A Pennsylvania judge has finally ordered the liquidation of Legion Insurance Co. and said that it would have been cheaper to allow the company to collect its reinsurance without state intervention.

Legion, which is owned by Mutual Risk Management, has spent the last year in financial limbo under the charge of the Pennsylvania Insurance Department.

The epic battle for control in the courts has been between the Pennsylvania Insurance Department, who wanted to liquidate the company, and Mutual Risk, who fought to keep it in business.

Commonwealth Court Judge Hannah Mary Leavitt cut short potential litigation for major Legion policyholders such as American Airlines by ruling last week that they can seek payments directly from reinsurers, such as Lloyds of London, rather than waiting for the state to collect from reinsurers during liquidation.

And in her written judgement she criticised the Pennsylvania Insurance Department for its handling of the complex case, stating it “does not have a business plan or written strategy” to collect reinsurance, and “has had little success in collecting” more than $300 million reinsurers owe to Legion clients.

In her opinion, Judge Leavitt blamed the Insurance Department for having “refused to allow” payments by other insurers to Legion clients after it took control of the troubled company in early 2002.

The judge also accepted arguments by Legion's owner, Mutual Risk, that it would have been cheaper to have allowed the company to collect reinsurance without state intervention, and she blamed the Insurance Department for refusing to allow former Legion executive Robert Mulderig to help collect that reinsurance.

David Ezekiel, chairman of Legion's owner, Mutual Risk Management Ltd., praised Leavitt's “well thought out ruling, even though the results were not what we wanted. The judge believes we were [salvageable. But she felt the difficulties with the reinsurers and the guaranty funds in the various states gave her no alternative” to liquidating the companies.

Among the claims that have gone unpaid during the long saga of its wind-up, Legion owes $140 million to American Airlines for the Philadelphia-based insurer's share of a fund for claims stemming partly from the September 11 terrorist attacks.

Judge Leavitt had denied or postponed three previous liquidation requests over the last 11 months, citing what she said were weaknesses or inaccuracies in the state's petitions and the likelihood they would lead to a taxpayer-funded bailout.

She wrote in her opinion, Pennsylvania has been “refusing” to pay the company's share of damages from the September 11 terrorist attacks since it took over Legion early last year. But Insurance Department officials said they got what they wanted despite the judge's criticism. “We are gratified that the judge has finally come around,” said Pamela Woldow, chief counsel to the Insurance Department. She called Judge Leavitt's delay “surprising, perhaps shocking.”

Ms Woldow also said the judge had made “serious factual errors in her opinion. Those mistakes we will certainly seek to address.” She declined to give examples.