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BOSTON-A state judge will soon decide the fate of a controversial settlement deal in which the Massachusetts Insurance Division would become ancillary receiver of the defunct Bermuda-based Electric Mutual Liability Insurance Co.

Supreme Judicial Court Justice John M. Greaney last week presided over a contentious hearing in which the settlement was attacked by EMLICO reinsurers and defended by regulators, EMLICO's liquidators and sole EMLICO policyholder General Electric Co.

Reinsurer lawyers charged that the agreement allows GE to reap the benefits of an allegedly fraudulent scheme to move the hugely insolvent insurer to Bermuda to take advantage of the island's favorable liquidation laws.

The deal also will hamstring reinsurers' efforts to defend themselves against massive GE pollution and asbestos claims, the lawyers contended.

The deal is "entirely unworkable, entirely unrealistic, entirely unfair and entirely unreasonable," said Scott Lewis, a lawyer with Palmer & Dodge in Boston, representing Kemper Reinsurance Co. and Hannover Ruckversicherungs A.G.

The parties to the agreement, meanwhile, charged that the reinsurers are merely trying to escape their claim obligations and described the settlement as the best possible deal under the unusual circumstances of EMLICO's collapse.

"The (Insurance) Commissioner has concluded that a return of EMLICO from Bermuda is unlikely and has negotiated accordingly," said J. David Leslie, a lawyer with Rackemann, Sawyer & Brewster in Boston representing the Insurance Division.

The reinsurers' legal attack "is clearly intended to destroy the settlement and nothing more," he said.

Justice Greaney ordered the sides to submit a new round of briefs by Friday replying to each other's arguments. He is expected to rule within several weeks.

The schedule already means the judge will miss a May 12 deadline set by the parties for court action on the settlement. The agreement allows EMLICO's liquidators-Bermuda and London partners of Coopers & Lybrand-to back out if the deal is not approved by the deadline.

Reinsurers have charged that the deadline was an attempt to coerce quick court approval, but those involved now say the delay is unlikely to scuttle the deal.

Meanwhile, the Massachusetts Attorney General has rejected a call by the head of the state Legislature's Insurance Committee to withdraw from representing the Insurance Division in the EMLICO case. State Sen. Dianne Wilkerson , D. Suffolk, also said Insurance Commissioner Linda Ruthardt acknowledged her belief that EMLICO misled the division when it sought approval to redomesticate to Bermuda (see related story).

EMLICO, a longtime GE liability insurer, won quick regulatory approval in June 1995 for a reorganization plan in which it spun off its non-GE liability business into a former subsidiary, Massachusetts-based Electric Insurance Co.

EMLICO, retaining scores of loss-plagued GE policies dating back to 1952, then moved to Bermuda. A few months later, it declared itself massively underreserved for asbestos and pollution claims and insolvent by more than $500 million.

The collapse triggered an international legal brawl in which EMLICO reinsurers charged that the insurer concealed its insolvency from Massachusetts regulators in a fraudulent scheme with GE to take advantage of Bermuda liquidation law. That law, reinsurers note, allows liquidators to estimate future liability losses and recover their discounted value immediately from reinsurers, a practice that would not be allowed in a Massachusetts liquidation.

Commissioner Ruthardt last year declined to reopen the EMLICO redomestication but said she would investigate the fraud charges as part of an examination of EIC, the former EMLICO unit.

In March, the Insurance Division, EMLICO's liquidators, GE and EIC announced a settlement that would continue the Bermuda liquidation but name Commissioner Ruthardt as EMLICO's U.S. receiver (BI, March 17).

Under the settlement, GE environmental claims settlements negotiated by the Bermuda liquidators will be reviewed in Massachusetts by a court-appointed special master recommended by the Insurance Division, GE and EMLICO's liquidators.

Commissioner Ruthardt, in turn, agreed to drop her investigation of the alleged fraud and withdraw her support of other investigations, including efforts by the U.S. Attorney's office in Boston to obtain sealed EMLICO documents.

At last week's hearing and in court filings, reinsurers and a Massachusetts-based consumer group lashed out at the proposed settlement.

Commissioner Ruthardt "has abdicated her regulatory responsibility throughout the EMLICO affair and now comes before the court and asks it to abdicate to her," Mr. Lewis told Justice Greaney.

EMLICO's move to Bermuda was itself illegal, as state law does not allow regulators to approve redomestication to a foreign country and because EMLICO in fact was insolvent at the time, reinsurers charged.

"The entire structure that the commissioner asks you to approve is based on the assumption that the redomestication was lawful," Mr. Lewis told the judge.

Kemper Re and Lloyd's of London underwriters asked the court either to throw out the settlement or defer action until a court resolves challenges to the legality of EMLICO's move.

