A federal law designed to make liability insurance more available and more affordable "is not working as well as intended" and should be modified, according to a Commerce Department report released yesterday.

Conflicting state interpretations are at the heart of the confusion about the Risk Retention Amendments of 1986 that were passed in the wake of the 1984-85 liability crisis. During those years physicians, child care services, municipalities, truckers, waste disposal companies, midwives and corporate directors and officers were among the many for whom coverage was either unavailable or available only at premiums double or triple what they had been paying.

Twenty-six states have adopted laws allowing members of these categories to form risk retention groups -- self-insured pools -- or to purchase group insurance, according to the report. The report counted 63 purchasing groups, 20 of which are in the health field. Six are in the recreation area, including two previously uninsured parks with large water slides.

Despite the rapid growth of these groups, the federal law is not accomplishing its intended purpose because each state interprets the law differently, the federal government said. (The insurance industry is regulated by the 50 states, not the federal government.)

The result for carriers trying to sell insurance in many states is "regulatory redundancy" and a "severe and costly paperwork burden," the report said.

For example, nurses in Fairfax lost their liability insurance coverage and were offered new policies by a group chartered in Illinois -- but at premiums substantially higher than before.

The Virginia insurance commission, which approves rates before policies are written, said the Illinois group may not sell policies in Virginia without the commission's approval. The Illinois group claims an exemption under the 1986 law.

Virginia officials said they have asked the Illinois group to justify its rates and the issue remains unresolved. Simplified, the problem is whether the states will continue to regulate insurance. The Commerce Department's suggested solutions cut another chink in the wall of exemption to federal antitrust statutes that shelter the insurance industry.

In the name of efficiency, the report proposes what amounts to national standards. Rate and form approvals would be limited to the principal place of business of the purchasing group.

To protect customers against abuses, buying groups could not deal with an offshore insurance company unless the company is registered in at least one state.

One of the most controversial proposals involves the elimination of agents as a cost-saving measure.

The Commerce Department would give purchasing groups the power to negotiate directly with insurance sellers without having to go through a state licensed agent.

State commissions recognize they can't control out-of-state insurance companies, but they maintain that requiring policies to be purchased through an agent -- who could demand the company offer better disclosure, for example -- is the state's duty in order to protect its residents.