Insurance Law § 3105 Does Not Dispense with Requirement of Proving Reliance and Loss Causation

On May 16, 2017, 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, explaining:

We agree with Countrywide that Ambac is required to prove all of 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.

The element of justifiable reliance is essential to any fraud claim. The Court of Appeals recently reaffirmed, in a fraud action brought by a financial guaranty insurer like Ambac here, the necessity of proving justifiable reliance.

A plaintiff asserting a fraud claim must also demonstrate that a defendant's misrepresentations were the direct and proximate cause of the claimed losses. To establish causation, a plaintiff must show both that the defendant's misrepresentation induced the plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which the plaintiff complains (loss causation). This Court has repeatedly reaffirmed this principle.

There is no merit to Ambac's contention that Insurance Law § 3105 dispenses with the common-law requirement of proving justifiable reliance and loss causation. Nor can that statute be used affirmatively as a basis to recover monetary damages. Insurance Law § 3105 provides that a material misrepresentation shall avoid a contract of insurance and defeat recovery thereunder. This Court recently observed that Insurance Law § 3105 does not, by its terms, create a cause of action, but merely codifies common law insurance principles.

At the outset, we note that, in its complaint, Ambac does not even reference Insurance Law § 3105, and pleads only common-law fraudulent inducement. Nevertheless, Ambac contends that its fraud claim is informed by that statute. By its express terms, Insurance Law § 3105 has no applicability here. It merely permits an insurer, in the event of a material misrepresentation, to either avoid a contract of insurance (i.e., pursue the remedy of rescission) or defeat recovery under the insurance contract (i.e., defeat an insured's claim for payment).

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. Here, Ambac seeks neither to rescind the policies, which are unconditional and irrevocable, nor to defeat a claim by an insured for payment. Instead, Ambac seeks to assert Insurance Law § 3105 as an affirmative claim seeking monetary damages. Under these circumstances, Insurance Law § 3105 is not applicable.

Furthermore, 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 (see Artibee v Home Place Corp., 28 NY3d 739, 748 [2017]). "The common law is never abrogated by implication, but on the [*3]contrary it must be held no further changed than the clear import of the language used in a statute absolutely requires" (Gottlieb v Kenneth D. Laub & Co., 82 NY2d 457, 465 [1993], quoting McKinney's Cons Laws of NY, Book 1, Statutes § 301[b]).

Here, the words fraud, justifiable reliance and causation appear nowhere in the statute. Nor does Ambac 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 correctly found that Ambac is not entitled to damages amounting to all claims payments it made or will make under the policies, regardless of whether they arise from a breach or misrepresentation. Although Ambac describes the relief it seeks as compensatory damages, it is no different from rescissory damages to which Ambac is not entitled.

(Internal quotations and citations omitted) (emphasis added).