”), requires federally insured lenders of mortgage real estate loans to determine if the borrower’s property is located in a special flood hazard area.

Following an affirmative flood determination, the lender must notify the borrower of that determination and require the borrower to purchase flood insurance. If the borrower fails to purchase flood insurance within 45 days of the lender’s notice, “the lender or servicer for the loan shall purchase the insurance on behalf of the borrower and may charge the borrower for the cost of the premiums and fees incurred by the lender or servicer for the loan in purchasing the insurance.” 42 U.S.C. Sec. 4012a(e)(2). 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. Sec. 4104b(d).

While Illinois courts have held that the Flood Act does not create a duty on the part of mortgage lenders to disclose flood hazards to borrowers (Mid-America Nat’l Bank of Chicago v. First Savings & Loan Ass’n of South Holland, 161 Ill. App. 3d 531 (1987)) and that borrowers cannot bring a private cause of action arising out of the lender’s failure to comply with the Flood Act (Lehman v. Arnold, 137 Ill. App. 3d 412 (1985)), the Illinois Appellate Court for the Third District has held that a borrower may in certain circumstances bring a private cause of action against a third-party flood determiner. Klecan v. Countrywide Home Loans, Inc., Appeal No. 3-10-0084 (June 29, 2011).

In Klecan, the Appellate Court found that while the plain language of the Flood Act authorized lenders to rely upon third-party determiners without incurring liability for the determiner’s mistakes, the Flood Act did not extend similar immunity to suits by borrowers against flood determiners. The Court went on to analyze Klecan’s complaint to see if it stated a claim for negligence. To state a claim for negligence a plaintiff must plead facts demonstrating the existence of a duty owed by the defendant to the plaintiff, a breach of that duty, and an injury proximately caused by the breach.

In deciding whether the flood determiner owed a duty to the borrower, the Appellate Court relied upon prior case law where the Illinois Supreme Court held that a surveyor could be held liable to a third-party purchaser who built his garage on his neighbor’s lot as a result of a negligent survey. Rozny v. Marnul, 43 Ill. 2d 54 (1969). The Appellate Court found that the flood determiner’s role is of similar importance in a real estate transaction as that of a surveyor. It further found that while the determiner was hired by the lender, its finding directly impacts the decision of the borrower to purchase flood insurance. Because the Klecans were foreseeable plaintiffs, the Court held that the flood determiner owed them a duty of care in the preparation of their flood determination.

With the flooding that has occurred in Chicago recently, home owners without flood insurance should make a determination whether a third-party flood determiner made a mistake in determining whether their property was located in a special flood hazard area.