Ambac Assurance Corporation, et al., Appellants,v.Countrywide Home Loans, Inc., et al., Respondents, Bank of America Corp., Defendant.BriefN.Y.June 6, 2018APL-2017-00156 New York County Clerk’s Index No. 651612/10 Court of Appeals of the State of New York AMBAC ASSURANCE CORPORATION and THE SEGREGATED ACCOUNT OF AMBAC ASSURANCE CORPORATION, Plaintiffs-Appellants, – against – COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE SECURITIES CORP. and COUNTRYWIDE FINANCIAL CORP., Defendants-Respondents, – and – BANK OF AMERICA CORP., Defendant. BRIEF FOR AMICUS CURIAE NEW YORK INSURANCE ASSOCIATION, INC. ROBERT S. PASTEL PASTEL & ROSEN, LLP Javier R. Tapia, Of Counsel 130 Washington Avenue Albany, New York 12210 (518) 462-4715 Attorneys for Amicus Curiae New York Insurance Association, Inc. PRINTED ON RECYCLED PAPER RULE 500.1(f) DISCLOSURE STATEMENT Amicus Curiae, New York Insurance Association, Inc. (“NYIA”), through their attorneys, state that NYIA is a domestic not-for-profit corporation established pursuant to the laws of the State of New York. NYIA has no parent organization and has one affiliate, the New York Insurance Scholarship Foundation, Inc., a 501(c)(3) public charity, the sole purpose of which is to support the education of students pursuing a degree in risk management or insurance in New York State in an effort to ensure the viability of the industry. i TABLE OF CONTENTS STATEMENT OF INTEREST OF AMICUS CURIAE ............................................. 1 ARGUMENT ............................................................................................................. 2 I. NEW YORK COMMON LAW HAS LONG HELD THAT INSURERS DO NOT NEED TO PROVE JUSTIFIABLE RELIANCE OR LOSS CAUSATION WHEN ASSERTING A CLAIM OF FRAUDULENT INDUCEMENT TO AN INSURANCE CONTRACT THROUGH MATERIAL MISREPRESENTATION BY THE INSURED .................. 2 II. WHERE RECISSION OF A FRAUDULENTLY OBTAINED POLICY IS NOT AVAILABLE RECOUPMENT OF PAYMENTS MADE TO SATISFY CLAIMS ON THE POLICY IS A JUST AND PROPER REMEDY ................................................................................................. 10 A. Principles of New York equity jurisprudence and sound public policy allow an insurer to recoup payments made on a policy even where rescission ab initio is unavailable as a remedy ................... 10 B. Even if rescission ab initio is unavailable to Ambac, Ambac should be allowed to recoup payments made on the policy Countrywide applied for pursuant to principles of New York equity jurisprudence and as a matter of sound public policy ........................................... 18 CONCLUSION ........................................................................................................ 21 ii TABLE OF AUTHORITIES Cases Page(s) Aioss v. Sardo, 223 A.D. 201 (3d Dept., 1928), aff’d 249 N.Y. 270 (1928) ......................... 14, 18 Ambac Assurance Corporation v. Countrywide Home Loans, Inc., 151 a.d.3D 83 (1st Dept., 2017) .................................................................. 2, 3, 21 American Surety Co. of New York v. Patriotic Assur. Co., Limited, 242 N.Y. 54 (1926) .............................................................................................. 5 Admiral Insurance Company v. Joy Contractors, Inc., et al., 19 N.Y.3d 448 (2012) .......................................................................................... 8 Armour v. Transatlantic F.I. Co.., 90 N.Y. 450 (1882) .............................................................................................. 3 Baljit v. Suzy’s Dept. Store, Inc., 211 A.D.2d 555 (1st Dept., 1995) ...................................................................... 14 Becker, Moore & Co., Inc., v. United States Fidelity & Guaranty Co. et al., 74 F.2d 687 (2d Cir., 1935) ................................................................................. 9 Centro Empresarial Cempresa S.A. v. América Móvil, 17 N.Y.3d 269 (2011) ........................................................................................... 3 Christiania General Ins. Corp. of New York v. Great American Ins. Co., 979 F.2d 268 (2d Cir. 1992) ................................................................................ 8 Colin et al. v. Hamilton Fire Ins. Co. of City of New York, 251 N.Y. 312 (1929) ............................................................................................ 5 Cruz. v. New Millenium Constr., 17 A.D.3d 19, 22-23 (3d Dept., 2005) ............................................................... 14 Diaz v. Ulster Vegetable Growers Co-Operative, Inc., 282 A.D. 426, aff’d, 306 N.Y. 859 (1954) ........................................................ 14 iii Di Donato v. Rosenberg, 256 N.Y.412 (1931) ........................................................................................... 14 Eastern Dist. Piece Dye Works, Inc., v. Travelers’ Ins. Co., 234 N.Y. 441 (1923) ............................................................................................ 4 Federal Insurance Company v. Arthur Anderson & Co., 75 N.Y.2d 366 (1990) .................................................................................. 16, 20 Federal Ins. Co. v. Kozlowski, 18 A.D.3d 33 (1st Dept., 2005) .................................................................... 15, 19 Geer v. Union Mut. Life Ins. Co., 273 N.Y. 261 (1937) .................................................................................. 6, 7, 21 Ginsburg v. Pacific Mut. Life Ins. Co. of California, 89 F.2d 158, 159 (2d Cir., 1937) .......................................................................... 5 Glickman v. New York Life Ins. Co., 291 N.Y. 45 (1943) ............................................................................................... 6 Hall v. Aetna Casualty & Surety Co., 89 F.2d 885 (2d Cir., 1937) ............................................................................... 17 Hare & Chase, Inc. v. National Surety Co., 60 F.2d 909 (2d Cir., 1932) ............................................................................... 18 Ins. Co. of N. Am. v. Kaplun, 274 A.D.2d 293 (2d Dept., 2000) ...................................................................... 13 Jenkins v. John Hancock Mut. Life Ins. Co., 257 N.Y. 289 (1931) ............................................................................................. 5 L. Smirlock Realty Corp. v. Title Guarantee Co., 52 N.Y.2d 179 (1981) ...................................................................................... 7, 8 Leamy v. Berkshire Life Insurance Company, 39 N.Y.2d 271 (1976) .......................................................................................... 