Prior to Bermuda Fire & Marine Insurance Co. Ltd.'s 1991 reorganisation company auditor Cooper & Lines suggested the company make millions of dollars in reserves for pollution and for bad debt on incurred but not reported losses, a court heard yesterday.

Eventually however, after negotiation with Cooper & Lines, the company decided not to make reserves for potential pollution losses or for bad debt on incurred but not reported losses (IBNR), factors which would have increased Bermuda Fire's liabilities.

Ian Croxford, lawyer for Cooper & Lines yesterday was questioning John Patterson, the company's former chief accountant and secretary, about the way Bermuda Fire managed its accounting.

Cooper & Lines is seeking to distance itself from figures and estimates used in the 1991 reorganisation. The liquidator claims the firm was negligent and should have known the company was either insolvent or about to become insolvent at the time of the reorganisation.

Documents put to Mr. Patterson reveal that Cooper & Lines advised that the company "might be a shortfall'' in the company's estimated liabilities, according to Mr. Croxford.

Actuarial firm Tillinghast had estimated Bermuda Fire's gross liabilities for pollution at $5.3 million.

Tillinghast also estimated that the company might have a $5 million to $7 million gross liability for bad debt on IBNR.

By the time of the 1991 reorganisation the company's bad debt liability had risen to $9.57 million and was discounted to $4.95 million.

Mr. Patterson agreed that it was a management decision on how to treat bad debt, bad debt on IBNR claims, and pollution claims. Pollution liability was not accepted by the company as management believed exclusion clauses in policies protected Bermuda Fire from claims.

Cooper & Lines advised the company book $2 million for defending against possible pollution claims in court.

Mr. Patterson said it was his understanding that the legal costs were already included in the figures from London underwriters.

Bermuda Fire had no special reserve for bad debt on IBNR, following a policy of booking bad debt as it was incurred.

Mr. Patterson also agreed that Cooper & Lines had been instructed by the board's finance committee to consider proposals for valuing the domestic business to be transferred to BF&M Ltd.

He agreed the firm wasn't instructed to put a value on the international business, a task which was left to Tillinghast or on the domestic business.

Ex-chief accountant questioned At a finance committee meeting Donald Lines said Bermuda Fire would not incur the cost of valuing the company's domestic business unless "there was a need for it'', Mr. Croxford claimed.

He agreed that the eventual value put on the BF&M business, a figure of about $56 million, was made by the directors. Cooper & Lines noted that the figure was a "directors' valuation'' in a proforma balance sheet used for the reorganisation.

Bermuda Fire's liquidator claims the company should have booked liabilities for pollution claims and bad debt on IBNR.

As a defendant in the fraud case Cooper & Lines denies it gave Bermuda Fire business advice on the 1991 reorganisation.

Mr. Patterson continues giving testimony today.