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BOSTON-The Massachusetts Insurance Commissioner is asking a state court to approve a settlement under which it would participate in overseeing the liquidation of Electric Mutual Liability Insurance Co. in Bermuda.
Reinsurers of EMLICO, however, contend the proposed deal puts them in a worse position for challenging claims by the failed insurer related to massive pollution and asbestos losses of its sole policyholder General Electric Co.
Under the terms of the settlement-reached last week among Massachusetts Commissioner Linda Ruthardt, GE, EMLICO's liquidators and an EMLICO affiliate-the Massachusetts commissioner will become U.S. receiver of EMLICO's winding-up in Bermuda.
Under the settlement, before any GE claim can be settled by EMLICO, the commissioner must submit it to a justice of the Supreme Judicial Court for Suffolk County (Mass.) for approval.
The claim will go directly to a special master-a lawyer-working under the authority of the court; the special master will make a recommendation to both the Massachusetts and Bermuda courts overseeing the liquidation. The plan calls for the special master to be appointed by the Massachusetts court based on recommendations by the commissioner, EMLICO and GE.
The settlement also calls for the Insurance Division
to drop its investigation into alleged fraud surrounding EMLICO's request for redomestication to Bermuda in 1995 and to declare the move final.
The settlement will become effective if approved by the Supreme Judicial Court for Suffolk County after a public hearing scheduled for April 8.
Also under the settlement, Electric Insurance Co.-a former EMLICO affiliate remaining in Massachusetts that assumed all non-GE business-must submit a business plan for its future operations and, in return, the commissioner will end her examination of Electric Insurance.
"This agreement paves the way for an efficient resolution to all claims brought in EMLICO's winding-up proceedings," said a statement from Coopers & Lybrand, EMLICO's joint liquidators in Bermuda.
The settlement is a partial resolution of the ongoing dispute over the redomestication of EMLICO. The company reorganized in 1995 by spinning off its non-GE liability business to EIC and then moving to Bermuda. A few months after the move, EMLICO declared itself underreserved for GE's pollution and asbestos claims and insolvent by more than $500 million.
Court fights erupted in both Bermuda and Massachusetts, with EMLICO's reinsurers charging that GE and EMLICO knew of EMLICO's impending insolvency and that moving to Bermuda was a strategy to take advantage of Bermuda liquidation laws permitting accelerated reinsurance payments.
In addition, a criminal grand jury sitting in Boston has been investigating the insurer's redomestication. That investigation is continuing.
Attorneys for EMLICO's reinsurers criticized both the settlement and Commissioner Ruthardt for agreeing to it.
"It's a sham," said Alice Richmond, an attorney with Richmond, Pauly & Ault in Boston, who represents underwriters at Lloyd's of London. "It puts us in a worse situation than under our reinsurance contracts," she said.
An attorney for another EMLICO reinsurer also attacked the settlement.
"It's astounding to me the commissioner has waived all rights on the fraud investigation." the attorney said. "It's another instance of the commissioner abdicating her responsibilities."
"It's curious at best why she is dropping the investigation when she assured the Insurance Committee (of the Massachusetts Legislature) in October she would get to the bottom of it and she has further strong evidence of fraud that has to come into her possession since she made that assurance," said Joseph T. McCullough IV, a lawyer with Lovell White Durrant in Chicago, representing Kemper Reinsurance Co.
The appointment of a special master to review GE's claims is the crux of the proposed settlement and also the focus of the reinsurers' criticism.
Ms. Richmond said the procedure by which the special master reviews claims is "not acceptable." She said the settlement means that since GE appointed the Bermuda liquidators to EMLICO and has a say in appointing the special master, "they are now completely in charge of the process," she said.
"It is the facade they have erected to give the appearance that Massachusetts will be given some meaningful role in the claim settlement process," Mr. McCullough said.
Under the settlement, the special master will have limited ability to reject a claim submitted by EMLICO's liquidators. It states the special master "shall not substitute his or her judgment for that of the parties to the compromise, but rather shall recommend approval of the compromise if it falls within a range of valuation that is fair and reasonable under the applicable policies of insurance."
The commissioner defended the provision, saying through a spokeswoman that she is "satisfied with the powers outlined in the agreement."
Also under the settlement, the reinsurers are not permitted to obtain additional information or question witnesses from EMLICO or GE on claims submitted to the special master, though they can submit comments and appear at a hearing before the special master arrives at a recommendation.
Also criticized by the reinsurers is a provision that allows GE or the EMLICO liquidators to ask the special master or the Massachusetts court to declare some submitted documents confidential.
"It's another instance of a behind-closed-doors deal," said one attorney for an EMLICO reinsurer.
The presence of GE as a party to the settlement also concerns the reinsurers, who called it unusual that a policyholder is part of a settlement between the insurer and the insurance commissioner.
"It's evidence that GE is the mastermind," Mr. McCullough said. "GE is the one that is effectively the puppeteer and EMLICO and the joint liquidators are the puppets."
Commissioner Ruthardt also agreed to withdraw an amicus brief she submitted to assist the U.S. Attorney in obtaining documents subpoenaed from Kemper Re for his criminal investigation. EMLICO and GE opposed the release of the documents. Also, all documents related to her investigation will not be considered public records.