EMLICO move `unlawful': The EMLICO row has taken a dramatic twist with a court ruling the company's transfer to Bermuda was invalid. The decision is a blow to state commissioner of insurance Linda Ruthardt. David Fox reports A US court has declared an insurer's move to Bermuda invalid.

The Massachusetts court said the state commissioner of insurance, Linda Ruthardt, had no authority to approve the transfer.

And it ruled Electric Mutual Liability Insurance Co. (EMLICO)-- now under a Bermuda Supreme Court liquidation order -- "never ceased to be'' a Massachusetts insurer.

Ms Ruthardt authorised the redomestication to Bermuda of EMLICO in 1995.

But the Supreme Judicial Court (SJC) for the Commonwealth of Massachusetts, yesterday siding with EMLICO reinsurers on a crucial issue, said in a landmark ruling she had stepped beyond her authority.

There was prior speculation about the consequences in Bermuda if the court declared the redomestication invalid.

However, writing for the four-member court, Justice Abrams noted: "EMLICO's status as a Bermuda corporation is, of course, a matter of Bermuda law and not before us in any event. We simply hold that EMLICO remains a Massachusetts insurer.'' The court further stated: "The commissioner argues that, even if her approval was invalid, EMLICO still has incorporated in Bermuda and commenced liquidation proceedings there. Therefore, she argues, an invalid redomestication is immaterial to the legal sufficiency of her petition. We disagree. The commissioner has relied on her order authorising EMLICO to transfer to Bermuda. Further, the petition assumes that the proper site for the liquidation of EMLICO is Bermuda rather than Massachusetts. This assumption rests on her premise that her redomestication order was valid. That order, however, was beyond the commissioner's power and authority.

"The commissioner's reliance on an invalid transfer to Bermuda therefore renders the petition legally insufficient.

"Section 49A (of the relevant Massachusetts statute) provides that a domestic insurer `upon such a transfer shall cease to be a domestic insurer.' "Because, as discussed above, a domestic insurer cannot be redomesticated to a foreign country under section 49A, there was no lawful transfer, and EMLICO never ceased to be a Massachusetts insurer.'' At issue was the interpretation of the law which authorised a domestic insurer to "transfer its domicile to any other state.'' The commissioner last March filed a petition in the SJC for the County of Suffolk seeking to be appointed the US receiver of the insurer for the Bermuda liquidation. The petition proposed a settlement agreement that was supported by EMLICO, affiliated company Electric Insurance Co. (EIC) and EMLICO's ultimate parent and sole policyholder, General Electric Co. (GE). It was not supported by some of EMLICO's reinsurers. The court said they were not persuaded by the contention of EMLICO, GE and EIC that because they all support the petition, and only the reinsurers oppose it, the single justice must automatically let the county court proceed to the merits of the petition.

Justice Abrams wrote: "A judge has a duty to dismiss a petition which he or she concludes is erroneous as a matter of law.'' He said: "We conclude that had the Legislature intended to facilitate redomestication to a foreign country, possibly subjecting policyholders and creditors to the vagaries of foreign law, it would have expressed this intent unambiguously, as other State Legislatures have.'' Ms Ruthardt contended that "state'' referred to foreign countries as well as US states.

The court replied: "We do not agree. We conclude, contrary to the commissioner's interpretation, that the word `state' in section 49A refers only to states of the United States. Because the commissioner's petition relies on the validity of her ruling that the word `state' ...includes foreign countries, we remand the case to the county court for the entry of a judgement dismissing the commissioner's receivership petition.'' Back in 1995, the commissioner had accepted EMLICO's statement that it had a surplus of $250 million and issued an order approving EMLICO's move to Bermuda June 28, 1995.

Her approval was a key requirement for the Bermuda insurance regulators to accept the company's incorporation here, effective July 1.

But once in Bermuda, and just four months later, the company declared it was insolvent by some $500 million.

The commissioner had approved a splitting of EMLICO's business, sending non-GE business to EMLICO subsidiary Electric Insurance Co. (EIC), before EMLICO redomesticated to Bermuda. The company is laden with still developing pollution liability claims from GE in the hundreds of millions of dollars, potentially billions, relating to toxic waste dumps.

GE and EMLICO have denied some reinsurers' claims that they knew EMLICO was insolvent in the US and moved the "bad'' business here specifically for the purpose of liquidation, because Bermuda insolvency law made it a more favourable jurisdiction than the US for GE, as sole creditor, to control the liquidation.

COURTS CTS