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Insurance Law

Reed Smith LLP on Mortgage Insurers Cannot Cry Insurance Fraud: An analysis of United Guaranty Mortgage Ins. Co., v. Countrywide Financial Corp., et al.

By Lilit Asadourian, Reed Smith LLP

In United Guaranty Mortgage Ins. Co. v. Countrywide Financial Corp., et al., 2009 U.S. Dist. Lexis 96283 (C.D. Cal. 2009), the United States District Court for the Central District of California dismissed with prejudice United Guaranty Insurance Co.'s ("United Guaranty") tort and statutory claims against Countrywide, holding that United Guaranty could not seek "poolwide" rescission of its mortgage insurance policies. This article analyzes the court's decision in United Guaranty, and the impact it will have on mortgage insurers attempting to avoid coverage on policies issued before the collapse of the housing market.

In United Guaranty, United Guaranty sold thousands of mortgage insurance policies to Countrywide Financial Corp. and Countrywide Home Loans Inc. ("Countrywide") to insure mortgage loans that Countrywide originated and then securitized and sold on the secondary market to investors. When the Countrywide sought coverage under the policies for defaulting loans, United Guaranty filed a lawsuit against Countrywide in the Central District of California seeking poolwide rescission of coverage for thousands of loans.

Judge Pfaelzer of the Central District Court dismissed all of United Guaranty's tort and statutory claims with prejudice, leaving only claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The Court held that United Guaranty's claims could not sound in tort where sophisticated parties entered into sophisticated agreements and transactions that contemplated contractual remedies for the breaches United Guaranty alleged. Id. at *74. In addition, the Court held that nothing in the policies contemplated that United Guaranty could rescind the policies on a "poolwide" basis. Instead, to avoid liability, United Guaranty will have to demonstrate on a loan-by-loan basis for thousands of loans that there was some breach by Countrywide sufficient under the language of the policies to justify rescission of coverage as to a particular loan. Id. at *29-*30.

The United Guaranty decision will likely have far reaching implications for mortgage insurers and policyholders across the country. The Central District Court's opinion in United Guaranty will guide other courts considering whether a mortgage insurer can recover in tort for breach of contractually obligated representations, or whether global rescission is appropriate for mortgage insurance policies that provide insurance on a loan-by-loan basis.

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Lilit Asadourian is a senior associate in Reed Smith LLP's Insurance Recovery Practice Group and is a graduate of the UCLA School of Law.