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Source: www.nyfraudclaims.com

In Ambac Assur. Corp. v Countrywide Home Loans, Inc.,2017 NY Slip Op 03919, decided on May 16, 2017 (1st Dep’t), the New York Appellate Division, First Department, was presented with the question of whether New York Insurance Law 3105 preempts or dispenses with the need to prove the elements of common law fraud in relation to a claim that an insurance policy was induced by fraud.

Insurance Law 3105 – Avoiding Insurance Policies

Insurance Law 3105 does not directly address this question or provide an affirmative statement on what elements are required to prove an insurance policy was induced by the fraud of the applicant thereof.  It provides in relevant part:

(b)(1) No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material.  No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.

It appears the statute only intends to address what can constitute a “material” misrepresentation for which an insurer has the right to “avoid any contract of insurance or defeat [the insured’s] recovery thereunder.”

In Ambac Assur. Corp. v Countrywide Home Loans, Inc., the plaintiff insurer sought to rely upon Insurance law 3015(b)(1) not simply to dispense with the other common law elements of fraud besides a material misrepresentation, but to sue the insured affirmatively for damages, alleging that the insured fraudulently induced the insurer to issue the insurance policies by making false statements about the insured’s operations and the insured loans.

The 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; or (b) create a separate affirmative cause of action for damages against the insured.

Common Law Fraud Applies to Insurance Law 3105 Issues

The First Department noted: “Insurance Law § 3105 contains no language suggesting that the legislature intended to relax the well-settled elements of a common-law fraud cause of action. Statutes in derogation of the common law must be strictly construed.”  It continued: “the words ‘fraud,’ ‘justifiable reliance’ and ‘causation’ appear nowhere in the statute. Nor does [plaintiff-insurer] cite to any statement of legislative intent or legislative history indicating that Insurance Law § 3105 was intended to alter the essential elements of a fraud claim.”

The Court then noted that “justifiable reliance” and “loss causation” were essential elements of common law fraud and could not be avoided by Insurance Law 3105.

The First Department also rejected its prior decision in MBIA Ins. Corp. v Countrywide Home Loans, Inc., 105 AD3d 412 (1st Dep’t 2013), which affirmed in part the lower court’s conclusion that pursuant to Insurance Law § 3105, plaintiff was not required to establish causation in order to prevail on its fraud claims or to comply with the common law of fraud.  In a footnote, the First Department flatly noted: “We recognize that MBIA Ins. Corp. v Countrywide Home Loans, Inc. (105 AD3d 412 [1st Dept 2013]) interpreted Insurance Law § 3105 differently and found that the plaintiff was not required to establish loss causation to prevail on its fraud claim. We decline to follow that part of the decision.”

Insurance Law 3105 Does not Create Affirmative Claim for Damages

In rejecting the argument that Insurance Law 3105 creates a separate cause of action for damages, the Court held: “Cases applying Insurance Law § 3105 arise in the context of either a declaratory judgment action by an insurer seeking rescission of an insurance policy or an insurer asserting a defense to an insured’s claim for payment under the policy.”  It then noted that the insured was neither seeking to rescind nor to defeat a claim by the insured, but instead “to assert Insurance Law § 3105 as an affirmative claim seeking monetary damages. Under these circumstances, Insurance Law § 3105 is not applicable.”