The reinsurers also argued that Massachusetts law does not allow Commissioner Ruthardt to act as ancillary receiver, because EMLICO is no longer domiciled or authorized as an insurer in the state.

Kemper and Lloyd's raised several other objections to the settlement agreement itself, labeling it inherently unfair.

The agreement, for example, still calls for GE's claims to be settled in Bermuda with liquidators GE itself has chosen, a situation that will result in "collusive" and inflated settlements, reinsurers allege.

"The fox is guarding the hen house-GE is effectively adjusting its own claims," Kemper Re argued in a brief.

In addition, the special master will be reviewing only the claim information submitted by the Bermuda liquidators; reinsurers will be allowed to comment on the settlements but cannot conduct discovery or cross-examine witnesses as part of the review, reinsurers note.

The time allowed reinsurers to comment-50 days after receiving notice of a settlement-is far too short for claims as large and complex as GE's, reinsurers say.

In fact, GE and EMLICO's liquidators may well combine some or all of GE's claims relating to more than $2 billion in potential cleanup costs at 600 sites into a single global settlement, a move that would put a "truly extraordinary" burden on reinsurers, the special master and the court, Kemper Re argued.

"If we never slept one minute from the time the claim was filed to the end of the 50-day period. . .we would have two hours to review each of 600 Superfund sites" and GE's related liabilities, Mr. Lewis argued.

While the settlement agreement would apply Massachusetts law to reinsurance coverage disputes, the reinsurers point out that it does not apply state insurance insolvency law to claims settlements by the estate. The result, reinsurers say, is that EMLICO's liquidators still will be able to estimate future liabilities and try to collect immediately from reinsurers through the special master process.

Kemper Re also rejected EMLICO's arguments that arbitration is the best place to resolve the reinsurers' disputes.

"It is a certainty that EMLICO will argue in subsequent arbitrations that reinsurers are bound by the outcome of the special master process," Kemper Re said in a brief. "They will assert that the special master's approval of any claim by definition means that the settlement was 'fair and reasonable' and, therefore, that reinsurers cannot object to the claim."

Other reinsurers objecting to the settlement included Commercial Union Insurance Co., Hannover Re and National Indemnity Co., a Berkshire Hathaway unit. All have begun arbitrations with EMLICO and asked the judge to throw out a stay of arbitrations called for in the settlement.

Also objecting was the Center for Insurance Research, a Cambridge, Mass.-based consumer group that has clashed with Commissioner Ruthardt in other cases. CIR argued that the deal could lead to higher insurance rates for Massachusetts policyholders and could jeopardize the Insurance Division's accreditation by the National Assn. of Insurance Commissioners.

General Re Corp., which also has fought the redomestication, withdrew its objections to the settlement agreement after regulators answered General Re questions on how the agreement would work.

The Insurance Division, EMLICO and GE, meanwhile, argued that the settlement is reasonable and within the commissioner's power. They also rejected the reinsurers' objections as groundless efforts by EMLICO debtors to avoid their obligations.

"All parties with cognizable interests support the petition," Mr. Leslie said. "Only certain debtors of the insurer object."

Among other things, the three parties urged Justice Greaney to ignore arguments about the legality of the redomestication and the alleged fraud; the only issues to be decided are whether EMLICO is insolvent and whether the settlement is in the best interests of the estate and GE, EMLICO argued.

A Massachusetts court recently ruled that reinsurers lack standing to challenge the redomestication, and a Bermuda judge separately concluded that arbitration is the proper forum to air the reinsurers' disputes, EMLICO said in a brief. Reinsurers are appealing both decisions.

The redomestication debate may be an "intellectually interesting exercise," but it has no practical effect because EMLICO is now a Bermuda company under control of a Bermuda court, said Thomas Martin, a lawyer with Shearman & Sterling in Washington, representing the Bermuda liquidators.

In fact, EMLICO could not be moved back to Massachusetts now because Bermuda law bars redomestication of an insolvent company, the liquidators note.

The settlement, with its special master review, "repatriates the significant issues that were 'lost' to Massachusetts through the redomestication," the Insurance Division maintains in a brief.

Reinsurers will have ample opportunity to challenge GE's claims in the Bermuda and Massachusetts proceedings, EMLICO's liquidators add.

"Before the joint liquidators determine whether to enter into any compromise with GE, they will provide the reinsurers with the opportunity to investigate claims, review documentation. . .and interpose defenses," the liquidators contend.

Between the Bermuda claims review and later reviews in Massachusetts, reinsurers wanting to challenge claims will have several "bites at the apple," not even counting later arbitration, the liquidators say.

"The work of the liquidation remains to be done and the longer the delay, the more assets are wasted," Mr. Martin told the judge. "You need not, should not, be the arbiter of every problem (the reinsurers) have in life."