Maryland State Insurance Commissioner Edward J. Birrane Jr. has failed to supervise properly the close-out of two unsuccessful insurance companies in the state, justifying "immediate removal proceedings" against Birrane and two longtime friends he appointed as deputy receivers to help in the close-outs, according to the state attorney general's office.

A "highly inbred group" of additional "favored recipients" benefitted financially in the receivership proceedings against the insurance companies and worked with "little if any outside check or control on their behavior," said Attorney General Stephen H. Sachs in a 154-page report to Gov. Harry Hughes.

These "failures deserve condemnation," Sachs added in a June 22 letter to Hughes, "and may well subject those responsible to civil litigation by financially affected private parties, or to proceedings brought by the state seeking their removal from the public and quasipublic offices they hold."

But, Sachs said, the actions "do not in my judgment, constitute violations of the criminal law."

Birrane was reported by his office in Baltimore yesterday to be on vacation and unavailable for comment. An Insurance Division spokeswoman said, however, Birrane is preparing a formal rebuttal to the Sachs report.

The question of possible removal proceedings against Birrane and the two deputy receivers may be moot. Birrane has said for some time he plans to resign and formally submitted his resignation to Gov. Hughes yesterday, effective Sept. 7. He said earlier he had planned to take a job with a private insurance company and his decision had nothing to do with the Sachs report.

Deputy receivers traditionally are appointed by the insurance commissioner and would not normally be retained when a new commissioner is named.

The Sachs report focuses in part on the Maryland Insurance Guaranty Association (MIGA), a quasipublic agency whose function is to protect policyholders and businesses with claims against casualty and property insurance companies that fail.

It cites two failed insurance companies--American Centennial Life Insurance Co. and Maryland Indemnity Co.--and says Birrane appointed Preston Tull and Ralph S. Moore, longtime associates, to be deputy receivers for the companies. In turn, other friends and associates were hired to work within MIGA and the two companies to help administer the receiverships.

Administrative cost soared, internal audit controls were relaxed and "parochial hiring practices" were implemented, the Sachs report said.

In his letter to Hughes, Sachs said there were "troubling episodes of make-work or 'churning,' including strong indications that the Maryland Indemnity deputy receiver did not do the 'review' for which he was paid $58,000 by MIGA."

"Lucrative positions and service contracts have been awarded to the same persons or firms without any special reason justifying that selection and without any serious management canvass for other candidates or for less costly alternatives," the Sachs report said.

MIGA is financed by contributions from state insurance companies, and no state funds were involved in the episodes, Sachs noted.