The lawyer for Bermuda Fire & Marine Insurance Co. Ltd.'s liquidator yesterday challenged testimony in Supreme Court from a former board director that the 1991 reorganisation was based on what he had characterised as a reasonable and conservative estimate of the reserves needed to keep the company solvent.

Under questioning Richard Spurling, a former Bermuda Fire director, admitted that the company should "probably'' have made some reserves for legal defence costs against claims on pollution liability in the US.

Clare Montgomery, lawyer for liquidator Ernst & Young, was cross-examining Mr.

Spurling, a partner at Appleby Spurling & Kempe, about his knowledge of the financial status of the company in 1991.

At issue is the liquidator's allegation that the company's finance committee didn't reveal important financial information about Bermuda Fire's solvency to the full board. The liquidator also claims auditor Cooper & Lines and legal advisor Conyers Dill & Pearman didn't give the board the relevant advice on the reorganisation.

Mr. Spurling said he believed at the time of the reorganisation that Bermuda Fire would be left with about a $12 million surplus over the amount reserved for future claims on the company's international business.

Mr. Spurling repeatedly said he believed the board took a conservative view of the reserves required when transferring the profitable domestic business to BF&M Ltd.

Ms Montgomery pointed out that for the 1990 year Tillinghast estimated the company's reserves for unpaid losses would amount to $41.86 million, a 27.9 percent or $11.7 million deterioration over the previous year.

"Does that look like a trend down?'' she asked.

"No it looks somewhat erratic,'' he said.

Mr. Spurling agreed that if there had been another 27 percent deterioration in 1991 the surplus left would have been used up and the company would have breached the Insurance Act requirements.

She also queried whether the board had been given enough time at the September 6, 1991 meeting to fully consider making the final dividend in which $33 million worth of shares in BF&M was transferred from Bermuda Fire.

The meeting lasted 35 minutes and was taken up by presentations by Cooper & Lines, Conyers Dill & Pearman.

She asked whether the board had been told that the $33 million share dividend was not a distribution from profits under generally accepted accounting principles.

"I don't recall that,'' Mr. Spurling said.

He also didn't know the cost of the reorganisation. Ms Montgomery estimated that the reorganisation cost about $2 million after Mr. Spurling guessed it would be about $200,000.

He admitted he wasn't aware that a reinsurance policy with Sun Alliance had a cancellation clause in the event Bermuda Fire reserves fell below $8.9 million.

"If I'm right about the $8.9 million it might mean BFMIC (Bermuda Fire) only had to suffer a deterioration of $3 million for the cancellation clause to take effect,'' Ms Montgomery claimed.

Spurling's testimony challenged by liquidator Mr. Spurling that the information would be important for the board to know. He said he expected the finance committee, Cooper & Lines, and Conyers Dill & Pearman to inform the board of the clause. The Sun Alliance policy, taken out in 1988, covered Bermuda Fire's international business from losses on its book between $32 to $50 million.

He said he wasn't aware the US National Association of Insurance Commissioners had decided even before the reorganisation that under accounting rules Bermuda Fire didn't have sufficient capital to meet US requirements for insurance companies.

On the issue of bad debt he said he wasn't aware that at the time of the reorganisation Bermuda Fire had $127 million outstanding on money owning from reinsurers on claims.

"Would you agree that the failure to recover even 10 percent would leave BFMIC in 1991 insolvent?'' she said.

"Yes,'' Mr. Spurling said.

He said he wasn't aware that the market considered that 10 to 15 percent of reinsurance was irrecoverable in the London market. He said he wasn't aware of a note prepared by Irmgard Viera, then head of the international business, estimating such an amount on the bad debt.

"If true it would have grave consequences,'' Ms Montgomery said.

"Yes, if accurate,'' Mr. Spurling said.

He said he was aware that the Tillinghast estimates of Bermuda Fire's reserves assumed that all money would be recovered from reinsurers. He said he wasn't aware that auditors had suggested a figure of $5 to $7 million should be made for bad debt.

"Was that material?'' she asked.

"Yes,'' he said.

Questioned on potential pollution claims, Mr. Spurling said he understood exclusion clauses in Bermuda Fire policies protected the company from such liabilities.

He said he knew the issue was being contested in the US courts at the time. He said he thought that Bermuda Fire had sought legal advice from a US lawyer on the issue.

"We contend that no such advice was sought,'' Ms Montgomery said, referring to testimony from Keith White, the former head of the international division, that he believed the issue was too complex and so he didn't feel there was any need to consult a US lawyer.

"I wasn't aware of that,'' Mr. Spurling said.

Ms. Montgomery asked whether it was appropriate for Bermuda Fire to have made not reserves for pollution claims or court costs.

"There probably should have been some reserves for defence costs,'' Mr.

Spurling said.

He said he hadn't been informed that Cooper & Lines' actuaries had advised some reserve should have been made or that the auditors advised a margin should have bee put in place to cover pollution.

As a director of Mutual Reinsurance, which wrote similar business in the London market, he said he was aware that the company's auditors had recommended reserves for pollution liabilities.

Ms Montgomery drew his attention to Bermuda Fire's payouts for pollution claims and defence costs. She said the payouts for defence costs rose from $16,000 in 1986 to $757,000 at the end of 1991. Meanwhile incurred losses went from $12,000 in 1985 to $2 million by 1991.

Claims against the company went from $102,000 in 1986 to $5.3 million in 1990 and to $15.79 million at the end of 1991.

Mr. Spurling said he wasn't aware of such figures.

Ms Montgomery continues questioning Mr. Spurling today.

BUSINESS BUC