Typically, when an insurer relies on material misrepresentations made by the insured upon application for coverage, the appropriate remedy is rescission of the policy.  But there may be circumstances where rescission is impractical or inappropriate, as recently occurred in Syncora Guarantee Inc. v. Countrywide Home Loans, Inc. 

As has been well documented, Countrywide has been under fire for various lending practices that were exposed when the housing bubble burst. Here, Countrywide sold or conveyed Mortgage Loans to trusts. The trusts, in turn, issued notes backed by the Mortgage Loans to investors. The investors were promised a return of principal with interest. Syncora, in essence, insured that payments received from the Mortgage Loans would be sufficient to cover the payments due to the investors.  If the mortgages were not paid, the policies issued by Syncora would cover the shortfall.

Syncora eventually filed suit against Countrywide, alleging that Countrywide misrepresented the terms of the underlying Mortgage Loans, and claims that if it had known the true details of the loans, it may have either declined to issue its financial guaranty insurance policies or issued the policies on different terms.  Syncora made claims for fraud, breach of contract, and for “rescissory damages.”

The insurer argued that it was entitled to rescissory damages because rescission of the policy would be unfair to the investors, was prohibited by the underlying investment contracts, and it also appears the Syncora had already paid out indemnity under the policies.

The Court pointed out that, “rescissory damages, while not often used in New York, are far from an unknown form of relief. … Rescissory damages are designed to be the economic equivalent of rescission in a circumstance in which rescission is warranted, but not practicable. A solid body of case law so holds.”

Countrywide argued that several courts applying New York law have held that rescissory damages are not available in New York, but the Court found that, although the cited cases did not grant rescissory damages, the cases did not hold against their availability.  The Court found that, under the circumstances of this case, rescission was warranted but impractical.  As such, the Court held that if Syncora can prove its case, it is entitled to rescissory damages, less premium collected.

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