By March of 1992 Bermuda Fire & Marine Insurance Co. Ltd. had been forced to pay out $16 million in gross claims over 18 months as it was unable to collect money owing by reinsurers, a court heard yesterday.

The cash outflow was noted six months after the 1991 reorganisation of the company.

The company would ordinarily have paid about 25 percent of the total and collected the rest from reinsurers. But due to legal concerns by brokers and reinsurers over the running of H S Weavers underwriting agency in London, the money was being withheld and Bermuda Fire was facing a cash flow crisis.

Clare Montgomery, lawyer for Bermuda Fire's liquidator, yesterday continued questioning John Patterson, the company's former chief accountant and secretary about how much management and the board knew about the problem.

"I don't think there was an end in sight at that point,'' Mr. Patterson said about attempting to get the debts in before Bermuda Fire ran out of ready cash.

The liquidator claims the defendants in the Supreme Court civil trial knew about the bad debt and cash flow problem and didn't properly reserve for the possible liability on the international operation.

Bermuda Fire's international insurance coverage was highly leveraged through thousands of reinsurers, who were on the hook for an average of 75 percent of possible liability.

In the latter half of the 1980s the company began running into problems as some reinsurers started going into liquidation in the early 1990s, or were refusing to pay until legal problems were sorted out at Weavers.

By 1991 Bermuda Fire had estimated bad debt on outstanding losses at $9.5 million which it put on its books as a liability discounted at $5.3 million.

"We had a cash flow problem,'' Mr. Patterson said.

Ms Montgomery questioned why the company didn't make a provision for estimated future claims.

Mr. Patterson said a general reserve on bad debt would have covered the incurred but not reported liabilities.

During questioning it emerged that Mr. Patterson had forgotten he was chairman of a Bermuda Fire security committee set up in 1989 to assess the bad debt problem. He had believed the committee was chaired by then chief executive Cyril Rance.

A list was established which classified the company's reinsurers according to their ability to pay. By 1991 the list of reinsurers the company believed it wouldn't be able to collect from had swelled.

An analysis of the reinsurers on the list at that time noted that many were of "poor quality'' and some were "dubious'' companies.

As Bermuda Fire started paying the portion of the claims it wasn't able to collect from reinsurers it began draining cash from its deposit accounts to cover the losses.

Ms Montgomery showed Mr. Patterson warnings from actuarial firm Tillinghast that its estimates of future liability excluded bad debt and that the exclusion might lead to underestimation of reserves.

She also noted that Tillinghast had warned the reserves might have been underestimated because the company was also excluding losses on pollution claims.

A February 1988 Tillinghast report noted that the company has specifically requested that its estimates exclude pollution coverage. The company was only reserving for legal expenses to defend against pollution claims. Mr. Patterson said company policy was that pollution was excluded from its coverage and so Bermuda Fire was not liable.

He said he was not aware that Weavers, through which the company wrote much of its international coverage, had been reserving for pollution claims and legal costs in 1997.

Tillinghast noted the provision in its 1987 report but noted that "under instructions'' pollution claims had been excluded from its estimates of Bermuda Fire's future liability.

Tillinghast had even gone so far as to remove pollution estimates from the Weavers figures for Bermuda Fire.

Mr. Patterson continues giving testimony today.