On the issue of loss causation, the First Department in Ambac pointed to numerous cases recognizing that loss causation has long been an essential element of a fraud claim. The court rejected Ambac’s argument that this common-law standard was altered in its case by New York Insurance Law Section 3105, which permits a fraud claim so long as the insurer establishes that the defendant made a material misrepresentation. Section 3105 “has no applicability here,” the court held, because that statute, by its express terms, applies only when an insurer seeks to rescind an insurance contract or to defeat recovery under such a contract. Ambac was not seeking to rescind its insurance contract or to defeat an insured’s claim for payment, since its policy contained provisions — typical in monoline policies — expressly stating that the policy was irrevocable (and therefore not subject to rescission) and that Ambac’s payment obligations were unconditional.

Leaving aside the significant role played by Countrywide’s (and other RMBS sponsors’) pervasive fraud in triggering the housing crisis, Countrywide’s argument is wrong as a matter of law. Quinn Emanuel moved for partial summary judgment on this issue, and Justice Bransten agreed that, pursuant to New York Insurance Law §§ 3105 and 3106, an insurer—including a financial guaranty insurer—need not establish loss causation in order to prevail on a claim for fraud or breach of warranty; all the insurer need show is that it would not have issued its policy without the misrepresentation (§ 3105) or that the breach of warranty materially increased its risk under the policy (§ 3106). On April 2, 2013, the First Department affirmed Justice Bransten’s decision and held that a New York court is “not required to ignore the insurer/insured nature of the relationship between the parties to the contract in favor of an across the board application of common law,” as urged by Countrywide.

The decision is significant for insurers, especially financial guaranty insurers, for two reasons. First, it confirms the long-standing insurance-law causation rule in New York, as codified in NY Insurance Law Sections 3105 and 3106. Under the statutory causation rule, a claim for fraudulent inducement of a policy or breaches of warranty in a policy permits an insurer to recover payments made on claims made under the policy, without resort to rescission, by showing that it would not have issued the policy absent the misrepresentations, or that the misrepresentations materially increased the insurer’s risk of loss.

As to the elements of the fraudulent inducement claim, the Court reaffirmed the long standing rule that a fraud plaintiff must prove justifiable reliance and causation. It rejected Ambac's argument that New York Insurance Law §3105 eliminated those elements for insurers because that section does not provide a cause of action for damages, does not "inform" common law elements of fraudulent inducement, and applies only to claims for policy rescission, which Ambac contracted away.As to Ambac's remedies, the Court held that Ambac could not avoid the sole remedy provision because the "factual allegations underpinning Ambac's transaction-level breaches are the same as those for the loan-level breaches." "Ambac's complaint fails to include breach of contract allegations beyond those that fall under the sole remedy provision of Section 2.

As to the elements of the fraudulent inducement claim, the Court reaffirmed the long standing rule that a fraud plaintiff must prove justifiable reliance and causation. It rejected Ambac’s argument that New York Insurance Law §3105 eliminated those elements for insurers because that section does not provide a cause of action for damages, does not “inform” common law elements of fraudulent inducement, and applies only to claims for policy rescission, which Ambac contracted away. As to Ambac’s remedies, the Court held that Ambac could not avoid the sole remedy provision because the “factual allegations underpinning Ambac’s transaction-level breaches are the same as those for the loan-level breaches.”

Under New York law, a misrepresentation will support a claim for rescission only if it is “material.” N.Y. Ins. Law § 3105. The jury found the insurer had proved, by a preponderance of the evidence, that Heinz had made misrepresentations in its application, and those misrepresentations had been “material.”