(CN) - MBIA Insurance doesn't have to link insurance claims paid on mortgage-backed securities to allegedly fraudulent statements made by issuer Countrywide Financial to prove its fraud claims a New York State Supreme Court judge has ruled.
     Instead, Judge Eileen Bransten said, to establish its claim of fraud, "MBIA must prove that Countrywide made representations that were material to its decisions to issue the insurance policies."
     MBIA filed suit in 2008 accusing Countrywide, later purchased by Bank of America, of misrepresenting the risk of over 368,000 residential mortgages it used to fund $20 billion in asset-backed securities.
     Countrywide maintained that MBIA had to prove that the alleged misrepresentations were the cause of the insurance claims and that they could not be traced to any other factor like the economic downturn that began in late 2007.
     Judge Bransten disagreed, noting that both New York common law and insurance law are "clear that a material misrepresentation made at the time an insurance policy is being procured may lead to a policy being rescinded and, or, avoided."
     "The court therefore finds that no basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentation allegedly made by Countrywide and claims made under the policy," Bransten states.
     MBIA will also be allowed to pursue damages, limited to the difference between whatever claims they pay out and premiums received, should they prove their fraud case.
     Countrywide had argued that MBIA was limited to rescission of the policies -either revoking them or refusing to pay.
     The judge sided with MBIA saying that such damages would "make MBIA whole without providing a windfall." She also agreed that MBIA was bound under its contracts with the policy holders to pay valid claims and that rescission could cause widespread economic harm.
     MBIA has filed similar misrepresentation suits against Morgan Stanley and IndyMac , while it is itself the subject of a $5 billion suit by twenty banks and financial services companies who claim that it fraudulently restructured itself in February 2009 to avoid the potential impact of its insurance liabilities.