LONDON-Willis Corroon Group P.L.C.'s decision to put Sovereign Marine & General Insurance Co. Ltd. into provisional liquidation earlier this month could have ramifications for other underwriters and policyholders.

But the extent of such fallout is unknown until it is clearer what prompted Sovereign to exit an orderly runoff and enter provisional liquidation.

The answer lies in a recent arbitration decision against Sovereign that has not been made public.

As a result of the arbitration ruling-which favored one of Sovereign's reinsurers, AXA Re-insurance (U.K.) P.L.C.-Sovereign asked Willis for unlimited financial backing. Willis refused, having already pumped 72.8 million pounds ($122.2 million) into Sovereign's reserves since the insurer entered runoff in 1991, as well as footing 20 million pounds ($33.6 million) in runoff expenses.

Tony McMahon and Phil Wallace, partners in KPMG corporate recovery practice in London, were appointed provisional liquidators for Sovereign on July 11.

While the arbitration decision is sealed, it is known that the ruling hinged on a clause common to many standard reinsurance contracts.

The arbitration decision is not being appealed by Willis, though AXA Re is considering whether to appeal on two findings by the arbitrator that were not in its favor, according to AXA Re Managing Director Kenneth Haddon.

A spokesman for Willis acknowledged that the arbitration decision "goes beyond one particular reinsurance treaty and could have wider ramifications than for Sovereign." But the spokesman denied that the other members of a stamp shared with Sovereign would be affected.

"There may well be implications for companies on the stamp" that were covering the same risks as Sovereign, all of which were underwritten by Willis Faber Underwriting Management Ltd., contends a London underwriter who did not want to be named. "There may be implications" in general for other insurers in other arbitration proceedings, he said.

Between 1979 and 1991, Sovereign led the Willis Faber Underwriting Management stamp, in which a pool of insurance companies wrote casualty, marine, aviation and non-marine business. During that time, the stamp changed as some insurance companies came and went. Two elements remained constant: Sovereign always led the business, and Tokio Marine & Fire Insurance Co. Ltd. of Japan was always one of the participants.

Other participants on the stamp included: Mitsui Marine & Fire Insurance Co. (Europe) Ltd.; Allianz International Insurance Co. Ltd.; Uni Storebrand Insurance Co. (U.K.) Ltd.; Atlantic Mutual Insurance Co.; Heddington Insurance (U.K.) Ltd.; Cornhill Insurance P.L.C., now owned by Allianz; French insurer CAMAT; and Wausau Insurance Co. (U.K.) P.L.C.

For Sovereign policyholders, it means that there will be a halt to claims payments until provisional liquidators come to grips with the company's assets and liabilities, said Marialuisa Gallozzi, a partner with Covington & Burling in Washington, who represents the International Policyholders Assn. Policyholders probably now will only get "cents on the dollar," she added.

Some of the Sovereign policyholders are in the United States. According to the Willis annual report, some of the claims relate to asbestos and environmental liability.

It is not clear what this will mean for other London market policyholders, though Willis' example could prompt the parents of troubled insurers to try to "clean up their books" and separate themselves from those underwriting subsidiaries, said Ms. Gallozi.

Sovereign has been in business since the turn of the century and was acquired by Willis in 1922. Sovereign was put into runoff in 1991, following a series of losses and the decision of other stamp companies such as Tokio to start underwriting their own business in London.

The recent arbitration decision involved a dispute over two of Sovereign's casualty surplus reinsurance treaties, which were led by Munich Reinsurance Co. and on which AXA Re participated. Although the other reinsurers paid their claims without question, AXA Re refused.

The value of the two reinsurance contracts in dispute totaled 10.2 million pounds ($17.4 million) as of Dec. 31, 1996, for paid and outstanding losses and incurred-but-not-reported claims, according to Willis's annual report.

As a result of the decision to put the insurer into provisional liquidation, all of Sovereign's reinsurance contracts could be affected, though why and how they are affected remains unclear unless the arbitration decision is made public through a court appeal or other means.

Sovereign's total reinsurance recoveries at year end 1996 were 168 million pounds ($287.3 million), while its gross outstanding claims totaled 240.3 million pounds ($410.9 million), down from 287 million pounds ($445.7 million) in 1995, according to Willis's annual report. Willis is not required to release capital and surplus figures for Sovereign, which will be written out of the company's accounts and has a book value of 6 million pounds ($10 million), according to a spokesman.

If the arbitration decision does affect other members on the stamp, industry executives in London wonder whether that would strain Willis' longstanding broker relationship with Japanese insurers Tokio Marine & Fire and Mitsui Marine & Fire.

However, a Willis spokesman stated, "There is the mistaken assumption that we will have broking clients who will suffer. We don't think that is the case. And we believe that they understand the business they are in and accept that there was no alternative" but to put Sovereign into provisional liquidation.

Tokio Marine & Fire is content with Willis' interpretation of events. "We have been told by Willis that (the arbitration decision) does not relate to Tokio U.K. or other member companies," said M. Goto, company secretary for Tokio U.K. in London. Tokio has had discussions with Willis since it was announced that Sovereign would go into provisional liquidation, but Tokio "has not been informed" about the details of the arbitration decision. "If it related to the other member companies, Willis would tell us," said Mr. Goto.

Tokio U.K. will continue to allow Willis Faber Underwriting Management to run off the business it underwrote on the stamp up until late 1991, he added. WFUM expects to continue to run off the business for all stamp members, as well as for Sovereign.

Jack Ryan, chief executive for Heddington in London, another stamp member, would not comment on "anything to do with Sovereign."

Other members of the stamp either could not be reached or referred calls to Sovereign's provisional liquidators.