US regulator sides with Lovells in fraud claims against insurers

In the battle over the controversial liquidation of Emlico, General Electric's captive insurer, the Massachusetts insurance regulator appears to be swinging to the side of Lovell White Durrant and its reinsurance client Kemper Re.

Lovells and Kemper Re have been claiming for the past two years that Emlico moved from Massachusetts to Bermuda so that it could liquidate there where insolvency laws are more relaxed and that Emlico's 400 reinsurers, including Kemper Re, would have to pay out a greater proportion of its claims.

Now the Massachusetts regulator, Linda Ruthardt, has used the allegations to argue that she should be appointed liquidator rather than the three Coopers & Lybrand liquidators appointed in Bermuda two years ago.

In a filing to the Massachusetts district court, she claims there is evidence that Emlico deliberately misled her when it sought her approval in 1995 to move to Bermuda. Emlico told her at the time that it had $230m in net assets and would have similar assets in future years.

Ruthardt cites a memo leaked to a newspaper, which contains advice for Emlico from Clifford Chance which was then advising the company dated December 1994, which "weighs the pros and cons of running off Emlico's business outside the US against those of a formal liquidation in Massachusetts".

She says that the memo notes that a Massachusetts liquidation "would involve several disadvantages for Emlico and GE" and that an "export" of Emlico outside the US "may be a viable and preferable option".

Ruthardt is fighting to be made liquidator of Emlico but the Bermudan liquidators are resisting this.

The Bermudan courts have asked the Massachusetts district court to force a "protocol" between Ruthardt and the existing liquidators to determine who should be in charge of what.

Massachusetts District Judge Woodlock last week agreed, ordering the two parties to come to an agreement by 6 March.

Freshfields partner Richard Chalk, who is acting for the Emlico joint liquidators, said that if Ruthardt were to be made liquidator "that would be completely inconsistent with the ongoing liquidation of Emlico which has been going on over the last two years in Bermuda".

He pointed out that the allegations of fraud had been made by the reinsurers for the past two years and that no court had so far upheld them.