Getting Back Improperly Obtained Policy Benefits: Rescissory Damages Do Not Require Causal Connection Under New York LawMarch 14th, 2012
In MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 936 N.Y.S.2d 513 (N.Y.Sup. Ct. Jan. 3, 2012), the New York State Supreme Court, New York County, ruled that a bond insurer need not demonstrate a causal connection between its insured’s alleged misrepresentations and payments made under policies issued to the insured in order to obtain rescissory damages—the amount paid less premiums received—under a fraudulently obtained insurance policy.
MBIA Insurance Corporation alleged that its insured misrepresented the quality of underwriting for mortgage loans backing securitizations that MBIA insured. In particular, MBIA alleged the insured: (i) misrepresented loan-to-value ratios, debt-to-income ratios and borrowers’ FICO scores; (ii) falsely represented that the loans complied with the insured’s underwriting standards; and (iii) falsified or inflated ratings for the loans.
MBIA moved for summary judgment. MBIA contended that it need not establish a causal connection between the insured’s alleged misrepresentations and payments made under MBIA’s insurance policies in order to rescind based on claims of fraud and breach of warranties. The insured argued that MBIA should not be entitled to rescissory damages for payments it made under the subject policies unless it could prove that the insured’s misrepresentations were the direct cause of those payments.
The court ruled that there is no basis under either New York insurance or common law to require an insurer seeking rescission to establish a direct causal link between the insured’s misrepresentations and the payment of claims made under the policy. Contrasting the heightened proof requirements for fraud, which require that damages must result from the material misrepresentations, the court held that an insurer seeking to rescind a policy based upon its insured’s fraudulent conduct need only show that the insurer would not have issued the policy on the same terms but for the insured’s misrepresentations. The court concluded that an insurer seeking rescissory damages based on fraud is not required to demonstrate the damages element of the traditional fraud claim, as the remedy sought is based in rescission and not compensatory damages.
In so ruling the court rejected the insured’s argument that MBIA must either prove its claim for fraud, including damages directly caused by the alleged fraudulent conduct, or be limited to rescission of the policy. MBIA argued that rescission would not be an appropriate remedy in this matter because it would harm the policies’ intended beneficiaries, the insured’s customers. The court noted that where rescission is warranted, but impractical, rescissory damages may provide the insurer with the financial equivalent of rescission. The court concluded rescissory damages equivalent to the amount paid under the subject policies, less premiums received from the insured, would make MBIA whole without providing a windfall.