NEW YORK -- A mammoth $168.8 million property loss that pitted General Mills Inc. against its own captive insurer has now triggered a bankruptcy court battle between the captive and its Bermuda reinsurer.

The reinsurer, Hopewell International Insurance Ltd., which has been in runoff in Bermuda since 1995, has filed for bankruptcy protection in New York in the face of a threatened lawsuit by General Mills' captive, Gold Medal Insurance Co.

In its filing, Hopewell seeks an injunction barring Gold Medal from suing it in the United States. That would instead force the captive to arbitrate an expected dispute over the huge General Mills loss in Bermuda under the terms of a so-called scheme of arrangement that has governed Hopewell's runoff.

A U.S. lawsuit by Gold Medal, Hopewell contends, could torpedo the entire runoff scheme by encouraging other Hopewell captive policyholders to sue rather than arbitrate in Bermuda.

General Mills and Gold Medal, however, charge that the bankruptcy filing is the latest in a series of bad faith actions by Hopewell to delay its day of reckoning on the loss, which arose from massive pesticide contamination of General Mills grain.

"When the history of this claim is reviewed in its entirety, we believe it is clear that Hopewell will be shown to be hiding behind various procedural devices as a pretext to minimize its exposure and the exposure of (its) retrocessionaires," Stephen A. Cozen, a lawyer for Gold Medal, said in a January letter to Hopewell's lawyers.

The reinsurer is trying to force a Bermuda arbitration, General Mills charges, because under Bermuda law Hopewell would not automatically be bound to indemnify Gold Medal for any payment to General Mills.

General Mills also has attacked the runoff scheme itself, charging that Gold Medal -- potentially Hopewell's largest creditor -- was unfairly deprived of a vote on the plan. While the scheme required approval of captive ceding companies representing 75% of Hopewell's claims, Hopewell valued the General Mills pesticide claim at zero for voting purposes.

Gold Medal has not yet filed a formal claim with Hopewell, though it notified the reinsurer of the loss early on.

The captive and its parent company were scheduled last month to arbitrate a dispute between themselves over the exact amount of the loss. That arbitration was postponed, though, when Hopewell filed its bankruptcy petition.

A hearing on Hopewell's petition for protection under section 304 of the U.S. Bankruptcy Code is scheduled for Sept. 17.

Minnesota-domiciled Gold Medal was one of more than two dozen captives that ceded business to Hopewell, a property reinsurance facility operated by International Risk Management Group Ltd. exclusively for captive management clients of IRM and its affiliates.

Under the program, General Mills insured its property, business interruption and stock risks with Gold Medal with a $20,000-per-claim deductible. Gold Medal then ceded 100% of the risk excess of a $200,000 self-insured retention to Hopewell, which in turn kept 4.9% of the risk and retroceded the rest to dozens of other treaty reinsurers worldwide.

In 1995, "unfavorable market conditions" and low capitalization prompted Hopewell to cease underwriting. While still solvent, the reinsurer entered voluntary runoff under a scheme of arrangement approved by its creditors and later ratified by a Bermuda court.

The General Mills dispute began in 1994, when the Minneapolis-based cereal maker discovered that an independent contractor handling its stores of raw oat grain had been spraying them with a pesticide not approved by the U.S. Food and Drug Administration.

The spraying had occurred in 18 separate shipments of grain over a two-year period, court records say. General Mills later destroyed raw grain and 50 million unsold boxes of cereal after selling and shipping 110 million additional boxes made with the treated grain. The FDA announced that the pesticide was not a health threat, and General Mills did not recall the cereal it had already sold.

The contractor, which had used the unapproved pesticide while billing General Mills for a more expensive FDA-approved chemical, was convicted on fraud and other charges in 1994 and sentenced to five years in prison.

General Mills -- which initially pegged its losses as high as $226.3 million but later agreed to a "compensable loss" figure of $168.8 million -- filed a claim with Gold Medal. Gold Medal, however, denied coverage, arguing that there was no physical damage to property and citing policy exclusions for contamination and faulty materials, according to court records and a lawyer involved in the case.

