The Bermuda Fire & Marine Insurance Company used to be the island's oldest insurance company.
In 1993, it went into provisional liquidation with what was alleged by its liquidators, Ernst & Young, to be a deficiency of $450m.
Almost all of its liabilities were contingent liabilities arising from its participation, between 1968 and 1983, on the HS Weavers and CR Drivers underwriting stamps.
Its exposure as a stamp company meant that it had underwritten substantial lines of US property and casualty business in the London market so that, when it started the run-off of that business in 1983, it had a long tail of liabilities for which it had to make annual reserves. It did so on the basis of actuarial estimates provided by Tillinghast and reviewed by its auditors.
In 1991, a year or so after the collapse of Weavers' parent company London United Investments, Bermuda Fire & Marine's profitable domestic insurance businesses were transferred to a new group for $57m. The shares were dividended out to its existing (public) shareholders.
The liquidators and six US creditors claimed that certain directors knew that Bermuda Fire & Marine was insolvent on a balance sheet basis and that the reorganisation was a fraud on the creditors of its London market business because it deprived them of recourse to assets otherwise available to meet their claims.
During the trial in Bermuda the issues crystallised into five topics. Did the relevant directors think that the actuarial estimates were to continue to deteriorate? Did they know that US EPA pollution liabilities and legal expenses were liabilities for which the company ought to, but did not, provide? Did they think that its reinsurance protections would continue to be secure over the life of the tail? Was it right to discount long tail liabilities? And was the board – composed of non-executive directors with no insurance expertise – able to discharge its duties: how much did the directors know of what management – who administered the run-off – knew?
The case was compromised on issues of confidentiality. But it highlighted several important issues: that the solvency of an insurance company on a balance sheet basis is a matter of expert opinion; that there is no orthodoxy in methods used to assess long tail casualty liability; that market issues like EPA pollution have a life of their own; and that Bermuda's custom of having non-executive boards reliant on non-board management may require review.