BANKING / FINANCE : Keating’s $5-Million Defense Fund Is Nearing Depletion, Lawyer Says

Beleaguered businessman Charles H. Keating Jr. and executives in his Phoenix company will probably exhaust their $5-million defense fund by the end of July and risk losing legal representation in a slew of court cases stemming from the Lincoln Savings & Loan scandal, one of his lawyers said Thursday.

Reliance Insurance Co., which has been paying the legal fees of 10 law firms, has notified directors and officers of Lincoln’s former parent, American Continental Corp., that its obligation to pay defense costs and any judgment will end when the $5-million limit is reached, said James I. Ham, a Los Angeles lawyer for Keating.

In state and federal lawsuits, American Continental bondholders and regulators accuse Keating and other company executives of fraud and racketeering in their operation of the company and the Irvine-based thrift. The Resolution Trust Corp., the government agency running the now-insolvent Lincoln, is seeking $1.1 billion in its lawsuit. Cleaning up Lincoln is expected to cost taxpayers $2 billion.

Insurance money is crucial to Keating’s defense. Without it, his lawyers would seek court permission to withdraw from the cases, Ham said. But Reliance says it won’t pay any more, and two other carriers are balking at picking up the defense tab.

Ham filed suit Thursday against financially troubled H.S. Weavers, a London insurance syndicate, seeking $500,000 in damages--essentially the amount due his firm. Weavers insures American Continental’s directors and officers with a $2-million policy.

Both Reliance and Weavers issued what are called self-consuming policies. That means that the policy limits can be consumed by legal fees. Arizona court decisions have refused to enforce such policies, saying they are against public policy, Ham said. He said he soon will seek a court order requiring Reliance to pay more than $5 million.

A third insurance firm, National Union Fire Insurance Co. of Pittsburgh, was ordered recently to start defending the Keating group, but it has asked a federal judge in Los Angeles on June 25 to allow it to appeal his decision.

“The insurance litigation is diverting attention from other cases,” Ham said. “But they are critical to Keating’s ability to have his day in court.”