This led General Mills in 1996 to take the unusual step of suing its own captive in a Minnesota court. The cereal maker separately pursued a claim in New York federal court against National Union Fire Insurance Co. of Pittsburgh, Pa., a unit of American International Group Inc. that wrote a malicious tampering policy for General Mills.

National Union settled the $114.8 million tampering claim for $17.5 million, court records show.

Meanwhile, General Mills and Gold Medal in April agreed to settle their dispute in a "baseball arbitration," in which each side would submit a settlement figure and an arbitrator would decide which was the more reasonable.

Gold Medal also warned Hopewell that it planned to file a reinsurance claim after the arbitration and if necessary sue Hopewell in Minnesota state court to compel it to arbitrate the reinsurance dispute in the United States.

Shortly before the scheduled arbitration, though, Hopewell obtained a Bermuda court order barring Gold Medal from suing it in the United States. The next day, July 30, Hopewell filed its bankruptcy petition in New York, seeking a similar injunction.

In its petition, Hopewell says Gold Medal's threatened lawsuit is a violation of the reinsurer's court-approved runoff scheme, which requires all disputes to be arbitrated in Bermuda.

Gold Medal can't argue that it is not bound by the runoff scheme, as Hopewell's creditors and the Bermuda court approved it, Hopewell says.

In addition, any judgment Gold Medal wins against Hopewell in the United States could scuttle the Hopewell runoff plan, because the captive would likely try to collect directly from Hopewell's dozens of U.S. retrocessionaires. This would deplete Hopewell's assets and encourage other captive clients of Hopewell to follow suit, the reinsurer charges.

"Hopewell thought it needed to protect its assets in the U.S. -- particularly reinsurance receivables -- against the possibility that Gold Medal would seek to commence actions against the retrocessionaires," explained Jonathan Bank, a lawyer with Chadbourne & Parke, which is representing the Bermuda reinsurer.

General Mills and Gold Medal, though, charge that the bankruptcy filing is part of a pattern of bad faith conduct by Hopewell.

Gold Medal repeatedly invited Hopewell to participate in the defense of the pesticide claim, but Hopewell has refused and has declined to say how it would respond to a reinsurance claim. Hopewell also informed Gold Medal that its reinsurance agreement did not contain a "follow the fortunes" provision and that Hopewell would not be bound by any settlement or U.S. court judgment.

"Hopewell has already had a chance to associate with Gold Medal in the defense of the General Mills claim," the captive argues. "Hopewell deliberately chose not to do so as part of a scheme designed to compel General Mills to litigate its insurance claim not once, but twice -- the second time in Hopewell's home court."

General Mills also charges that its captive was unfairly deprived of the voting power it should have had when Hopewell submitted its runoff scheme for creditor approval. Gold Medal got voting credit only for a small claim it had already settled, and there was no provision for it to contest the voting power assigned to it, according to General Mills.

The runoff scheme improperly altered the provisions of the captive's contract with Hopewell -- including a clause calling for arbitration of disputes in Minneapolis -- and does not bar Gold Medal from taking legal action against Hopewell in the United States, General Mills and Gold Medal claim.

The captive insurer also denies that such action would threaten Hopewell's assets or the runoff scheme itself. Among other things, Gold Medal notes that Hopewell under the scheme collects from its retrocessionaires on a given claim and immediately pays that money to the captive insurer claimant rather than pooling all of its recoveries for a pro-rata distribution, as would happen in an insolvent liquidation. This means that Hopewell is merely acting as a "pass-through" for money that Gold Medal could collect directly, the captive argues.

General Mills and Gold Medal argue that Hopewell's bankruptcy filing should be thrown out for a number of reasons, including that the runoff scheme is a private contract and not the kind of court- or government-supervised proceeding that would qualify for ancillary bankruptcy protection in the United States.

While the two sides await a bankruptcy judge's ruling on the petition, they have agreed that General Mills and Gold Medal will not try to sue Hopewell and that Hopewell will stay its demand for a Bermuda arbitration.