to BF&M Ltd. in 1991, lawyer Robin Potts told the Supreme Court Ahmed ElAmin reports The five directors on the finance committee of Bermuda Fire & Marine Co. Ltd.

could not have known about and were not responsible for the "alleged insolvency'' of the company in 1993, their lawyer claimed yesterday in Supreme Court.

Lawyer Robin Potts said the evidence presented in court would show that the five acted honestly in doing their duties as directors and there had been no intent to defraud creditors as claimed by the liquidators.

Mr. Potts denied Bermuda Fire was insolvent either before or after the company's profitable domestic business was transferred to BF&M Ltd. in 1991 and questioned whether in fact the company was currently insolvent.

Cooper & Lines, Conyers Dill & Pearman and BF&M Ltd. and shareholders are also being sued by liquidator Ernst & Young. BF&M's shares, which were given to Bermuda Fire as part of the transaction, were dividended out to the company's shareholders soon after the creation of BF&M. Bermuda Fire was left with the international business which was in run off.

Mr. Potts is acting for William Cox, Donald Lines, Gregory Haycock, Michael Collier, and Charles Collis, who died last year.

"Neither BFMIC (Bermuda Fire), nor its directors, nor the individual defendants, nor BFMIC, management, nor BFMIC legal and financial advisors intended that the individual creditors would go unpaid,'' Mr. Potts said.

At the time of the 1991 share dividend in BF&M Cooper & Lines gave a proforma balance sheet which showed that the company would have a $12 million surplus once liabilities had been weighed against the assets.

He said that the "alleged insolvency'' of Bermuda Fire was based on anticipated claims of $407.8 million that the liquidators had estimated would be coming in but as of 1998 had not yet received notification.

And he claimed that all of Bermuda Fire's international policies, underwritten in the London market, excluded pollution liability. He questioned whether the liquidators were now in fact accepting pollution claims as liabilities, thus boosting their claim that Bermuda Fire was insolvent by $453 million.

Bermuda Fire's 1998 balance sheet showed that the company had assets of $99.1 million and current reinsurance receivables of $53.6 million, for a total of about $152 million. The liquidators have also estimated the company had $103 million of anticipated reinsurance receivables on case reserves -- claims that had been made but not as of then accepted as valid.

Case reserves were "disputed'' claims, Mr. Potts said.

The company had also estimated another $191 million of reinsurance assets on anticipated claims that hadn't yet come in -- called "incurred but not reported'' (IBNR) by insurers.

After deducting estimates on bad debt of $37 million for current reinsurance receivables, $34 million on the case reserves, and $66 million on IBNR, Mr.

Potts said Bermuda Fire liquidators expected to collect $189.7 million from reinsurers.

After deducting $37 million for total runoff costs, the 1998 accounts showed the company had assets of $251.4 million.

Liabilities were estimated at $123 million on current claims, $173.4 million on case reserves and $407.8 million on IBNR for a total of $704.6 million.

That left Bermuda Fire with a net liability of $453.3 million.

"That is the figure being bandied about,'' Mr. Potts said. "That deficiency is occasioned by the IBNR figure and provisions for irrecoverable reinsurance.

If you take these figures out you don't have a deficiency at all.'' While asserting that his case was not whether Bermuda Fire was insolvent or not he questioned the "validity of the IBNR'' estimates.

Directors `cannot be blamed for alleged insolvency' "If that estimate is right, $453 million as being the ultimate deficiency, then it is as plain as pikestaff that BFMIC would have collapsed whether or not the 1991 reorganisation had taken place,'' Mr. Potts said. "The assets transferred under the 1991 reorganisation are small beer by comparison with the $450 million.'' He claimed the defendants in the case could not have known the company would eventually become insolvent, and it was only with the benefit of hindsight that the liquidators were making allegations of fraud.

He said Bermuda Fire's "alleged insolvency'' was mainly caused by reinsurers who stopped paying claims in 1992 and 1993. Some had stopped on the grounds that they had been misled by Weavers Underwriters -- the managing agency writing business on Bermuda Fire's behalf in London.

Others had become insolvent. A few had also decided to take advantage of Bermuda Fire's attempt to make a scheme of arrangement in 1993 and had stopped paying to get out of their debts, Mr. Potts alleged.

Mr. Potts was attacking the liquidators claim that the defendants in the case didn't set aside enough reserves for IBNR, bad debt from reinsurers, and for pollution claims.

He went on to attack each of the liquidator's allegations that the defendants knew about Bermuda Fire's impending insolvency. He denied that Bermuda Fire had a cash flow problem at the end on 1990 as alleged.

He claimed that in 1990 reinsurers on the international business were at the time delaying payments to Bermuda Fire only because there was uncertainty over whether the money should go to Weavers or directly to the company.

The reinsurers never denied they owed the money. By 1992 Bermuda Fire had succeeded in obtaining a court order for the money to be paid directly to the company.

"It's untrue,'' Mr. Potts said. "There was no cash flow problem at the end of 1990. BFMIC's actual cash was actually better than at any time in its history.'' He said the 1990 audited accounts showed the company had cash and deposits of $31 million, an increase of $13 million over the previous year. Current liabilities were covered 3.1 times by cash and deposits compared to 1.6 times the previous year.

He disputed liquidator's allegations that a "tidal wave'' of pollution claims had helped bring Bermuda Fire under and that the defendants should have known these were coming.

Most of the claim payments were for legal fees to defend the company against pollution claims, he said. The international policies underwritten through Weavers all contained pollution exclusion clauses and this was confirmed by Tillinghast in 1990.

He said Bermuda Fire's policy was to not accept any pollution claims because of the clauses.

"The position of BFMIC was that `We ain't liable','' Mr. Potts stated.

The case continues today.

BUSINESS BUC