7 iv Liberty Mut. Ins. Co. v. McClellan, 127 A.D.767 (2d Dept., 1987) ........................................................................... 12 Matter of the Liquidation of Union Indem. Ins. Co. of New York 89 N.Y.2d 94 (1996) ............................................................................................ 8 Metropolitan Life Ins. Co. v. Conway, 252 N.Y. 449 (1930) ............................................................................................. 5 Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144 (3d Dept., 1991) ...................................................................... 12 Norguard Ins. Co. v. Lopez, Civ. Action No. 15-5032 (DRH)(AYS) (E.D.N.Y. 2017) ................................. 14 Pasternak v. Laboratory Corp. of Am. Holdings, 27 N.Y.3d 817 (2016) ........................................................................................... 3 People v. Hobson, 39 N.Y.2d 479 (1976) ........................................................................................ 21 Reliance Ins. Companies v. Daly, 38 A.D.2d 715 (2d Dept., 1972) ........................................................................ 12 Satz v. Massachusetts Bonding & Ins. Co., 243 N.Y. 385 (1926) ............................................................................................ 3 Scarburgh Co., Inc. v. American Manufacturers Mutual Insurance Company, 435 N.Y.S.2d 997 (N.Y. Sup. Ct., New York Cty., 1979) ................................... 7 Sebring v. Fidelity-Phenix Fire Ins. Co. of New York, 255 N.Y. 382 (1931) ............................................................................................. 7 Sirius Am. Ins. Co. v. Burlington Ins. Co., 81 A.D.3d 562 (1st Dept., 2011) .......................................................................... 9 Stecker v. American Home Fire Assur. Co., 299 N.Y. 1 (1949) ................................................................................................. 7 v Teeter v. Allstate Ins. Co., 9 A.D.2d 176 (4th Dept. 1959), aff’d 8 N.Y.2d 1039 (1960) ............ 11, 14, 18, 21 Travelers’ Ins. Co. v. Pomerantz, 246 N.Y. 63 (1927) ............................................................................................... 6 Vander Veer, II v. Continental Casualty Company, 34 N.Y.2d 50 (1974) ............................................................................................ 6 Statutes New York Insurance Law §6908 (2018) ................................................................ 18 New York Vehicle & Traffic Law §313 (2018) ......................................... 10, 12, 14 New York Workers’ Compensation Law §54 (2018) ............................................. 13 Other Authorities Black’s Law Dictionary (8th ed. 2004) ..................................................................... 18 Restatement (Second) of Contracts §162 (1981) .......................................................................................................... 3 Tentative Draft #1 Restatement of the Law of Liability Insurance §9, cmt. b (2016) .................................................................................................. 5 Robert H. Jerry II & Douglas R. Richmond, Understanding Insurance Law, 748 (Lexis 2012) .................................................................................................. 4 Ruth S. Kochenderfer, “Misrepresentations and Other Ways to Lose your Coverage,” PLI Course Handbook, Insurance Coverage 2008: Claim Trends & Litigation, 1-16, 12-14, (2008) ............................................................................... 10 Kevin Schlosser, “First Department Rules NY Insurance Law 3105 Requires All Elements of Common Law Fraud, Including Causation” (May 22, 2017), available at, http://nyfraudclaims.com/first-department-rules-ny-insurance-law-3105- requires-elements-common-law-fraud-including-causation/ ..................................... 9 vi Schlam Stone & Dolan LLP, “Insurance Law § 3105 Does Not Dispense With Requirement of Proving Reliance and Loss Causation” (May 22, 2017), available at, http://www.schlamstone.com/insurance-law-%C2%A7-3105-does-not- dispense-with-requirement-of-proving-reliance-and-loss-causation/ ........................ 9 STATEMENT OF INTEREST OF THE AMICUS CURIAE The New York Insurance Association, Inc. (“NYIA”) is a state association of over 65 property and casualty insurers writing in excess of $15 billion in annual New York premiums—over 25% of the market. NYIA represents both the largest national commercial and many of the largest personal lines insurance companies, and its membership is comprised of stock, mutual and cooperative property and casualty insurers doing business in virtually every region of New York State. NYIA was formed in 1997 by the unification of the former New York Insurance Alliance, founded in 1882, and the New York State Insurance Association, founded in 1942. NYIA’s mission is to promote a viable and strong insurance market in order to better serve the insuring public, to promote the economic, legislative and public standing of its members and the insurance industry, to provide a forum for discussion of policy issues of common concern to its members and the insurance industry, and to serve the public interest through activities promoting safety and security of persons and property. As an association of insurers, NYIA brings special expertise in the knowledge of insurance markets, law, and policy. In this brief, NYIA explains that the long-standing corpus of New York’s common law insurance law jurisprudence has never required an insurer to establish justifiable reliance or loss causation when 2 seeking to vitiate a policy procured by material misrepresentation. Furthermore, in section II of our brief, NYIA explains the importance of allowing insurers the equitable remedy of recouping amounts paid on policies that have been procured by material misrepresentation as a deterrent to this type of conduct, and as a means of ensuring that innocent parties do not pay increased premiums to offset this unjust and market altering behavior. Accordingly, NYIA respectfully submits this brief to assist this Court in resolving these issues. ARGUMENT I. NEW YORK COMMON LAW HAS LONG HELD THAT INSURERS DO NOT NEED TO PROVE JUSTIFIABLE RELIANCE OR LOSS CAUSATION WHEN ASSERTING A CLAIM OF FRAUDULENT INDUCEMENT TO AN INSURANCE CONTRACT THROUGH MATERIAL MISREPRESENTATION BY THE INSURED The lower court’s decision in Ambac Assurance Corporation v. Countrywide Home Loans, Inc., 151 A.D.3d 83 (1st Dept., 2017), ignores the centuries-old rule that insurers have a remedy if they have been induced by fraud or misrepresentation to issue insurance—without regard to whether their reliance was justifiable or whether the misrepresentation