Judge Rules That Insurer Must Defend Keating : Insurance: The company that issued a lawsuit-liability policy to American Continental executives says it will appeal the decision.

A federal judge ruled Thursday that an insurance carrier must defend Charles H. Keating Jr. and other American Continental Corp. officials in litigation brought by the company’s investors.

U.S. District Judge Stephen V. Wilson in Los Angeles also ruled that the “potential liability” of Keating and others stemming from the lawsuits is covered under a policy issued by National Union Fire Insurance Co. of Pittsburgh.

The 12-page decision is seen as a key victory for the beleaguered Arizona businessman. It also could prove a boon to investors who lost $250 million in last year’s collapse of Keating’s firm and its Irvine-based Lincoln Savings & Loan unit.

While National Union’s coverage is limited to $1 million, Wilson’s finding could make more than $75 million in coverage from 30 other insurance carriers available for any judgment or settlement in the lawsuits, said James I. Ham, a Los Angeles lawyer for Phoenix-based American Continental. That so-called excess coverage typically follows the form of National Union’s policy, he said.

“This is a big first step in establishing a source of (insurance) funds to pay claims,” Ham said.

But those who bought American Continental’s bonds and notes may not be able to dip into that pool of money for some time. National Union is considering an appeal, said its lawyer, Robert A. Zeavin of Los Angeles.

“I think Judge Wilson, with all due respect, was incorrect,” Zeavin said. “I suspect we will probably appeal.”

He said the company, which now must pay the substantial legal bills for the Keating group, will ask for a court order to halt the litigation while the appeal is pending.

Like National Union, two other carriers that provided liability and fiduciary insurance on American Continental and its directors and officers refused to defend the Keating group.

They also are seeking court orders stating that allegations against the group are excluded from coverage.

Keating and his top executives face numerous civil and criminal investigations. They are defendants in a $1.1-billion government lawsuit accusing them of racketeering and other wrongdoing, and they are named in 17 state and federal lawsuits brought by investors.

The investors include nearly 22,000 primarily elderly Lincoln depositors who bought nearly $200 million in American Continental debt securities at the S&L;’s 29 Southern California branches.

In their lawsuits, they contend the company misrepresented the bonds in a classic “bait and switch” scheme that included assurances that the bonds were as safe as deposits at Lincoln.

But deposits were insured by the federal government, and the bonds weren’t.

At issue in the insurance litigation is whether the term “unfair competition” in the policy covered the alleged misrepresentations made by Keating and other employees.

In arguing that Keating’s alleged actions were not covered under National Union’s policy, Zeavin had contended that unfair competition referred only to “palming off,” a common-law term that means unauthorized sale of look-alike products.

American Continental’s Ham argued that unfair competition should be defined more broadly to include the state’s legal definition--an “unlawful, unfair or fraudulent business practice and unfair, deceptive, untrue or misleading advertising.”

Wilson, siding with Ham, quoted a 1967 California Supreme Court opinion: “Unfortunately, the insurance industry has become addicted to the practice of building into policies one condition or exception upon another in the shape of a linguistic Tower of Babel.

“We join other courts in decrying a trend which both plunges the insured into a state of uncertainty and burdens the judiciary with the task of resolving it. We reiterate our plea for clarity and simplicity in policies that fulfill so important a public service.”