An insolvent creditor of Bermuda Fire & Marine Insurance Co. (BFMIC) in liquidation is in the middle of a dispute with Lloyd's underwriters that has led to allegations of bad faith.

Transit Casualty Co., which collapsed in Missouri 1985, has filed breach of contract and bad faith suits against Lloyd's underwriters for refusing to cover $3.3 million in paid claims allowed by the estate.

The 15 Lloyd's syndicates are also liable for $23.3 million in Transit reserves, and may eventually owe the estate a total of $40 million, Business Insurance (BI) has reported.

But Lloyd's underwriters have also levelled bad faith charges, as one syndicate claimed Transit had made a practice of improperly allowing claims from large corporate policyholders.

Lloyd's underwriters alleged Transit allowed the claims to boost the reinsurance recoveries and pad incentive bonuses paid to Transit managers under deferred compensation plans.

BI said the plan has already cost Transit $21 million, including several million dollars payable to special deputy receiver J. Burleigh Arnold and his two top officers.

The Transit estate at March 31 reported total assets of $564.9 million and estimated unpaid liabilities of $3.5 billion.

The receivership had recovered assets of $987.7 million, including $654.5 million from reinsurance, and had distributed $233.3 million to Transit creditors, representing 25 percent of allowed policyholder claims.

Transit had for years written heavily-reinsured Fortune 500 liability business, which led to costly pollution and asbestos claims, and mass tort product liability losses.

Its reinsurance had been placed with 900 principally non-US reinsurers, 85 of which was said to be Bermuda companies.

Two of those Bermuda companies in 1993 were BFMIC and Belvedere Insurance Co., although the latter was said to have paid all outstanding claims.