caused a particular loss.1 The First Department reasoned, 1 See, Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 151 A.D.3d 83 (1st Dept., 2017) 3 [w]e agree with Countrywide that Ambac is required to prove all the elements of its fraudulent inducement claim, including justifiable reliance and loss causation. The elements of a fraud cause of action are long settled. To establish fraud, a plaintiff must show a misrepresentation or a material omission of fact which was false and known to be false by [the] defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.2 The foregoing is the common law standard for cases involving fraudulent inducement by material misrepresentation into a commercial contract, not rescission of an insurance contract.3 As to the common law standard for cases involving fraudulent inducement by material misrepresentation to an insurance contract, the New York Court of Appeals has spoken loudly, clearly, and consistently, that in the insurance law context an insurer is not required to prove justifiable reliance or loss causation to establish fraudulent inducement; rather the insurer need only show the insured made a false representation that was material to the risk at issue in the contract.4 Since at least as early as Armour v. Transatlantic Fire Ins. Co., 90 N.Y. 450 (1882), the Court of Appeals has stated: [i]t is not necessary…in order to sustain a defense of misrepresentation in applying for the policy, to show that the misrepresentation was 2 Id. (internal quotation marks omitted) (citing, Pasternak v. Laboratory Corp. of Am. Holdings, 27 N.Y.3d 817, 827 (2016)). 3 See Restatement (Second) of Contracts §162 (1981). See also, Centro Empresarial Cempresa S.A. v. América Móvil, 17 N.Y.3d 269, 276 (2011); but see, Satz v. Massachusetts Bonding & Ins. Co., 243 N.Y. 385, 393 (1926) (noting the subtlety of insurance contract cases, and citing the maxim, “[w]hat do they know of the law of the insurance contract who only the law of contract know?”) 4 See, infra n.5, n.6. 4 intentionally fraudulent. A misrepresentation is defined…to be where a party to the contract of insurance, either purposely or through negligence, mistake, or inadvertence, or oversight, misrepresents a fact which he is bound to represent truly…it is an implied condition of the contract of insurance that it is free from misrepresentation or concealment, whether fraudulent, or through mistake. If the misrepresentation induces the insurer to enter into a contract which he would otherwise have declined, or to take a less premium than he would have demanded had he known the representation to be untrue, the effect as to him is the same if it was made through mistake or inadvertence, as if it had been made with a fraudulent intent, and it avoids the contract.5 This common law standard was later affirmed by the Court of Appeals in Eastern Dist. Piece Dye Works, Inc. v. Travelers’ Ins. Co., 234 N.Y.441 (1923), stating that a misrepresentation, “[i]f material…constituted a defense, although made innocently and without any feature of fraud; it was sufficient that it was material as an inducement for the issue of the policy, and was untrue.”6 Later in American Sur. Co. of New York v. Patriotic Assur. Co., 242 N.Y. 54 (1926) the Court of Appeals declared that in a material misrepresentation case the insurer has no duty to inquire into the truth or falsity of the representation stating that: 5 Armour v. Transatlantic F.I. Co., 90 N.Y. 450 (1882). Of course, if the misrepresentation is immaterial the common law requires proof of fraud, see Id. (stating that “[a]n immaterial misrepresentation, unless in reply to a specific inquiry, or made with a fraudulent intent, and influencing the other party, will not impair the contract”); see also, Robert H. Jerry II & Douglas R. Richmond, Understanding Insurance Law, 748, (Lexis 2012) (explaining that the “reliance” element of material misrepresentation alludes to the truism that insurers do not rely on immaterial statements, “[r]eliance is closely related to materiality: if a statement is material, it can often be inferred that the insurer relied on it. In contrast, a statement is not material if it does not invoke the insurer’s reliance.”) 6 Eastern Dist. Piece Dye Works, Inc. v. Travelers’ Ins. Co., 234 N.Y. 441, 449-450 (1923). 5 so far as we are aware, it has never been held by any authority of substantial weight that a person making a material misrepresentation in an application for insurance will be relieved from the consequences thereof if he can show that the other party [i.e. the insurer], by the exercise of sufficient diligence and pains, might have discovered the inaccuracy of the representation.7 In addition to stating that the insurer has no duty to inquire into the representations of the insured the Court of Appeals later clarified that at common law the insurer also need not prove that the misrepresentation caused the loss.8 In Metropolitan Life Ins. Co. v. Conway, 252 N.Y. 449 (1930) the court stated that even though the loss is unrelated to the breach the policy is still voidable at the election of the insurer,9 and a year later in Jenkins v. John Hancock Mut. Life Ins. Co., 257 N.Y. 289 (1931) the Court of Appeals affirmed this rule stating “[t]he untruthful answer defeats recovery on the policy,” even where the loss is caused by a different eventuality.10 7 American Surety Co. of New York v. Patriotic Assur. Co., Limited, 242 N.Y. 54, 65 (1926). See also, Colin v. Hamilton Fire Ins. Co. of New York, 251 N.Y. 312, 314 (1929) (reaffirming the insurer has no duty to inquire into the representation, stating, “[n]o evidence indicates the defendant [i.e. the insurer] knew the truth to be different from the representation which appears on the face of the policy. The fact that by the exercise of diligence it might have discovered the falsity of the representation does not relive that person making it from the consequences of his act.”) 8 Metropolitan Life Ins. Co. v. Conway, 252 N.Y. 449, 452-453 (1930). 9 Id. at 452-453. 10Jenkins v. John Hancock Mut. Life. Ins. Co., 257 N.Y. 289 (1931); See also, Ginsburg v. Pacific Mut. Life Ins. Co. of California, 89 F.2d 158, 159 (2d Cir., 1937) (applying New York common law and stating, “[t]hat such a causal connection is not necessary seems also to be the law of New York…If the rule were otherwise, the insured could freely misrepresent information specifically requested and still recover on the policy if the causal connection could not be traced,” citing Jenkins); and Tentative Draft #1, Restatement of the Law of Liability Insurance §9, cmt. b (2016), stating, “no court has adopted the contribute-to-the-loss rule as part of the common law of liability insurance.” (emphasis added) (this draft of the Restatement of the Law of Liability Insurance is cited here for its research content only). 