A county court judge in Massachusetts has ruled that the EMLICO dispute is so controversial, and potential claims are so large, that the full Massachusetts Supreme Judicial Court should preside over a side issue that he was asked to consider.

The dispute centres around a General Electric Co. (GE) decision to relocate its liability insurer, EMLICO (Electric Mutual Liability Insurance Co.), to Bermuda in 1995.

The insurer declared insolvency a few months later, and reinsurers who may now be liable for as much as $1 billion in claims have complained the companies knew before the move from Massachusetts that EMLICO was insolvent.

Reinsurers allege fraud, claiming EMLICO and GE deceived US and Bermudian regulators about the insurer's solvency so they would approve the redomestication. They said the Bermuda liquidation filing was part of a larger scheme to obtain a more favourable bankruptcy forum, than if they had filed in the US.

The companies deny these allegations. Bermudian regulators claim they knew of the possibility of insolvency and were not concerned. Massachusetts regulators have conceded they were not completely aware of the potential for insolvency.

One said if he had been, he would not have allowed EMLICO to leave Massachusetts.

The case landed in the Supreme Judicial Court for Suffolk County when an embattled Massachusetts Commissioner of Insurance, Linda L. Ruthardt, petitioned the court to approve a settlement agreement that would give her an ancillary receivership to the Bermuda liquidation of EMLICO.

EMLICO's joint liquidators, Coopers & Lybrand Bermuda, and the Bermuda Supreme Court have already agreed to the plan which was worked out among the Commissioner, the liquidators and GE.

Reinsurers are against the plan, which would also mean the commissioner would drop an investigation into the fraud charges.

But last week, Justice John Greaney referred the Commissioner's petition to the full court, possibly starting this September.

The court will decide whether the state's insurance commissioner had the power to allow EMLICO to relocate to Bermuda under legislation which permits redomestication only "to any other state''.

The full court will hear a case where the Commissioner will be designated as the appellant and must file a brief by July 25. GE, EMLICO and affiliate Electric Insurance Co., which support the Commissioner, are also to be considered as appellants and must also file by that date.

The reinsurers, although given no right under their application for intervention, will be allowed to proceed as amici curiae and file their briefs by August 22. The commissioner will then be given a right of reply by September 5. Oral arguments could proceed in September, or October at the latest.

Justice Greaney conceded there was "substantial controversy'' over the decision to allow EMLICO to move to Bermuda.

He said in his ruling, "It is fair to say that the losses that have been (and will be) incurred by EMLICO will be staggering, and, correspondingly, the Dispute goes to Supreme Court He concluded that a question existed as to whether legislative requirements had been satisfied to enable the Commissioner's petition to be considered on its merits, and decided that the question was substantial enough that it deserved review by the full court.

Justice Greaney also noted other reasons for his decision: "The case has drawn significant attention both within and outside of the insurance industry.

A good deal of the commentary has been negative with respect to the Commissioner's allowance of EMLICO's redomestication application.

"Further, if the petition is approved, the case could establish a precedent for other insurers to seek to redomesticate to Bermuda or to another foreign country and, in the event of an ultimate insolvency, use Massachusetts as an ancillary site to deal with local or United States claims.

"Any such procedure, in my opinion, should be on firm legal ground.'' COURTS CTS