The Court of Appeals issued an important decision in the residential mortgage-backed securities litigation saga in the Ambac case on June 27. The court found that financial guaranty insurer Ambac Assurance Corporation will be required to prove both justifiable reliance and loss causation in its upcoming fraud trial against securities issuer Countrywide Home Loans.

Ambac successfully argued in the Commercial Division that, pursuant to Insurance Law Section 3105, it was exempt from having to prove reliance on Countrywide’s allegedly fraudulent statements and could recover all $2 billion of its insurance payments regardless of whether those payments resulted from the alleged fraud. The Court of Appeals rejected Ambac’s argument that Section 3105 alters the insurer-plaintiff’s burden of proving the traditional elements of a fraud claim, and further held that Ambac was limited to the repurchase protocol provided in the parties’ contracts as its exclusive remedy for breach of contract and could not recover attorney fees.