6 Accordingly, at common law, an insurer does not need to inquire into the veracity of an insured’s representations, and once a misrepresentation is identified the insurer need not establish that the misrepresentation caused the loss. The only remaining question is “was it material?”11 As the Court of Appeals emphatically stated in the seminal case of Geer v. Union Mutual Life Ins. Co., 273 N.Y. 261 (1937): [m]isrepresentation in an answer, by affirmation of an untruth, or by suppression of the truth, is material where it substantially thwarts the purpose for which the information is demanded and induces action which the insurance company might otherwise not have taken…[t]he question is not whether the company might have issued the policy even if the information had been furnished; the question in each case is whether the company has been induced to accept an application which it might otherwise have refused. (emphasis in original).12 These common law principles have been affirmed and re-affirmed by the Court of Appeals on numerous occasions since Geer, most notably in: Glickman v. New York Life Ins. Co., 291 N.Y. 45 (1943) (reaffirming that loss causation is not required, “[t]he fact that the applicant died from another cause does not disprove the increase of risk”)13; Vander Veer v. Continental Casualty Company, 34 N.Y.2d 50 (1974) (holding that, “[f]ailure to disclose is as much a misrepresentation as a 11 Travelers’ Ins. Co. v. Pomerantz, 246 N.Y. 63, 67 (1927). 12 Geer v. Union Mut. Life Ins. Co., 273 N.Y. 261 (1937), 7 N.E.2d 125, 128, 129 (N.Y. 1937), (citing, Travelers’ Ins. Co. v. Pomerantz, at 67 (stating that, “[a]ny misrepresentation which defeats or seriously interferes with the exercise of such a right [to refuse a policy] cannot truly be said to be an immaterial one.”). 13 Glickman v. New York Life Ins. Co., 291 N.Y. 45 (1943). 7 false affirmative statement…[b]y his failure to disclose his heart condition, plaintiff [applicant] deprived the defendant [insurer] of freedom of choice in determining whether to accept or reject the risk”)14; Leamy v. Berkshire Life Insurance Company, 39 N.Y.2d 271 (1976) (holding that, “for the purpose of determining the materiality of the misrepresentations, a decedent’s [applicant’s] own understanding of their significance is irrelevant…[t]herefore, the net effect of the nondisclosures here, especially in combination, must be said to have deprived the defendant [insurer] of freedom of choice in determining whether to accept or reject the risk”)15; L. Smirlock Realty Corp. v. Title Guarantee Co., 52 N.Y.2d 179 (1981) (citing to Geer and stating, “[i]t is manifest that revelation of this information certainly would have affected defendant’s [insurer’s] choice of insuring the risk covered by the policy issues to the plaintiff [applicant])”16; and 14 Vander Veer v. Continental Casualty Company, 34 N.Y.2d 50, 53 (1974). 15 Leamy v. Berkshire Life Ins. Co., 39 N.Y.2d 271 (1976) (internal quotations omitted). 16 L. Smirlock Realty Corp. v. Title Guarantee Co., 52 N.Y.2d 179 (1981). It is worth noting here the difference in New York jurisprudence between non-disclosure cases and material misrepresentation cases. The Court of Appeals has stated five different rules in non-disclosure cases. The first, is so-called “strict marine rule” cases involving marine insurance in which case the uberrimae fides doctrine of utmost good faith still applies, and any non-disclosure of material fact, irrespective of whether it is innocent or fraudulent, is deemed a material misrepresentation that can vitiate the policy. Sebring v. Fidelity-Phenix Fire Ins. Co. of New York, 255 N.Y. 382, 386 (1931); Stecker v. American Home Fire Assur. Co., 299 N.Y. 1 (1949); and Scarburgh Co., Inc. v. American Manufacturers Mutual Insurance Company, 435 N.Y.S.2d 997 (N.Y. Sup. Ct., New York Cty., 1979) (stating that, “[q]uite appropriately, counsel on both sides agree that a higher duty of disclosure is imposed upon an applicant for marine insurance than one who is seeking to insure a casualty or other inland marine risk”) (internal quotations omitted). A second type of non-disclosure case involves reinsurance where the Court of Appeals has also held that the uberrimae fides doctrine of utmost good faith applies, stating that, “[t]he phrase uberrimae fidei and its translation, ‘of the utmost good faith,’ has long been used to characterize the core 8 Admiral Insurance Company v. Joy Contractors, Inc., 19 N.Y.3d 448, 461 (2012) (stating that, “even if a contractor not named in the insurance policy as a named or additional insured demonstrates a triable issue of fact as to whether it was a covered insured under the policy, this would have been unavailing as the policy was void ab initio on account of material misrepresentations made by (its insured) in the application process to procure the insurance.”)17 duty accompanying reinsurance contracts.” Matter of Liquidation of Union Indem. Ins. Co. of New York, 89 N.Y.2d 94 (1996) (citing, Christiania Gen. Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268 (2d Cir. 1992). A third type of non-disclosure case involves those where the applicant is never asked about certain information but knows that if disclosed such information would be material to the insurer in which case the duty to disclose is triggered, and “good faith requires him to disclose that circumstance, though unasked.” Sebring at 387 (of course, if the applicant is asked about certain information then the applicant is put on notice that it is material to the risk as understood by the insurer and the applicant must disclose. See, Christiania, at 280). A fourth type of case applies the “ordinary rule” which involves cases of innocent non-disclosure where the applicant was never asked about the information at issue and did not disclose such information. In such cases, the Court of Appeals has held that “[u]nless nondisclosure of a fact, concerning which he has not been asked, be fraudulent, the applicant’s omission to state it will not avoid a fire or life policy” Sebring at 388; and in Stecker, “[u]ntil the Legislature says otherwise, we hold that the ordinary rule, as to nondisclosure, is the one to apply in respect to policies like the one in suit [i.e. fire insurance policies], and that as, to such policies, if the insurer makes no inquiry, and the insured no representation, as to the fact in question, then concealment, short of actual fraud, in respect to such a fact, does not void the policy” Stecker at 1. Lastly, a fifth type of non-disclosure case involves title insurance, as in L. Smirlock Realty Corp., where the Court of Appeals has explicitly included title insurance within ordinary rule cases holding that, “a policy of title insurance will not be rendered void pursuant to a misrepresentation clause absent some showing of intentional concealment on the part of the insured tantamount to fraud.” L. Smirlock Realty Corp., at 179. We note this line of jurisprudence here because of the similarity between non-disclosure cases and material misrepresentation cases (i.e. because where a duty to disclose exists, a non-disclosure is a material misrepresentation), and because the case at bar contains elements of non-disclosure in addition to material misrepresentation. 