to look at two issues: whether EMLICO is insolvent and whether implementation of the receiver's agreement advances the interests of EMLICO's estate and its principal policyholder, GE.

The joint liquidators are Peter C.B. Mitchell and David E.W. Lines of Coopers & Lybrand (Bermuda) and Christopher J. Hughes of Coopers & Lybrand (London).

They argue that the answer to both questions is yes. The receiver's agreement, they say, "promotes an efficient winding up of EMLICO's affairs and provides the impetus for a full and complete settlement of litigation that has drained the finite resources of the estate and diverted the joint liquidators from the discharge of their primary function: collecting assets of the estate and paying policyholders and creditors.

The receiver's agreement would establish Massachusetts commissioner of the Division of Insurance, Linda L. Ruthardt, as receiver. She would then have the right to evaluate compromises entered into between the joint liquidators and GE and to participate in a process whereby those compromises are subject to scrutiny by a Massachusetts special master and by courts in Massachusetts and Bermuda.

But the agreement also specifies that disputes concerning construction of insurance policies and reinsurance treaties will be determined in accordance with the substantive law that would have applied if EMLICO were domiciled in Massachusetts.

The agreement was the product of negotiations between the liquidators' lawyers and the commissioner, and was agreed to by the Bermuda Supreme Court on March 12.

The liquidators say that the reinsurers who are objecting to the agreement are trying to delay or avoid their contractual obligations. Nothing in Massachusetts insolvency law sanctions the type of inquiry they are seeking.

The liquidators' position remains that none of the allegations being made by the reinsurers have any bearing on the matter before the court.

EMLICO filed a winding up petition with the Bermuda court on October 20, 1995.

Since 1984, GE had been tendering to EMLICO for defence and indemnity, claims relating to hazardous waste sites for which GE had received or expected to receive a governmental claim for environmental clean-up. EMLICO denied coverage.

By December 1993, GE had incurred clean up costs of about $514 million and also told EMLICO that they had estimated their potential liabiity for clean up of over 500 hazardous waste sites, for purposes of global settlement discussions.

EMLICO never indicated that it would be in a position to endorse those estimates or accept them as reliable indicators of its own potential future liability to GE.

Until they applied for winding up in October 1995, EMLICO maintained a reserve for asbestos liability ($128.5 million as of year end 1994), but no reserve for environmental clean-up claims and exposures (other than $25 million for defence costs).

EMLICO didn't post a reserve for clean-up because it claimed that coverage was not provided for such exposures under its contracts and agreements with GE, and was consistent with FASB (Financial Accounting Standards Board) reporting requirements.

FASB 5 (accounting for contingencies) provides that liability should be accrued when it is "probable'' that a loss will occur and the amount of that loss can be "reasonably estimated''.

EMLICO says it did not believe that GE's hazardous waste clean-up claims gave rise to a probable or reasonably estimable liability within the meaning of applicable accounting standards, so it carried a reserve only for anticipated legal expense to contest the GE claims for coverage.

They did make a footnote disclosure of these contingencies in financial statements and management reports between 1991 and 1994.

By December 1994, a KPMG Peat Marwick partner could not make an actuarial estimate of ultimate liabilities for asbestos and environmental claims, Liquidators have their say From Page 28 legal issue as to whether or not the company was liable, a lack of information about clean up costs and the lack of a generally accepted actuarial method for these types of exposures.

Faced with a potential insolvency, EMLICO sought options from various professional advisors and eventually sought regulatory approval to move the potentially insolvent part of the business to Bermuda.

Over a four-month period, they say, approvals were sought and obtained by the Commissioner of Insurance in Massachusetts, the Bermuda Minister of Finance, the Bermuda Monetary Authority and the Registrar of Companies. EMLICO said all parties knew of the potential insolvency. By July 1, 1995, EMLICO was a Bermuda company.

But both KPMG (February 1995) and Ernst & Young (August 1995) signed off on reports that approved the company's total net reserves of $703 million as reasonable, although both expressed no opinion on the hazardous waste clean-up reserves because of the "uncertainty'' associated with the claims.

But more asbestos claims had begun to come in during the second quarter and escalated in the third quarter. And other major casualty insurers were, starting in late June, beginning to substantially increase their environmental related loss reserves.

When a new actuarial technique, the exposure model for environmental liability estimation, was applied to the EMLICO case, which led to the conclusion that the company was insolvent.

COURTS CTS