commissioner of insurance to, "if legally possible, bring EMLICO back to Massachusetts.'' The preliminary report from the state House of Representatives Post Audit & Oversight Bureau, also states that claims of fraud against Electric Mutual Liability Insurance Co. (EMLICO) and General Electric (GE) can be decided "most expeditiously'' in Massachusetts.

And it calls for a thorough determination over whether the state commissioner of insurance ever had real authority to allow EMLICO to leave the US for Bermuda in the summer of 1995.

The document from legislative investigators is highly critical of the Massachusetts regulatory process by which EMLICO was allowed to move to Bermuda.

If the report's criticisms are valid, the Division of Insurance (DOI) didn't do its job. And that could have affected the decision made by Bermuda regulators to approve EMLICO's move.

As a professional and practical courtesy, Bermuda's insurance regulators would have relied on the DOI's satisfaction that the EMLICO application to move to Bermuda was all in order.

The investigators conducted an extensive preliminary review of the process by which the DOI evaluated and approved the redomestication from Beverly, Massachusetts to Bermuda. They used their power of subpoena to take testimony and review thousands of pages of documents.

The report, obtained by The Royal Gazette states that there were sufficient "red flags'' raised to put the commissioner of insurance Linda Ruthardt on notice that the proposed redomestication had ramifications for more than just General Electric Co. (GE) and EMLICO.

The report said that the DOI's process by which EMLICO was allowed to redomesticate was "fundamentally flawed and failed to achieve the level of oversight necessary...'' The report also stated that the complex EMLICO restructuring was unique and not previously done in the US, although Massachusetts regulators treated it as if it was an ordinary move.

Criticisms from the report include: The commissioner made no attempt to ensure widespread notice was made to the insurance industry of the proposed redomestication "despite the fact that GE and its mutual insurance company appeared to be commencing an entirely new process of quantifying the potential exposures of hundreds of contaminated sites.'' The DOI simply accepted the company's interpretation of Massachusetts laws governing redomestication without checking with independent counsel.

The DOI's financial review of EMLICO prior to redomestication appeared limited and routine, despite the fact the company was proposing to do something that had not been done before. The commissioner failed to appreciate the widespread ramifications of the restructuring and therefore no significant independent analysis was conducted.

The DOI failed to obtain all necessary documents from EMLICO that would lead to an informed decision, including documents that showed GE demanded from EMLICO $514.5 million in payment for claims, or that there were some 500 potentially contaminated sites that could lead to future insurance claims.

What was more troubling was that the commissioner failed to independently assess the reasons behind the restructuring, especially with a company applying to move out of the country. The report stated: "The real issue here was not the evaluation of the financials that were submitted, but rather the methodology used to evaluate loss reserves. The company changed the method once in Bermuda and became insolvent within days of the method change.'' The DOI's practices and procedures failed to provide it with the level of necessary oversight.

The commissioner's actions were partly responsible for the "litigation frenzy'' and have "seriously damaged the integrity and credibility of the insurance regulatory framework, the insurance commissioner's office, and ultimately the Commonwealth.'' The expediting of the redomestication process was troubling.

The commissioner ignored the "red flags'' noticed by her staff in regard to the calculation of loss reserves.

The DOI should have been aware of public information regarding GE's heavy losses that was available before the redomestication.

The division relied upon financial information submitted by the company and its auditors, instead of investigating itself.

Bring EMLICO back to US, Mass. legislators asked in 1995 through a series of corporate restructurings, spun off the profitable part of their business to related company Electric Insurance Co. (EIC) and sought to move the rest under the EMLICO name to Bermuda.

The company segregated its "good'' business left in Massachusetts from the "bad'' business that was moved to Bermuda for run-off.

The report from the bureau said that in effect, it was a "non-arms length reorganisation'' of related and commonly-owned companies, a reorganisation that could potentially minimise the total amount of environmental claims paid by GE and its related entities.

The bureau describes the commissioner of insurance's decision to allow EMLICO to move to Bermuda as "hasty'' and quoted the Bermuda Supreme Court as saying that the trial of reinsurers' allegations that GE and EMLICO used fraud to get the company to Bermuda will be "long and complex''.

The report talked of insurance regulators in Massachusetts who acted with uncharacteristic haste, and without the necessary legal and financial tools to oversee the appropriateness of what was being proposed.

The report calls for: Emergency legislation that requires redomesticating companies to post a bond of 20 percent of their loss reserves, to provide some protection when less than full disclosures are made.

The commissioner to hold a public hearing for any substantial change in a company's corporate structure.

All property and casualty insurers to include with their annual DOI filings up-to-date estimates of potential specified losses.

Property and casualty companies to be forced to tell the DOI two months prior if they are changing the way they are calculating loss reserves.

New laws to guard against "fraudulent conveyance of assets and fraudulent representations made to the commissioner, to protect the division from manipulation.

The utilisation of the substantial industry and academic expertise to consider legislation to better protect the consumers and the integrity of the DOI's role in the regulatory process.

COURTS CTS