17 Admiral Insurance Company v. Joy Contractors, Inc., 19 N.Y.3d 448, 461 (2012) (citing, Sirius Am. Ins. Co. v. Burlington Ins. Co., 81 A.D.3d 562, 563 (1st Dept., 2011). 9 Accordingly, as the overwhelming weight of the foregoing authority illustrates, the New York Court of Appeals has in three different centuries18 consistently held that the common law of New York requires that an insurer claiming fraudulent inducement to an insurance contract by material misrepresentation need only show that the information presented was in fact a misrepresentation and that it was material to the risk, i.e. that it impacted the insurer’s right to refuse the policy. At no time has the Court of Appeals stated that an insurer must show justifiable reliance or loss causation when claiming fraudulent inducement to an insurance policy by material misrepresentation. The decision below does not appear to overturn New York’s longstanding rule that as to a rescission claim an insurer need not establish justifiable reliance or loss causation. However, if it does, 19 the decision would clearly be subject to reversal 18 But see, Becker, Moore & Co., Inc., v. United States Fidelity & Guaranty Co. et al., 74 F. 2d 687 (2d Cir., 1935) (applying New York law, and stating that the doctrine of material misrepresentation in insurance law, “has been settled law for more than a century and a half, [i.e. since 1785] that such collateral misrepresentations, though honestly made, will avoid a policy.”) 19 Kevin Schlosser, “First Department Rules NY Insurance Law 3105 Requires All Elements of Common Law Fraud, Including Causation” (May 22, 2017), available at, http://nyfraudclaims.com/first-department-rules-ny-insurance-law-3105-requires-elements- common-law-fraud-including-causation/ (stating that, “[t]he First Department ruled that Insurance Law 3105(b)(1) does not (a) dispense with the need to prove the elements of common law fraud in the context of avoiding insurance policies or declining to pay thereunder; and, Schlam Stone & Dolan LLP, “Insurance Law § 3105 Does Not Dispense With Requirement of Proving Reliance and Loss Causation” (May 22, 2017), available at, http://www.schlamstone.com/insurance-law-%C2%A7-3105-does-not-dispense-with- requirement-of-proving-reliance-and-loss-causation/ (stating that, “the First Department issued a decision in Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2017 NY Slip Op. 03919, holding that Insurance Law Section 3105 does not dispense with the requirement to plead and prove reliance and loss causation). 10 on the basis of New York’s longstanding material misrepresentation doctrine. New York common law has long held that insurers do not need to prove justifiable reliance or loss causation when seeking to rescind a policy that was procured by a material misrepresentation by the insured. However, even where an insurer in unable to rescind an insurance contract that was fraudulently procured by material misrepresentation, New York law has allowed the insurer to recoup payments made under the policy. II. WHERE RECISSION OF A FRAUDULENTLY OBTAINED POLICY IS NOT AVAILABLE RECOUPMENT OF PAYMENTS MADE TO SATISFY CLAIMS ON THE POLICY IS A JUST AND PROPER REMEDY A. Principles of New York equity jurisprudence and sound public policy allow an insurer to recoup payments made on a policy even where rescission ab initio is unavailable as a remedy Ordinarily, the remedy available to an insurer who has been fraudulently induced to accept a policy by material misrepresentation is rescission.20 However, even where rescission is unavailable as a remedy, New York courts have nevertheless allowed insurers to recoup payments made under a policy procured by material misrepresentation. For example, in the case of third party auto liability insurance, rescission ab initio is unavailable because New York Vehicle and Traffic Law §313 acts as a 20 See, Ruth S. Kochenderfer, “Misrepresentations and Other Ways to Lose your Coverage,” PLI Course Handbook, Insurance Coverage 2008: Claim Trends & Litigation, 1-16, 12-14, 2008. 11 statutory bar to vitiating the policy and requires that third party auto insurance policies only be cancelled prospectively pursuant to the statute.21 As a matter of public policy courts have recognized that protecting innocent third parties who may be injured as a result of the insured’s conduct is a “supervening” interest to which “[t]he common law right to rescind ab initio for fraud must likewise yield to the superior force of the statute.”22 However, although the court in Teeter v. Allstate Ins. Co., 9 A.D.2d 176 (4th Dept. 1959) closed the door to the insurer as to rescission, it left the door open as to whether the insurer could recover damages, stating: [w]e are not called upon to say at this time what remedy, if any, an insurance company may have against an insured in tort or in quasi contract for fraudulently inducing it to issue an insurance policy which it was thereafter forbidden to terminate except on the statutory notice. We do not express any opinion as to whether, in the event that the insurance company were required to pay damages to a third party growing out of an accident which occurred before the company could make its termination effective under the statute, the company could maintain an action against the insured for reimbursement…Neither do we express any opinion as to whether the fact that the plaintiff had initiated the chain of events by his own fraud bars a recovery for damages.23 21 Teeter v. Allstate Inc. Co., 9 A.D.2d 176, 180 (4th Dept., 1959), aff’d 8 N.Y.2d 1039 (1960). See also, N.Y. Vehicle & Traffic Law §313(a) (2018) (stating that “[n]o contract of insurance for which a certificate of insurance has been filed with the commissioner shall be terminated by cancellation by the insurer until at least twenty days after mailing to the named insured at the address shown on the policy a notice of termination by regular mail…”) 22 Id. at 181. 23 Id. at 185-186 (emphasis added). 