A New York state judge made it easier for the bond insurer MBIA Inc to pursue its $1.4 billion lawsuit accusing Bank of America Corp's Countrywide Financial unit of fraudulently inducing it to insure risky mortgage-backed securities.

New York State Supreme Court Justice Eileen Bransten ruled on Tuesday that to show fraud, MBIA need only show Countrywide misled it about the $20 billion of securities it insured, not that the misrepresentations caused its losses.

MBIA shares closed 8.1 percent higher.

MBIA accused Countrywide of misrepresenting the quality of underwriting for about 368,000 loans backing 15 financings it insured between 2005 and 2007, while the housing market was booming. It said it would not have provided insurance on the agreed terms had it known how the loans were made.

While not ruling on the merits, Bransten lowered the burden of proof on MBIA to show Countrywide committed fraud and breached its insurance policies.

No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy, she wrote, citing New York common law and insurance law.

The judge also said Armonk, New York-based MBIA may try to prove financial damages, while agreeing with Countrywide that it will not be an easy task.

She rejected Countrywide's argument that MBIA's only remedy was to void its insurance policies. MBIA had said that would be unfair to investors.

KEY DEFENSE REJECTED

The importance of today's ruling cannot be overstated, said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund.

Bank of America has lost one of its key defenses in the ongoing litigation over mortgage putbacks by the monoline insurers, he said. It could become significantly more devastating for the banks if it becomes a precedent for putback litigation over private label securitizations.

Bransten issued a similar ruling on Tuesday against Countrywide in a case brought by another insurer, Syncora Holdings Ltd's Syncora Guarantee unit.

Lawrence Grayson, a Bank of America spokesman, said the bank is reviewing the rulings.

The insurers' losses are due to the mortgage market collapse, a risk they agreed to insure, he said.

Jay Brown, MBIA's chief executive, said in a statement the insurer is very pleased with its ruling, which provides a straightforward path to recovery of our losses.

MBIA shares closed up 94 cents at $12.53 after earlier rising as much as 11.4 percent to $12.91. Bank of America shares rose 24 cents to $5.80.

BIG COSTS

Bank of America has incurred tens of billions of dollars of legal bills and writedowns tied to mortgages since the second-largest U.S. bank bought Countrywide in 2008.

In a November regulatory filing, Bank of America said unresolved litigation could significantly boost costs and materially impact future results.

It also said that, through September 30, it had resolved about half of the $6 billion of representations and warranties claims tied to monoline-insured transactions, including $2 billion in an April settlement with Assured Guaranty Ltd .

MBIA meanwhile was restructured by New York's insurance department in 2009 after the company, which traditionally insured municipal bonds, incurred big losses from insuring mortgage debt. Bank of America and some other banks are challenging that restructuring.

The cases are MBIA Insurance Corp v. Countrywide Home Loans Inc et al, New York State Supreme Court, New York County, No. 602825/2008; and Syncora Guarantee Inc v. Countrywide Home Loans Inc et al in the same court, No. 650042/2009.

(Reporting by Jonathan Stempel in New York; additional reporting by Karen Freifeld in New York, Ben Berkowitz in Boston and Rick Rothacker in Charlotte, North Carolina; editing by Carol Bishopric, Gary Hill and Andre Grenon)

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