The state of Maryland has won a crucial victory in its twisted legal battle to recover $100 million it lost after the failure of Bethesda's Community Savings & Loan Association during the 1985 S&L crisis.

Baltimore Circuit Court Judge Joseph H.H. Kaplan, in a decision received by attorneys over the weekend, ruled that a Chicago insurance company may be liable for as much as $55 million for damages suffered by the state because of Community's collapse.

The judge rejected the company's claim that it had agreed to cover only $5 million worth of damages suffered by Community.

American Casualty Co., a subsidiary of CNA Insurance Cos. of Chicago, covered the directors and officers of Community in the event of lawsuits connected with their corporate duties. The state sued the former officers for fraud and wrongdoing, shortly after seizing control of the S&L in 1985.

The insurance litigation is considered critical to the state because it indicates for the first time that a sizable "pot" exists to pay for any damages Maryland wins in its multimillion dollar lawsuit. Although Maryland has since sold Community to Mellon Bank of Pittsburgh, a state agency continues to control many of its old assets and is pursuing litigation related to its failure. Most of the state's losses stem from money paid to Mellon to offset bad loans made by Community.

"We're very pleased with the court's opinion," John B. Isbister, a Baltimore attorney representing the state, said yesterday. "We will be looking to the insurance policy in the event we are successful in the litigation against the directors and officers. This assures that there's potential for a bigger pot at the end."

A spokeswoman for CNA said the company would not comment until it has a chance to review Kaplan's 64-page ruling.

The insurance lawsuit had its origins in February 1984, when American Casualty renewed its liability insurance policy with Community. At that time, the company promised to cover the savings and loan association's 11 directors and officers for up to $5 million each -- for a total of $55 million. According to Kaplan's ruling, this coverage corresponded to the type of coverage Community had purchased from American Casualty since 1976.

However, in September 1985, shortly after Community was placed in conservatorship and its troubles became public, the insurer notified the state that it had intended to offer a combined coverage of only $5 million. The company chalked up the difference to a "clerical error" and said that Community had agreed to purchase the reduced coverage.

Kaplan said in his ruling, however, that the insurance company failed to show convincingly during the trial last February that it had made a mistake and that the two parties had actually agreed to the reduced coverage. The judge questioned the credibility of the company's chief witnesses, its own underwriter and the agent who sold the policy.

"American Casualty had in place at the time of the 1984 renewal an almost foolproof procedure for ensuring that the insured received notice of policy changes, that the insured understood those changes, and that American Casualty could prove both of those facts," Kaplan wrote. "American Casualty's failure to use its procedure in this case leaves it with the record it has produced -- equivocal documents, faded memories and 'reconstructed recollections.' These simply are not a sufficient basis ... to grant the ... remedy" sought by CNA.