Allegations by the liquidator of Bermuda Fire & Marine Co. Ltd. that the company's finance committee directors, law firm and auditors worked together to defraud international creditors were labelled as an "absurd conspiracy theory'' in Supreme Court yesterday.

BF&M Ltd. lawyer Elizabeth Gloster yesterday attacked one of the main pillars of liquidator Ernst & Young's claim that the transfer of Bermuda Fire's profitable domestic business to the company in 1991 was a "fraudulent conveyance'' and that the assets should therefore be returned.

Ms Gloster disputed allegations that Bermuda Fire directors and management deliberately ignored the potential for millions of dollars in pollution claims so as to hide the company's pending insolvency. Gabriel Moss, lawyer for Bermuda Fire's liquidator and creditors, was incorrect in claiming that the company wrote comprehensive general liability clauses that only had partial or no exclusion clauses for pollution, she said. Such policies were written in the US. Bermuda Fire was instead covering excess liability policies in the London market that excluded pollution claims, she claimed.

Company followed standard practice, lawyer asserts policies -- mainly written by Weavers Underwriting in the London market -- had clauses excluding pollution liability coverage.

It was therefore proper for the company not to reserve for potential pollution losses. At no time did actuarial firm Tillinghast or auditors Cooper & Lines advise the company it was improper for Bermuda Fire not to make reserves for future pollution losses, she said.

A Tillinghast report on Weavers for 1990, given in June 1991, showed that the market at the time was uncertain about the potential liability that might arise from pollution claims, she said.

"It was a question of business judgment,'' she said. "Whether hindsight shows the business decision was wrong is irrelevant.. .What matters is whether it was an honest view. It was a perfectly honest and reasonable approach to take.'' She also claimed no "sinister intent'' could be read into the fact the company had specifically asked Tillinghast to exclude pollution losses from estimates of Bermuda Fire's liabilities. She said the company was following standard practice at the time.

"Critically, at no stage did Tillinghast ever advise BFMIC (Bermuda Fire), either formally in their annual reports, or informally in correspondence or meetings with management, that it was wrong or unreasonable for BFMIC not to provide for pollution, or that the reserves would be materially understated without such a provision,'' she said.

Ms Gloster also questioned whether Bermuda Fire even owed money to the six corporate creditors -- who are also plaintiffs in the suit against the defendants.

She said the policies they held with Bermuda Fire contained pollution exclusion clauses. It could be disputed that they weren't owed any money at all by the company.

"It's perfectly clear that the understanding at BFMIC (Bermuda Fire) that all policies at Weaver's contained pollution exclusion clauses,'' Ms Gloster said.

"At no stage was the board informed by Weavers and Tillinghast that they might have been liable for Weavers policies.'' She said Bermuda Fire was "brought to knees by legal fees in defending pollution claims'' and not over the pollution claims themselves. She added that Bermuda Fire had made provision for legal fees.

"The evidence in relation to paid (pollution) claims is that they were minuscule,'' she claimed.

Cooper & Lines own case in defence of the firm rests on the claim that Bermuda Fire acted properly in not making reserves for pollution, she added. For the 1990 year Bermuda Fire was reserving for 100 percent for claims a switch in policy from previous years when the company had only reserved for 92 percent or less of Tillinghast estimates.

Cooper & Lines was of the opinion that the 100 percent reserving "provided enough fat'' for any potential pollution claims, Ms Gloster said.

BF&M's expert witness in the case will testify that many insurance companies didn't reserve for pollution claims. Bermuda Fire itself was not brought down by pollution claims, she added.

"Some of the big boys weren't reserving for pollution and some were,'' Ms Gloster said. "It varied from insurer to insurer.'' Earlier Ms Gloster also argued that the Bermuda Fire liquidator was not entitled to any damages from BF&M because the liquidator was unable to show that the company suffered any loss from the 1991 transaction.

BF&M was only part of the 1991 transaction in relation to the transfer of assets in return for $56 million in shares, cash and a loan note. She argued that the liquidator's claim for damages and assets was over the Bermuda Fire's board subsequent declaration of a special share dividend handing out BF&M stock to its shareholders. BF&M was not party to the declaration of the share dividend she claimed.

"They are not entitled to damages because they cannot show they actually suffered any loss,'' Ms Gloster said. "The expert evidence will show that it is very doubtful they can demonstrate they suffered any loss. It's very doubtful whether the domestic business would have had any value if the reorganisation had not gone ahead. If it's right to say that BFMIC was insolvent it's very difficult to see that the domestic business would have had any value had its good will not been preserved in the way in which the reorganisation allowed it to be preserved.''