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BOSTON-The Massachusetts Insurance Division may become ancillary receiver of the defunct Electric Mutual Liability Insurance Co. under a proposed agreement that would keep EMLICO's liquidation in Bermuda.
Under a deal still being negotiated last week, EMLICO claim settlements with sole policyholder General Electric Co. would be subject to Massachusetts regulatory and court approval. The Massachusetts division also would "aid in the collection and transfer of assets to the joint liquidators" in Bermuda, sources familiar with the talks confirm.
The division also likely would drop an investigation into charges that GE and EMLICO conspired to mislead regulators into approving the insurer's move to Bermuda, where it later declared itself insolvent by more than $500 million, sources say.
EMLICO's liquidators and GE representatives would not provide details of the proposal. Insurance Division officials declined to comment.
While waiting for an announcement of the plan's specifics, though, EMLICO reinsurers and some Massachusetts legislators last week were already voicing doubts about the deal, which one state senator complained was being "done behind closed doors."
It is unclear, for example, what impact the plan would have on claims against the reinsurers, several of which have charged that GE and EMLICO planned the Bermuda move specifically to take advantage of Bermuda liquidation laws that would accelerate reinsurance payouts.
Reinsurers and state lawmakers also objected to any abandonment of the inquiry into alleged fraud by GE and EMLICO and questioned how much control the Massachusetts division would have over massive GE pollution and asbestos claims settled by EMLICO's Bermuda liquidators.
In a letter to the state senator last week, Insurance Commissioner Linda Ruthardt said, "I am aware of concerns which have been expressed by EMLICO's reinsurers and anticipate that any settlement will materially address those concerns."
She also noted that any settlement will be subject to Massachusetts court approval.
The settlement talks are the latest twist in the complex saga of EMLICO, a longtime GE general liability insurer that reorganized in 1995, spinning off its non-GE business into a former affiliate, Electric Insurance Co., and moving to Bermuda. A few months after the move, EMLICO declared itself hugely underreserved for GE pollution and asbestos claims and insolvent by more than $500 million.
In subsequent court fights in Massachusetts and Bermuda, EMLICO reinsurers charged that EMLICO knew it was insolvent before the move and concealed the fact from regulators in a conspiracy with GE to take advantage of creditor-friendly Bermuda liquidation laws.
The charges have prompted an investigation by a Boston-based federal grand jury. Last week, the state's Supreme Judicial Court heard arguments over whether EMLICO reinsurer Kemper Reinsurance Co. may comply with a grand jury subpoena for documents that show EMLICO was considering runoff in Bermuda several months before the move.
A lower court ruled last year that Kemper Re may not turn over the documents, which earlier had been sealed at EMLICO's request (BI, Oct. 7, 1996).
Faced with the allegations, Ms. Ruthardt last year considered reopening the EMLICO redomestication but decided instead to pursue the fraud charges as part of an examination of Massachusetts-based Electric Insurance, headed by several former EMLICO officers.
As part of this investigation, the Insurance Division subpoenaed EMLICO-related records from several consultants, including Tillinghast-Towers Perrin.
The settlement talks between regulators, GE and EMLICO were disclosed last month when the parties jointly sought to delay a court action to enforce the Tillinghast subpoena (BI, March 3).
Sources familiar with the talks last week confirmed a Boston Globe report that the deal calls for the Massachusetts division to become ancillary receiver for EMLICO with oversight of GE environmental and asbestos claims settlements.
Under the proposed deal, EMLICO liquidators with Coopers & Lybrand would negotiate claim settlements with GE and then submit the settlement packages to Massachusetts regulators for approval, the sources say.
"Large" claims would also be subject to additional review by a special master appointed by the state Supreme Judicial Court, according to one source, who could not say how "large claims" will be defined. Reinsurers would have "ample opportunity" to air objections to these settlements in the court approval process, the source said.
If Massachusetts authorities rejected a settlement, it would return to Bermuda for renegotiation.
Massachusetts law would apply to the GE claims and to issues related to reinsurance coverage, according to the sources.
As part of the deal, the Massachusetts division also would reaffirm its approval of EMLICO's reorganization and is expected to drop its investigation of alleged fraud by GE and EMLICO, the sources say.
Reinsurers and legislators have already objected to this reported provision.
"The issue of fraud on a public agency is being swept under the rug," charged Joseph T. McCollough IV, a lawyer with Lovell White Durrant in Chicago, representing Kemper Re.
"I am concerned that the questions raised concerning the process utilized by the division in the course of the EMLICO hearings and the adequacy of the financial information provided to the division in this regard remain unanswered," State Rep. John P. Slattery said in a letter to Ms. Ruthardt.
"I respectfully urge you to incorporate into any agreement. . .a provision requiring full and complete disclosure of EMLICO's financial position as of the date of entry of the redomestication order."
State Sen. Michael W. Morrissey also questioned "why other people, including reinsurers, were not asked to participate, and the intent of having this deal done behind closed doors rather than through a public hearing process as it should have."
Reinsurers also raised several questions about the deal that remain unanswerable in the absence of specifics on how the agreement would work.
It is unclear, for example, whether EMLICO's liquidators might still argue that reinsurers are subject to Bermuda liquidation law, which allows the liquidators to estimate future claims and attempt to collect immediately from reinsurers, reinsurer lawyers say.
Also unclear is how the deal would affect the insolvency clause in reinsurers' contracts, which allows them to interpose defenses to GE claims against EMLICO. Reinsurer lawyers wonder, for example, whether Bermuda liquidators would be allowed to settle claims with GE with no argument from reinsurers.
Reinsurers also questioned whether Massachusetts authorities really will have much control over GE claims if the settlements are reached in Bermuda and presented to regulators as done deals.
"GE's claims against EMLICO will continue to be handled by GE's handpicked liquidators, with GE acting as the puppeteer," Mr. McCollough charged in a statement.
Negotiators for the Insurance Division, EMLICO's liquidators and GE were meeting Friday afternoon to work on the deal, and sources familiar with the talks said they were unsure when an agreement might be finalized.