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BOSTON-A state Supreme Court judge has refused to rule on the Massachusetts Insurance Division's proposed settlement with Electric Mutual Liability Insurance Co. until the entire court can decide whether EMLICO's redomestication and the settlement deal itself are legal.

In a setback for state regulators and sole EMLICO policyholder General Electric Co., Justice John M. Greaney last Thursday put off ruling on the settlement, which would continue EMLICO's Ber-muda liquidation while making the Massachusetts division ancillary receiver.

Justice Greaney ruled that the full court should first decide whether Insurance Commissioner Linda Ruthardt had the authority to allow EMLICO to move to a foreign country in the first place and whether state law allows her to act as EMLICO's ancillary receiver.

EMLICO reinsurers, which have charged that the redomestication was illegal and part of a fraud by EMLICO, hailed the ruling as a victory.

"Clearly, in his opinion he sees the merit of what the reinsurers are saying," said Joseph T. McCullough IV, a lawyer with Lovell White Durrant in Chicago, representing Kemper Reinsurance Co. "What he is saying is it's not good enough to just approve this settlement and not dig into it."

Representatives of the Insurance Division, EMLICO's Bermuda liquidators and GE, meanwhile, downplayed the ruling.

"We are still confident that on the basis of the facts the settlement will be approved," a GE spokesman said.

Even if Justice Greaney had ruled on the settlement itself, one side or the other would have appealed for review by the full Supreme Judicial Court, added Ian Crawford, a lawyer with Todd & Weld in Boston, representing EMLICO's liquidators. He declined to comment on whether the delay threatens the settlement.

The agreement gave EMLICO's liquidators the option of backing out if the court didn't approve the settlement by May 12. In his ruling, though, Justice Greaney ordered the parties to submit new filings over the summer and said the full court would hear oral arguments in September or October.

"We were hoping to have a quicker resolution," Mr. Crawford conceded. But the liquidators have not discussed the impact of the delay, and "no decision has been made" regarding the settlement, he said.

EMLICO, a longtime GE liability insurer, won Insurance Division approval to move to Bermuda in 1995. Within four months of the move, it declared itself massively underreserved for GE pollution and asbestos claims and insolvent by more than $500 million. The collapse triggered a storm of litigation, with reinsurers charging that EMLICO engineered its move in a fraudulent scheme with GE to take advantage of Bermuda liquidation laws that would accelerate its reinsurance recoveries.

State regulators launched their own investigation of charges that EMLICO had concealed its insolvency but dropped the inquiry in March when they announced their proposed settlement with EMLICO, a Massachusetts-based former EMLICO subsidiary and GE (BI, March 17).

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

Reinsurers labeled the deal a sham and, in a May hearing before Justice Greaney, attacked it on several grounds, including that the settlement and the redomestication itself violate Massachusetts law.

In his ruling last week, Justice Greaney refused to approve or reject the deal, instead agreeing with reinsurers that the full court should review it.

At issue are two sections of Massachusetts law. One, known as section 49A, allows redomestication of an insurer "to any other state." The other, section 180C-the basis for the settlement deal-provides for the court-approved liquidation of an insolvent "domestic company."

Kemper Re and other reinsurers argued that the word "state" in section 49A does not include a foreign country like Bermuda and that EMLICO's redomestication was illegal. On the other hand, if EMLICO's move was legal, it ceased to be a "domestic company" under section 180C and the court has no authority to approve a settlement creating a Massachusetts ancillary receivership, reinsurers argue.

"I conclude that a question exists as to whether the requirements of (section 180C) have been satisfied so as to enable the petition to be considered on its merits," the judge ruled.

He said this issue also raises two other questions: whether a domestic insurer such as EMLICO can, under section 49A, be allowed to redomesticate to a foreign country; and the effect of an invalid redomestication on the legal sufficiency of the commissioner's petition under section 180C.

"I view resolution of the questions to be important for other reasons as well," the judge added. "If the petition is approved, the case could establish a precedent for other insurers to seek to redomesticate to Bermuda or to another foreign country and, in the event of an ultimate insolvency, use Massachusetts as an ancillary site to deal with local or United States claims.

"Any such procedure, in my opinion, should be on firm legal ground," he wrote.

In a footnote, the judge also noted a recent scathing legislative report on the Insurance Division's handling of EMLICO and Ms. Ruthardt's response noting her own "frustrations" with the redomestication.

"In my view, this is not a happy state of affairs and emphasizes the need for careful examination of the petition in view of the precedent that may be set," he wrote.

In another footnote, Justice Greaney invited the parties to consolidate appeals of other EMLICO-related rulings by lower Massachusetts courts. Reinsurers, for example, may try to consolidate their appeal of a state judge's April ruling that they have no standing to sue the Insurance Division to reverse the redomestication (BI, April 7).

Separately, the Bermuda Court of Appeal has given Kemper Re leave to appeal a ruling that blocked its efforts to obtain judicial review of Bermuda government orders allowing the redomestication (BI, June 23).