A proposal by D.C. Mayor Marion Barry to change the District's no-fault auto insurance law is drawing fire from insurance industry officials who say the mayor wants to gut the statute that went into effect less than two years ago.

The mayor's proposed amendment would eliminate the current requirement that motorists buy personal injury protection (PIP) coverage that compensates them for injuries regardless of fault in an automobile accident. The legislation would make such coverage optional.

Instead, a motorist would be required to purchase liability insurance to protect him from claims based on fault, according to the proposal.

"I think it will end the really beneficial parts of no-fault insurance," said Donn Knight, regional vice president of Geico, the District's largest insurer and one of the leading supporters of the no-fault law.

"To me, it's a reversal of the present law," added Lawrence Mirel, an attorney representing the American Insurance Association. "It amounts to repealing the no-fault insurance bill."

The mayor's plan also would allow liability suits by persons with PIP coverage in cases where their medical bills are less than $5,000. The no-fault law now in effect allows persons with PIP coverage to sue only if their medical bills exceed $5,000.

The consumer and regulatory affairs committee of the City Council will hold a public hearing on the proposal July 3.

In a letter to Council Chairman David A. Clarke, Barry attributed the need for a change in the law to several factors, including a U.S. District Court judge's decision last December that struck down the $5,000 threshold in the law. Judge Oliver Gasch's ruling in Dimond v. the District of Columbia that the limit is unconstitutional has been appealed to the U.S. Court of Appeals.

In the letter, Barry cited a study by the insurance administration of the city's Department of Consumer and Regulatory Affairs that showed no general deep reductions in insurance premiums as a result of no-fault insurance. The study also noted there were fewer uninsured motorists in the District than previously thought, a factor that partly fueled the push for no-fault insurance during council hearings in 1982.

"The citizens of the District . . . should not have to wait in limbo while the court reviews the appeal of the Dimond decision," Barry wrote.

The history of the battle over no-fault insurance here has pitted insurance companies, which argue no-fault speeds compensation and reduces premiums by cutting the costs of litigation, against trial lawyers, who defend citizens in automobile accident cases.

Several no-fault proposals, favoring one side or the other, went before the City Council in 1982. The final version of the bill, which was opposed by the trial lawyers, was not signed by the mayor, who expressed concern then about the quality of consumer protection offered by the law.

Although no hearing has yet been held on the mayor's new amendment, battle lines appear to be forming again.

"From my reading of what the mayor proposes," said Jacob Stein, lead attorney for the challengers to the no-fault law in the Dimond case, "it is an attempt to deal with the ruling of Judge Gasch, which struck down the $5,000 threshold. The mayor's bill also reflects some experience with the law. And that experience was different from what was expected -- with respect to insurance rates and other anticipated benefits."

Donald Chaikin, another leading trial attorney here, said, "Any lawyer wants to retain the right of an injured party to make a claim. Any no-fault law basically deprives a consumer or injured party from making the claim . . . . We certainly totally approve of a compulsory liability insurance law."

Lined up on the trial attorneys' side is council member John Ray (D-At Large), chairman of the Consumer and Regulatory Affairs Committee.

"He thinks this is an improvement over the present law in that it does make no-fault voluntary for the consumers, rather than mandatory," said Margaret Gentry, special assistant to Ray.

Insurance industry officials contend that the mayor's proposal to make PIP coverage voluntary and liability insurance mandatory would make the purchase of both coverages prohibitively expensive.

Consumers would be reluctant to buy no-fault PIP insurance and would rely instead on the compulsory liability coverage, said James E. Jones Jr., senior Washington representative for the Alliance of American Insurers.

"The cost of having both systems would be out of this world," he said.