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BOSTON-The Massachusetts Insurance Division has "seriously damaged the integrity and credibility" of state regulation in its "fundamentally flawed" handling of Electric Mutual Liability Insurance Co.'s 1995 redomestication, a blistering legislative report charges.
The preliminary report by Massachusetts House investigators also expresses "serious reservations" about a proposed Insurance Division settlement with EMLICO and sole policyholder General Electric Co., and recommends that regulators instead try to return EMLICO to Massachusetts from Bermuda, where it collapsed in 1995.
The House Post Audit & Oversight Bureau released the confidential report last week after its contents were reported in the Boston Globe.
Insurance Commissioner Linda Ruthardt labeled the report "bizarre" and "filled with inaccuracies," but she declined to comment on its specifics.
In a measure of the suspicion and ill feeling surrounding the EMLICO affair, Ms. Ruthardt also initially questioned whether the report itself was a hoax.
Before learning that it had been publicly released by the House bureau, Ms. Ruthardt pointed to some of its conclusions-questioning the proposed settlement, for example-and said, "That's why I suspect this may be a spurious document."
She went on to speculate that the report may have been produced by an EMLICO reinsurer. Several reinsurers have charged that the redomestication was a fraud and have opposed the settlement, which would keep EMLICO's liquidation in Bermuda and name the Massachusetts division ancillary receiver.
"It must behoove someone to influence a judge of the Supreme Judicial Court," she said, referring to Justice John M. Greaney, who is expected to rule shortly on the settlement proposal. "The timing is particularly interesting."
Meanwhile, state Sen. Diane Wilkerson, D-Suffolk, chairwoman of the Joint Committee on Insurance, greeted the report enthusiastically.
"It substantiates the validity of all the concerns I've had for several months," Sen. Wilkerson said. "For me, the House bureau report is something of a vindication."
Sen. Wilkerson's committee grilled Ms. Ruthardt last year during a hearing on the EMLICO debacle (BI, Nov. 4, 1996).
EMLICO, a longtime GE liability insurer, won Insurance Division approval to move to Bermuda in 1995 after spinning off all of its business except decades of loss-plagued GE general liability policies. Within four months of the move, EMLICO declared itself hugely underreserved for pollution and asbestos losses and insolvent by more than $500 million.
In a barrage of litigation that followed, EMLICO reinsurers charged that the insurer knew it was insolvent and plotted its redomestication with GE to take advantage of Bermuda liquidation statutes that would speed up reinsurance recoveries.
The House Post Audit & Oversight Bureau, an investigative arm of the legislature, launched its own inquiry, subpoenaing thousands of pages of documents and taking sworn testimony from Kevin McAdoo, an assistant insurance commissioner who was involved in reviewing the redomestication and later investigating the alleged EMLICO fraud.
The bureau's preliminary report found the Insurance Division's handling of the redomestication was "fundamentally flawed and failed to achieve the level of oversight necessary to protect. . .the integrity of the insurance and reinsurance industry in Massachusetts."
House investigators "found no evidence to suggest that this type of corporate reshuffling with an ultimate change of domicile to Bermuda had ever been attempted by a United States-based insurer," the report says. "Nonetheless, the (Insurance Division) treated this extraordinary move as if it were a change from Springfield to Hartford."
Among other things, the report says that:
Regulators "apparently chose to ignore precedent" in Massachusetts law that provisions allowing redomestication to another "state" do not intend "state" to include a foreign country like Bermuda.
Reinsurers have charged that the Insurance Division relied on an opinion of EMLICO's own lawyers on this issue.
The Insurance Division's financial review of EMLICO before the redomestication "appeared limited and routine, despite the fact that the ultimate end of the EMLICO affiliated group was a corporate restructuring transaction that had never been undertaken by a domestic insurer."
GE and EMLICO documents dated in 1994 include a GE demand for payment from EMLICO of more than $500 million in environmental claims and indicate the existence of more than 500 contaminated sites that could produce claims, the report says.
An Insurance Division official told House investigators, though, that "he had not seen such documents or anything like them."
"As it now stands, there are no easy answers to the myriad of legal issues that have been raised by this redomestication. The only way to expeditiously resolve them is to reopen the issue of whether the Commissioner had the authority to let EMLICO leave the country," the report says, calling for an effort to repatriate the insurer to Massachusetts "if legally possible."
The report adds that "if, as the Commissioner has indicated, a number of serious questions about the actual timing of EMLICO's solvency remain, then no settlement should be considered until those questions are answered."
The House bureau also recommends changes in state law that would:
Require a redomesticating property/casualty insurer to post a bond equal to 20% of loss reserves, with release of the bond dependent on two years of solvent operation after the move.
Require regulators to hold public hearings on any significant insurance company restructuring. Such hearings are not currently required.
Investigators prepared the preliminary report so that members of the House Post Audit & Oversight Committee could decide whether further inquiry was necessary, according to Thomas W. Hammond Jr., director of the Post Audit bureau.
The committee voted May 28 to continue the EMLICO investigation, Mr. Hammond said.