12 Where the Teeter court merely left the door open for an insurer to recover against the insured for damages resulting from the insured’s material misrepresentations, ensuing courts have zoomed right through. For example, in Reliance Ins. Companies v. Daly, 38 A.D.2d 715 (2d Dept., 1972), the court upheld the insurer’s cause of action for damages stating, “nothing in the applicable law precludes a suit for damages after the insurer’s responsibilities to a third party have been satisfied. The statutory scheme preventing rescission ab initio is a recognition that there is a public interest in the insurance policy which may exceed the interest of the parties to the contract…[t]hat public interest is unaffected by a suit for damages which in no way impinges upon the injured party’s recovery.”24 Similarly, in Liberty Mut. Ins. Co. v. McClellan, 127 A.D.767 (2d Dept., 1987) the court stated that “our holding in no way prevents [the insurer] from seeking redress against its insured for any losses incurred as a result of its misrepresentations.”25 Later in Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144 (3d Dept., 1991), the court elaborated upon the insurer’s right to be made whole when it has issued an insurance policy to which it was fraudulently induced to enter: [t]he fact that the statutory scheme [Vehicle and Traffic Law §313] prevents rescission ab initio reflects that there is a public interest in automobile insurance policies which exceeds that of the parties to the contract…For this reason, a suit by an insurer against its insured to recover damages the insurer was obligated to pay to an injured third 24 Reliance Ins. Companies v. Daly, 38 A.D.2d 715, 716 (2d Dept., 1972). 25 Liberty Mut. Ins. Co. v. McClellan, 127 A.D.2d 767 (2d Dept., 1987). 13 party as a result of the insured having fraudulently obtained the insurance is cognizable…Just as the public interest is not disserved by a suit brought by the insurer against its insured who fraudulently procured the policy, neither is it disadvantaged if the insurer is relieved of a claim asserted against it by such an insured. If it is established, as defendant here affirmatively alleges, that plaintiff acquired his policy by fraudulent means, denying plaintiff the right to recover would not impinge in any way upon the protection the policy accords innocent victims, would not subvert the statutory proscription against retroactive cancellation and would comport with elementary fairness.26 More recently, the court in Ins. Co. of N. Am. v. Kaplun, 274 A.D.2d 293 (2d Dept., 2000), reaffirmed that an insurance company can recover damages in a material misrepresentation case, stating, “[a]n insurance carrier that is precluded from rescinding a policy retroactively due to fraud is not without means of redress. For example, if the insurer is required to pay benefits under the policy to a third party, it may bring an action against its insured to recover such losses.”27 As with third party auto liability insurance, workers’ compensation insurance policies are also statutorily barred from rescission pursuant to New York Workers’ Compensation Law §54(5).28 The public policy reasons for disallowing rescission of a workers’ compensation insurance policy are similar to the third party auto insurance context, namely, to protect employees regardless of any fraud 26 Mooney v. Nationwide Mut. Ins. Co., 172 A.D.2d 144, 149 (3d Dept., 1991). 27 Ins. Co. of N. Am. v. Kaplun, 274 A.D.2d 293, 298 (2d Dept., 2000). 28 N.Y. Workers’ Compensation Law §54(5) 2018 (stating, [n]o contract of insurance issued by an insurance carrier against liability arising under this chapter shall be cancelled within the time limited in such contract for its expiration unless notice is given as required by this section…”), 14 committed by the employer in inducing the insurance carrier to the contract.29 As the court stated in Aioss v. Sardo, 223 A.D. 201,203 (3d Dept., 1928): [w]hatever the rights may be between the carrier and the insured employer, so long as the policy, once it is issued, is outstanding, the carrier’s liability to the injured employee remains. No question of warranties, or of false representations made by the employer in securing the policy and no stipulations of the policy as between the employer and carrier have force or effect as between the carrier and such employee who was injured while the policy is outstanding. A chief purpose of this law is to assure payment of any and every award to an injured employee; this is accomplished by requiring that every employer except a self-insurer shall insure and keep insured.30 However, as with Teeter, the court in Aioss left open the door as to whether an insurance carrier could recover for damages directly from the employer stating, “[w]hether the carrier, having paid the award, has a valid cause of action against the insured employer is not here for determination.”31 29Aioss v. Sardo, 223 A.D. 201,203 (3d Dept., 1928), aff’d 249 N.Y. 270 (1928). 30Id. at 203; See also, Di Donato v. Rosenberg, 256 N.Y.412 (1931), Diaz v. Ulster Vegetable Growers Co-Operative, Inc., 282 A.D. 426, aff’d, 306 N.Y. 859 (1954), and Cruz. v. New Millenium Constr., 17 A.D.3d 19, 22-23 (3d Dept., 2005) (stating that, “[t]he same rationale [towards Vehicle and Traffic Law §313] applies here given the language of Workers’ Compensation Law §54(5) itself and the policy behind the Workers’ Compensation Law generally…namely, to surely and swiftly compensate an injured employee or a dependent of a deceased employee.”) 31 Aioss at 203. See also, Norguard Ins. Co. v. Lopez, Civ. Action No. 15-5032, 11 (DRH)(AYS) (E.D.N.Y. 2017) (applying New York law, and rejecting the argument that the insurer’s duty to indemnify the employer under the Workers’ Compensation Law precludes the insurer from receiving damages for fraud), and, Baljit v. Suzy’s Dept. Store, Inc., 211 A.D.2d 555 (1st Dept., 1995) (stating that in a case where the employee seeks recovery outside of the workers’ compensation system by arguing that the workers’ compensation policy was void on account of allegations of fraud on the part of the employer in undercounting its employees in order to secure a lower premium, that, “such alleged fraud, if any, would be against [the employer’s] compensation carrier and…[t]he compensation carrier would be entitled to recoup any unpaid premiums on its policy.”) 