Members of the Maryland Senate, still smarting from the regulatory failure that contributed to the state's severe savings and loan crisis, criticized Insurance Commissioner Edward J. Muhl today over a similar scandal in the insurance industry that has tied up an estimated $40 million belonging to thousands of U.S. construction contractors.

Muhl, appearing today before the Senate Finance Committee, endorsed two legislative proposals to strengthen the state's regulation of Maryland's insurance industry and limit the government's financial liability in a growing scandal surrounding the failure of Eastern Indemnity Co., a Rockville-based surety insurance firm.

The office of Attorney General Stephen H. Sachs is conducting a criminal investigation of Eastern Indemnity principals, Muhl announced today.

Several committee members criticized Muhl's testimony about the health of the insurance industry, saying his statements were as upbeat as assurances they heard a year ago from state S&L regulators.

"So far, in what we've heard, we could substitute 'savings and loans' for 'insurance companies,' " state Sen. Howard A. Denis (R-Montgomery) said at one point.

Lawmakers also said they were disturbed by parallels between the system of state-chartered savings and loan associations, which collapsed last May, and the local insurance industry, which has been shaken since 1975 by the collapse of 14 other insurers -- property and casualty insurers, and life and health insurers -- including Eastern Indemnity last year.

Like its now-defunct counterpart in the S&L industry, the quasi-public agency responsible for policing Maryland insurance companies is controlled by officials of the insurance industry itself.

The agency, called the Maryland Insurance Guaranty Association (MIGA), has a $3.5 million deficit, largely because of $14.5 million in unpaid claims against Eastern Indemnity and other insurers.

Eastern Indemnity, which was founded in the late 1970s, operated in the Washington area and Sun Belt states with money provided by small construction firms that could not obtain insurance from conventional agencies. By granting insurance to construction contractors, Eastern enabled developers to proceed with projects on schedule. Many of the claims against Eastern were filed by developers after the contractors failed.

In the fall of 1984, Muhl's office launched a preliminary investigation into how Eastern Indemnity President Graham Perkins was using company funds, according to a spokesman for Muhl.

Perkins, who Muhl said is living in Florida, could not be reached for comment.

In January 1985, after Perkins left Maryland, the state seized control of the company. On Feb. 11, 1985, a Montgomery County Circuit Court judge declared Eastern Indemnity to be financially insolvent.

In the year since, about 1,000 Maryland residents have filed claims to recover roughly $10 million they had paid to Eastern Indemnity, Muhl told the finance committee today.

Muhl today endorsed a measure to limit to $300,000 the maximum amount any claimant may recover in the case. The measure also would reorganize MIGA to allow payment of all Maryland claims against Eastern Indemnity within two years, rather than eight years under the current system.

"I will admit that MIGA (was) never designed to handle massive insolvencies," said Muhl. But, he added, "I do not see the system failing."

Legislators said they wanted to be cautious. "We're more sensitive that we were a year ago," said committee chairman Sen. Dennis F. Rasmussen (D-Baltimore County), the committee chairman.