Federal Court Rules that Insurer May Prevail on its Representation and Warranty Claims Without Proving that the Breaches Caused Loans to Default

On September 25, Judge Jed S. Rakoff of the Southern District of New York issued a written opinion denying summary judgment in Assured Guaranty Municipal Corp.’s contract dispute with Flagstar Bank FSB over its insurance policies on nearly $1 billion in mortgage-backed securities backed by home equity loans.  Assured initiated this action in April 2011, alleging that Flagstar breached representations and warranties concerning the underwriting guidelines used to originate the mortgages, the credit characteristics of the loans, and the absence of negligence or fraud in the origination process.  Assured alleges that many of the loans have defaulted, resulting in $82.4 million in claims paid to date.  In denying Flagstar’s summary judgment motion, Judge Rakoff found that Assured need not demonstrate loss causation – that is, that the representation and warranty breach caused the loan to default and caused Assured to suffer damages – but rather that Assured could prevail if it proves that the representation and warranty breach materially increased the risk of loss to Assured.  Trial in this matter is scheduled for October 9.  Judge Rakoff’s ruling is similar to that of Judge Paul Crotty in Syncora Guarantee Inc. v. EMC Mortgage Corp., a decision covered in the June 25 issue of the Week in Review.  Order.