15 Though not statutorily barred – as in third-party auto and workers’ compensation insurance – courts have entertained claims for recoupment of payments made on a policy that was barred from rescission with directors and officers (D&O) insurance. For example, in Federal Ins. Co. v. Kozlowski, 18 A.D.3d 33 (1st Dept., 2005), the directors and officers of the corporation sought coverage under its D&O policies, which the insurer attempted to rescind on the basis of material misrepresentation.32 The court disposed of the case, first by insisting that the insurer establish its material misrepresentation case in its underlying declaratory action, declaring that the insurer: must show that [the insured] participated, directly or indirectly, in misrepresenting facts to induce [the insurer] to issue the policy…[the insurer] makes no effort to meet this burden. It fails to cite any alleged misrepresentation made by [the insured] to induce the issuance of the [policy] or even allege that [the insured] ever signed an application or furnished any answers or information as part of the application process.33 While insisting on due process, the Appellate Division nevertheless recognized that the misrepresentations, if true, would allow the insurer to recoup payments made under the policy, largely affirming the lower court’s ruling that: 32 Kozlowski at 35-37. 33 See, Kozlowski at 39. 16 [u]ntil [the insurer’s] rescission claims are litigated and determined in its favor, the policy obligation to defend or pay for a defense remains in effect. In so ruling [Supreme Court] recognized that if [the insurer] ultimately prevailed on its rescission claim, it could seek to recover the costs of the defense it provided [the insured].34 Furthermore, the court went on to state, “[t]his Court has recognized that under a directors and officers policy calling for the reimbursement of defense expenses…insurers are required to make contemporaneous interim advances of defense expenses where coverage is disputed, subject to recoupment in the event it is ultimately determined no coverage was afforded.”35 In addition to D&O insurance, another area of insurance where insurers have paid claims on the policy but were still able to recover damages is fidelity guarantee insurance. For example, in Federal Insurance Company v. Arthur Anderson & Co., 75 N.Y.2d 366 (1990) the corporation had a fidelity insurance policy which was triggered when an employee embezzled approximately $4,000,000 from the company. 36 The insurance company paid the claim made by the insured and sued the insured’s accountant/auditor arguing that the auditor’s negligence in not discovering the employee’s embezzlement during the course of its audit resulted in the loss.37 The auditor argued that the insurer was barred from recovery, in part, 34 Id. at 38. 35 Id. at 38, 42. 36 Federal Ins. Co. v. Arthur Anderson & Co., 75 N.Y.2d 366, 369 (1990); 37 Id. 17 because of the doctrine of superior equities.38 The Court of Appeals, nevertheless, allowed the insurer to recover damages against a negligent third party on the basis of the doctrine of equitable subrogation.39 In doing so, the Court stated that its decision was, “based upon the principle that in equity an insurer, which has been compelled under its policy to pay a loss, ought in fairness to be reimbursed by the party which caused the loss,” and concluded by stating, “[t]hus, the general rule is that an insurer which has paid part of a loss may proceed pro tanto against a third person whose negligence or wrongful act caused the loss.”40 As the foregoing authorities demonstrate, New York courts have been open to granting an equitable remedy to insurers unable to rescind an insurance contract procured by material misrepresentation, namely, by allowing insurers to recoup claim payments made under the policy. The rationale which courts have arrived at in granting insurers the ability to recoup such payments – public policy and elemental notions of fairness – also apply to the financial guaranty insurance policy in this case. Accordingly, Ambac should be allowed to recoup payments made under the policy from Countrywide. 38 Id. 39 Id. at 371. 40 Id. at 372, 374. See also, Id. at 372-373 (stating that these equitable principles have been applied by New York courts in cases involving automobile insurance and marine insurance); and, Hall v. Aetna Casualty & Surety Co., 89 F.2d 885 (2d Cir., 1937) (allowing the fidelity bond insurer to make a claim against the culpable employees for their defalcations). 18 B. Even if rescission ab initio is unavailable to Ambac, Ambac should be allowed to recoup payments made on the policy from Countrywide pursuant to principles of New York equity jurisprudence and as a matter of sound public policy Financial guaranty insurance is insurance governed by the corpus of New York insurance law jurisprudence.41 As such, Ambac should be allowed to proceed against Countrywide in quasi-contract to recoup payments made under a policy allegedly procured by material misrepresentation, because Ambac’s ordinary equitable remedy, rescission, is unavailable.42 For example, similar to the accident victims in Teeter and its progeny, or the employees in Aioss and its progeny, the investors of the securitization trusts here are innocent parties who did not make material misrepresentations in applying for the insurance policy, but who nevertheless benefit from the policy. Therefore, as in the third-party auto, and workers’ compensation contexts, Ambac must honor its 41 See N.Y. Ins. Law §6908 (stating that, “[a]n insurer issuing policies of financial guaranty insurance shall be subject to all of the provisions of this chapter applicable to property/casualty insurers to the extent that such provisions are not inconsistent with the provisions of this article”); see also, supra n.4; and, Hare & Chase, Inc. v. National Surety Co., 60 F.2d 909 (2d Cir., 1932) (applying Pennsylvania common law of material misrepresentation to a depression- era financial guaranty case, and even applying the uberrimae fides doctrine to financial guaranty policy in that case. It does not appear that New York courts have adopted the uberrimae fides doctrine to financial guaranty insurance, however, we note that the level of sophistication of the parties here is more akin to the level of sophistication of parties to a marine insurance or reinsurance contract than fire or title insurance policies, see supra, n.16). 42 See supra, n.28; and QUASI-CONTRACT, A/K/A, IMPLIED-IN-LAW CONTRACT, Black’s Law Dictionary, 345-346 (8th ed. 2004) (defining quasi-contract as, “[a]n obligation created by law for the sake of justice; specif., an obligation imposed by law because of some special relationship between them, or because one of them would otherwise be unjustly enriched. An implied-in-law contract is not actually a contract, but instead a remedy that allows the plaintiff to recover a benefit conferred on the defendant.”) 