Government regulators poking through the empty office buildings, windmill farms, junk bonds and just plain junk left by the nation's failed savings and loans have unearthed some documents that may be convertible into cash.

The documents are insurance policies, designed to protect the directors and officers of the failed institutions against lawsuits in which they might be found to have been negligent in performance of their official duties.

With the cost of the thrift cleanup running into the hundreds of billions, the insurance policies represent only small consolation -- by some estimates, they could yield hundreds of millions of dollars if the government were to pursue legal actions in each of the various cases, as it has threatened. For a property-casualty insurance industry, already reeling from a series of natural and man-made catastrophes in recent years, however, the thrift crisis is likely to deal a severe blow.

Just how much the government will ultimately be able to recover is unclear. So far in this fiscal year, the government has recovered about $300 million from various types of liability insurance after failures of thrifts and commercial banks combined. Future actions will depend on the extent of the coverage held by institutions and the state of the law as it develops.

"There really are no numbers, nor I suspect is there anyone that would even attempt to set a possible limit" on the potential liability that insurers face on directors and officers coverage, said Craig Gass, head of the insurance consulting practice of the accounting firm KPMG Peat Marwick. "I can say cavalierly that exposure is to the extent of the policy limits, but I don't think anybody has attempted to put a number on that."

"There are some very big losses" facing some insurers, particularly those who wrote broad-based coverage in the mid-1980s, said Stephen Sills of Executive Risk Management Associates, a company affiliated with Aetna Life & Casualty Co.

But while insurers say they worry about the market and some other companies, none admitted to facing excessive losses themselves.

Government officials estimate that they have disposed of about a quarter of the roughly 780 failed or failing thrifts they expect to have to deal with. They caution, though, that while many institutions had substantial coverage, others had dropped their insurance by the time they failed -- in some cases on the theory that having insurance merely invited lawsuits from the government or disgruntled shareholders.

Typically, Gass said, financial institutions carry directors and officers liability coverage -- known as D and O insurance -- ranging from a couple of million dollars for smaller institutions to $20 million to $25 million for larger institutions. "I wouldn't suspect that anybody but large money-center banks would carry more. It's too expensive," he said.

Those -- coupled with professional liability policies for accountants and the like who performed services for the failed thrifts -- represent a deep pocket for the government to get its hand into. It is a prospect that alarms not only insurers, but also officials of healthy financial institutions, who fear that if the government is too successful in pursuing claims under the policies, coverage in the future will disappear, as it almost did in the mid-1980s.

"The regulators have made it clear they intend to go after D and O assets. The extent to which they can do that will determine if we even have a D and O {insurance} market after 12 months," said Ed Armstrong, a risk management consultant with the Wyatt Co. "D and O insurers don't feel like reinsuring the federal {deposit} insurance funds."

As might be expected, a monumental legal battle already is in progress between the insurers and the regulators, waged in state and federal courts from coast to coast with, so far, no clear winner.

Insurers, burned by regulators' lawsuits in earlier bank failures, have in recent years written into their D and O policies clauses that void the coverage under a variety of circumstances, including instances when the insured institution slips into insolvency or is taken over by regulators. This is called the "regulatory exclusion."

Another, known as the insured vs. insured exclusion, eliminates coverage when one director or officer of an institution sues another. Often, this exclusion comes into play when the government takes over a failed thrift and installs new managers, who promptly file lawsuits against the directors for running the institution into the ground. Insurance lawyers construe that as insured vs. insured litigation.

These exclusions were intended to get many D and O insurers off the hook in the case of ordinary thrift failures, but it is not clear that the courts will sustain them. Decisions so far have gone both ways, and both sides profess to see the tide shifting in their favor.

One reason for the disparate court decisions, said Mark Rosen, deputy general counsel for the Federal Deposit Insurance Corp., which is charged with handling this part of the thrift cleanup, is that "you are not dealing with standard form language. Courts are not construing the same language" in each case and thus reach different conclusions.

"We win about 70 percent" of the cases involving the regulatory exclusion, Rosen said. Sometimes courts have found the clause inapplicable and sometimes ambiguous, and in general in insurance litigation "ambiguities are resolved against the insurer." But the principal argument against both exclusions is that they are contrary to "public policy," and courts have the power to override contract provisions that conflict with the public interest.

In a Maryland case involving the ill-fated Maryland Deposit Insurance Fund and First Maryland Savings and Loan, a trial court and an appellate court threw out the insured vs. insured defense on those grounds. The insurer, American Casualty Co. of Reading, Pa., is seeking review by the Maryland Court of Appeals, the state's highest court.

Most of the government victories have been at the trial court level, and insurers are pinning their hopes on the appellate courts. They won one recent victory in the Sixth U.S. Circuit Court of Appeals involving Aetna and United Southern Bank of Nashville. At the lower court, the FDIC won a $6.5 million judgment against Aetna Casualty and Surety Co., which had written $3 million in surety bonds for United Southern. Aetna refused to pay under the bonds, citing the regulatory exclusion, and the FDIC won the full $3 million plus another $3.5 million in punitive damages in a U.S. district court in Tennessee.

The Sixth Circuit reversed the award, reasoning that if courts were "free to refuse to enforce contracts as written on the basis of their own conceptions of the public good, the parties to contracts would be left to guess at the contents of their bargains."

However, other American courts have been willing to keep insurers guessing, and they are likely to do so until a definitive ruling is handed down by the Supreme Court. It is a process that keeps insurers on edge, their lawyers busy and prosperous, and foreign insurers such as Lloyds of London scratching their heads.

"Specialty reinsurers offshore are appalled by the ability of plain language to be set aside by subsequent litigation," said Brian Smith, executive vice president of the U.S. League of Savings Institutions.

Whichever way the issue goes, it will have enormous impact on the insurance market and on financial institutions.

If insurers prevail and the exclusions are sustained, banks and thrifts may soon come to feel that the policies are so riddled with exceptions that they are not worth the premium. "Some institutions are saying these policies are sort of Swiss cheese ... that is sort of 'noninsurance insurance' and are dropping it," Smith said.

On the other hand, if the exclusions are overridden, "I would expect the insurance community to say the hell with it. If we can't say what we cover and what we don't, we won't cover anything," he said. This latter possibility alarms officials of healthy institutions, who carry the coverage not to protect against regulators but to protect against shareholder, customer and employee lawsuits.

One nonfinancial side effect of all this is that it is getting increasingly difficult to find people to serve as directors of financial institutions. In cases where banks and thrifts are going without D and O insurance -- or where exclusions exist -- wealthy directors could find themselves named in suits without any insurance at all.

"Anybody that serves as a director on a savings and loan board ought to have their heads examined," said Wyatt's Armstrong, not at all in jest.