Suit Against Major Insurers Is Reinstated : Litigation: The action by 19 states, including California, charges that firms conspired to limit certain types of coverage and to increase rates.

SAN FRANCISCO — A federal appeals court Tuesday reinstated a suit by 19 states, including California, accusing major insurance companies of conspiring to limit liability coverage and drive up rates for businesses and government agencies in the mid-1980s.

In San Francisco, the U.S. 9th Circuit Court of Appeals ruled 3-0 that the alleged agreement among insurers, reinsurance firms and trade organizations would amount to a boycott against those who wanted broader coverage.

A federal law from the 1940s protects insurance companies from being sued for violating federal antitrust law for agreements that limit competition. But suits are allowed when insurers engage in a boycott.

The appeals court said U.S. insurers could also be sued for allegedly conspiring with London-based reinsurers, which are not regulated by the states. Reinsurers provide insurance for insurance companies.

The ruling would allow a trial of the suit, which was dismissed in 1989 by U.S. District Judge William Schwarzer of San Francisco.

The suit, filed in 1988, blamed the alleged conspiracy for rising prices and limited availability of liability insurance for local governments and private entities such as child-care centers. Insurers attributed the higher prices and restrictions to declining investment income and state liability rules that increased their losses on insurance claims.

The suit accused four insurance companies--Hartford Fire Insurance Co., Aetna Life & Casualty Co., Cigna Corp. and Allstate Insurance Co.--of conspiring in 1984 to eliminate liability insurance covering damage during the policy term and cover only losses suffered and claimed within the term. The suit said the insurers also sought to curtail coverage for pollution.

The states alleged that the companies got reinsurers to threaten to withdraw coverage from firms providing broad liability coverage and pressured a trade organization to limit the information it distributed to firms offering broad coverage.

Those alleged actions would amount to a boycott, said the court opinion by Judge John Noonan.

The suit was filed by Alabama, Alaska, Arizona, California, Colorado, Connecticut, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Montana, New Jersey, New York, Ohio, Pennsylvania, Washington, West Virginia and Wisconsin. Texas has a similar suit in its state courts.