19 obligations to the third parties but ought to be able to recoup payments made under the policy from Countrywide. The lack of a statutory bar to rescission in this case should not preclude such recovery, as rescission here is barred by the terms of the policy, but primarily by market forces which prohibit a financial guaranty insurer such as Ambac from seeking rescission in equity because RMBSs sponsors such as Countrywide would no longer seek out Ambac to insure such financial instruments as investors would be less likely to invest in securitized trusts that were not insured against default without risk of rescission and loss of coverage.43 Countrywide should not be allowed to take advantage of such market forces to play fast and loose with its information, or submit slipshod information when applying for financial guaranty insurance. Ambac should, therefore, as a matter of public policy that protects innocent actors and that aims to protect New York’s insurance markets, be allowed to recoup payments made under the policy in this case. In addition to the auto insurance and workers’ compensation contexts, Kozlowski also supports the conclusion that Ambac should be allowed to recoup from Countrywide payments made under the policy. In Koslowski, the court required the insurer to make payments under the policy to the insured until it had established 43 We note the unlogic of saying that policies cannot by their very terms be rescinded, since rescission ab initio renders the policy (including all the terms and conditions therein) a nullity. We recognize, therefore, that in the absence of a statutory prohibition (as in the auto and workers’ compensation contexts) the unavailability of rescission on these policies is pursuant to economic imperatives rather than a positive legal proscription. 20 that the insured had in fact made material misrepresentations that induced the insurer to accept the policy, and then recoup payments made under the policy from the insured if the insurer prevailed in its material misrepresentation case. That is akin to the scenario here where Ambac seeks to continue to make payments under the policy, but also seeks to be given the opportunity to establish its material misrepresentation case against Countrywide, and recoup payments made under the policy from Countrywide if it prevails. Arthur Anderson also supports an equitable theory of recovery for Ambac. In that case the insurer was allowed to recoup payments, not against the employee who embezzled from the policyholder, but against a third party who was not a party to the insurance policy, but who nevertheless adversely impacted the insurer’s interest. Similarly, here, Countrywide is not the insured under the policy, but its misrepresentations nevertheless have adversely affected Ambac’s interest as the insurer to the policy. Accordingly, the culpability of Countrywide in harming Ambac’s interests (i.e. by materially interfering with the insurer’s freedom to reject the policy) is as great, if not greater, than the culpability of the auditor in Arthur Anderson against whom the Court nonetheless allowed the insurer to recover. Therefore, even though Countrywide is not the policyholder under this policy Ambac should be allowed to recover against Countrywide for its misrepresentations which have harmed Ambac’s interest as the insurer. 21 CONCLUSION New York common law has long held, both prior to, and since Geer, that the only elements an insurer need establish in order to vitiate a policy for fraudulent inducement are that the applicant made a representation that was false and material to the risk. This longstanding body of law is worthy of being followed pursuant to principles of stare decisis. As the Court of Appeals explained in People v. Hobson, 39 N.Y.2d 479 (1976), “Stare decisis does not spring full-grown from a precedent but from precedents which reflect principle and doctrine rationally evolved.”44 The doctrine of material misrepresentation to an insurance contract is precisely such a doctrine which has grown rationally over centuries. Any ambiguity in the lower court’s decision in Ambac Assurance Corporation v. Countrywide Home Loans, Inc., 151 A.D.3D 83 (1st Dept., 2017) as to whether it overturns the longstanding material misrepresentation rule renders that decision subject to reversal on the basis of New York’s well established common law of material misrepresentation as well as principles of stare decisis. Furthermore, even where rescission is unavailable to an insurer, New York courts have allowed carriers to recoup payments made on a policy that was procured through material misrepresentation from a culpable party. Teeter suggests that the 44 People v. Hobson, 39 N.Y.2d 479 (1976). standard for recovery is in tort or quasi-contract.45 Quasi-contract is the appropriate standard in this case as Countrywide is an applicant for an insurance policy without being the insured. This configuration and the economic logic of the insurance policy at bar, renders Ambac’s ordinary equitable remedy of rescission unavailable. Countrywide should not be allowed to take advantage of this unique situation and insulate itself from material misrepresentations made to an insurer. To allow such conduct to stand without consequence is distortive of the insurance market in New York and would allow a wrongdoer to profit from its misconduct, a scenario which is abhorrent to justice. Therefore, in order to protect innocent parties under the policy, to protect the markets for insurance in New York, and to serve the interests of “elementary fairness”46, the court should allow Ambac to recoup from Countrywide, payments made under a policy that was procured by material misrepresentation of the risk as viewed by the insurer, an interference which “cannot truly be said to be an immaterial one.”47 Z1 Dated: April 20, 2018 Attorneys for amicus curiae New York Insurance Association, Inc. Robert S. Pastel Pastel & Rosen, LLP Javier R. Tapia, Of Counsel 130 Washington Avenue Albany, New York 12210 (518) 462-4715 45 See supra, n.23. 46 See supra, n. 26. 47 See supra, n.12. 22 NEW YORK STATE COURT OF APPEALS CERTIFICATE OF COMPLIANCE I hereby certify pursuant to 22 NYCRR PART 500.l(j) that the foregoing brief was prepared on a computer using Microsoft Word Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Line spacing: Double Word Count. The total number of words in this brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of citations, proof of service, certificate of compliance, corporate disclosure statement, questions presented, statement of related cases, or any authorized addendum containing statutes, rules, regulations, etc., is 6,662 words. TDated: April 20, 2018 Attorneys for amicus curiae New York Insurance Association, Inc. Robert S. Pastel Pastel & Rosen, LLP Javier R. Tapia, Of Counsel 130 Washington Avenue Albany, New York 12210 (518) 462-4715 23