(Article from Insurance Law Alert, May 2017)
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Reversing in part a New York trial court decision, an appellate court ruled than a bond insurer cannot rely on state statutory law to avoid proving loss causation in its fraud-based suit against Countrywide Financial Corporation. Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2017 WL 2115841 (N.Y. App. Div. May 16, 2017).
The suit arose out of securitizations consisting of over 375,000 pooled residential mortgage loans with an original principal balance of approximately $25 billion. Ambac provided insurance for the securitizations, under which it agreed to insure payments of principal and interest due to investors. Following the failure of the securities to perform, Ambac paid more insurance claims than it anticipated and ultimately entered statutory rehabilitation. Ambac then sued Countrywide, alleging that it fraudulently induced Ambac to insure the securitizations and breached representations and warranties made in transaction documents. Both parties moved for summary judgment on various issues.
The appellate court ruled that to recover, Ambac is required to prove all elements of its fraudulent inducement claim, including justifiable reliance and loss causation. The court rejected Ambac’s argument that New York Insurance Law § 3105 dispenses with the common law requirement of proving those elements. The court explained that Section 3105, which provides that a material misrepresentation “shall avoid [a] contract of insurance” and “defeat recovery thereunder,” does not create a separate cause of action, but rather codifies common law insurance principles. The court further reasoned that Section 3015 is inapplicable because it generally applies to rescission claims (rather than claims seeking monetary damages), and Ambac’s policies are expressly unconditional and irrevocable. Notably, other New York courts, addressing the same issue, have reached a different conclusion. See MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 963 N.Y.S.2d 21 (1st Dep’t Apr. 2, 2013) (rejecting Countrywide’s argument that Insurance Law §§ 3105 and 3106 bar the “recovery of payments made pursuant to an insurance policy without resort to rescission”); MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 39 Misc.3d 1220(A) (N.Y. Sup. Ct. N.Y. Cnty. Apr. 29, 2013) (insurer need not demonstrate justifiable reliance for fraudulent inducement claim under § 3015).
The court also ruled on the scope of permissible damages against Countrywide. Among other things, the court ruled that Ambac was not entitled to damages for all past and future claims paid under the policies, reasoning that Ambac “accepted the risk that an economic downturn could cause the loans to default and trigger its obligation to pay.” However, the court held that the trial court should not have dismissed Ambac’s reimbursement claim, finding that the relevant transaction agreements entitled Ambac to reimbursement for claims paid as a result of Countrywide’s failure to abide by the repurchase protocol, and that a separate remedy-limiting provision did not apply to such reimbursement claims.