Liability Insurance Company might be forced into liquidation after it moved to Bermuda, court documents show.

EMLICO's move from Massachusetts to Bermuda has come under heavy criticism from US reinsurers, who allege that the company moved to the Island in order to go into liquidation in a "creditor friendly'' environment.

While US regulators, notably Massachusetts insurance commissioner Linda Ruthardt, have come under heavy fire, local officials have not, although the implication that the Island is unfriendly to debtors of insolvent companies could hurt Bermuda's reputation.

Registrar of Companies Kymn Astwood has refused to comment on the insurer's controversial move, as has Finance Minister Grant Gibbons, on the basis that it is still before the courts.

Local officials have also refused to comment on what would happen to the company if Massachusetts insurance commissioner Linda Ruthardt determines something was amiss in the original hearings to move the company, and decides to revoke approval for the company's move to Bermuda.

In an affidavit in May, Mr. Astwood said the company was solvent when it applied to move to the Island but did not hide the fact that depending on what happended to a number of environmental claims, the company might have to seek liquidation.

EMLICO had sought in February 1995 in principle approval from the Bermuda Monetary Authority (BMA), the body that vets applications relating to the continuation or incorporation of all companies.

Mr. Astwood's affidavit reads: "The letter of application expressly stated that an adverse determination for EMLICO on coverage issues arising from GE's environmental clean-up liabilities could result in EMLICO's potential insolvency, and stated that GE and EMLICO believed that "should liquidation proceedings become necessary, Bermuda offers a legal and statutory framework and a regulatory environment which is more efficient and conducive to a resolution of the issues''.

The affidavit explained how in applications involving insurers, the BMA "relies substantially'' on the review and opinion of the Insurance Admissions Committee (IAC), a sub-committee of government's Insurance Advisory Committee.

The IAC resolved in February to admit EMLICO subject to, among other things: the written consent of the Insurance Commissioner of the State of Massachusetts to the continuation of EMLICO into Bermuda; the isolation and novation of all non-GE policies so that in the event that EMLICO obtained all approvals to continue into Bermuda, EMLICO would be run off, that is, that EMLICO would not underwrite any new insurance business but would run off those GE policies relating to potential exposures resulting from environmental clean-up or long-tail latent injuries. On the licensing of EMLICO as a Bermuda exempted mutual insurance company, the only policyholder or insured of EMLICO would be GE and EMLICO's sole role would be to handle and resolve GE claims; and EMLICO's insurance licence would be restricted so that EMLICO would be prohibited from writing any further insurance business without the express written approval of the Minister of Finance.

Mr. Astwood said he knew from the beginning that there was a possibility EMLICO faced insolvency because of the nature of environmental claims.

But on June 28, 1995, written consent from Ms Ruthardt's office arrived and Mr. Astwood recommended to the Minister that EMLICO's application be approved.

The affidavit noted that the Registrar's office was kept abreast of the mounting asbestos-related lawsuits against GE and other expected litigation over silicon implant devices. These developments occurred as major US insurers were posting substantial reserves.

Mr. Astwood said: "I do not consider that I or the Minister of Finance was misled in anyway by EMLICO.

"The central allegation (by EMLICO reinsurers) appears to be that EMLICO represented to myself and the Minister that it was not EMLICO's and GE's intention that EMLICO would be placed into insolvent liquidation after its arrival in Bermuda and that we relied upon this representation. "I did not understand EMLICO to have made any such representation to me or the Minister.

Nor did the Minister or myself rely upon any such matter. "On the contrary, as I have explained above, EMLICO drew to our attention the potential for a liquidation of the company, and I was aware that EMLICO could become insolvent, and I considered that Bermuda's legal and statutory framework and regulatory environment could appropriately and satisfactorily regulate any insolvency.

"The timing of any potential insolvency was not a matter which affected my, or the Minister's decision. The applicant also alleges that I and the Minister were misled by the statement of surpluses shown in EMLICO's annual statement for the year ended 31st December 1994 and in the memorandum of continuance.

"Again, I do not agree that we were so misled. The documents submitted by EMLICO made clear that these surpluses depended upon stated assumptions and hypotheses and that alternative assumptions and or further developments could render EMLICO insolvent.'' Mr. Astwood concluded that he was satisfied that EMLICO kept his office informed of material developments affecting EMLICO both prior to and following its continuation into Bermuda.