A Bermuda-based captive that admits to being in "dire financial condition" is fighting an arbitration panel's order that it post security of $70 million in a dispute over coverage for sub-prime automobile loans in the US, KYC News' Inside Bermuda newsletter reported.

Details are contained in litigation at the US District Court for the District of New Jersey between Founders Insurance Company Ltd., which is managed in Bermuda by Bott & Associates, and Everest Reinsurance Company, a Delaware corporation based in New Jersey that is a wholly-owned subsidiary of Bermuda-registered Everest Re Group Ltd.

Everest Re took the dispute from the arbitration room to the court-room on February 8, 2008 when it filed a petition to confirm an arbitration award entered on January 11, 2008 requiring Founders to post $70 million in security by no later than January 15, 2008.

"Founders has failed and refused in all respects to comply with the award," it was stated in the petition, which is heavily redacted to prevent details about the dispute becoming public knowledge. One of the few snippets of information in the petition is that the dispute concerns an excess of loss reinsurance agreement, effective July 2, 2003, to which Everest Re and Founders are both parties.

Founders Insurance gave a better insight into the nature of the dispute in a motion to dismiss the petition that it filed with the court on March 19.

"This claim arises out of Founders' efforts: 1) to recover from Everest, a ceding insurer, significant sums of money drawn down from a trust account that was established as security for unauthorised reinsurance; and 2) to prevent Everest from drawing down further on the trust account," stated Founders.

"On February 1, 2007, Founders served upon Everest a demand for arbitration to resolve a dispute concerning payments made by Everest under a default protection policy in connection with sub-prime automobile loans. Founders has argued that Everest's failure to maintain the credit underwriting standards required under the Everest policy operated to invalidate certain claims presented to Everest under the default protection policy.

"However, Everest continued to make such claims payments and sought to recover those payments from Founders under a stop loss reinsurance agreement between the parties.

"On February 21, 2007, Founders commenced a proceeding in the Supreme Court of the State of New York, New York County seeking an injunction in aid of arbitration pursuant to Article 75 of the CPLR [Civil Practice Law and Rules]. Hon. Richard B. Lowe of that Court issued an order which temporarily restrained Everest from drawing down on the trust account pending the hearing on Founders' application for a preliminary injunction."