The General Accounting Office has warned Congress that the federal government's insurance program may be encouraging arson-for-profit in the blighted neighborhoods of American cities.

The GAO, in a report released today, urged the Department of Housing and Urban Development to tighten the rules so that slum landlords will find it harder to buy inflated property insurance and cash in on fires.

The government regulates so-called "Fair Plan" insurance pools in 26 states and the District of Columbia which guarantee that property owners can obtain insurance in the high-risk areas which are deteriorating. The GAO said that all but five of these state plans are operating at a loss - paying out more in claims than they collect in premiums.

The losses ranged from $68 million in New York and $60 million in Michigan to $446,000 in the state of Washington. The District of Columbia plan has lost $621,000. These costs are passed on, eventually, to all insurance holders in the form of rate increases.

The GAO could not establish statistical proof that the federal program stimulates arson-for-profit, but the report cited lengthy complaints and particulars from the insurance industry and managers aho run the "Fair Plans." They blame the Federal Insurance Administration (FIA) in HUD for the laxness, but the GAO said that insurance companies are also responsible.

Sens. Charles H. Percy (R-III.) and Sam Nunn (D-Ga.), who have been investigating arson as a national problem, said the GAO findings are "shocking confirmation that the federal government has lost control of the arson problem."

Their joint statement urged HUD to revamp the insurance operating rules. The program was enacted after the urban riots in the 1960s to help inner-city homeowners and businessmen get insurance in high-risk areas.

"If the federally monitored insurance program designed to encourage maintenance of inner-city properties is instead helping to burn them down, then the entire program must be reevaluated," the senators said.

The GAO said Fair Plan managers interviewed "believe that plans are operating in a manner that encourages arson-for-profit." They blame "the FIA's attitude that no one should be denied insurace coverage."

Among the abuses and proposed reforms cited by the GAO:

In some states and the District of Columbia, the Fair Plans "provide the amount of insurance the property owners request without attempting to determine the property's actual or market value. As a result, properties can be insured significantly above their actual market values."

The GAO recommended that HUD eliminate this practice and insist that insurance coverage be based on established property value.

Some state managers complain that they are not allowed to use the property owner's charcter and past as a reason for denying coverage, even though suspicions of arson-for-profit are established.

One of the Fair Plans denied coverage to a property owner who was under indictment for arson, but the case was appealed to state insurance regulators, who ordered approval of the policy. New York officials complained that insurance could not be denied to individuals whose properties have had a history of fires.

GAO suggested that Fair Plan managers be directed to inspect city records on unpaid taxes, housing code violations and past fires in order to judge whether an owner is an unreasonable risk.

Under federal regulations, a 30-day notice is required to cancel insurance coverage, but sometimes after the cancellation notice the building is burned down in the 30-day waiting period and the insurance claim is collected.

In Massachusetts, the Fair Plan manager canceled insurance on a building after he was warned that a fire was planned. Then he spent $10,000 on guards to make sure the building didn't burn during the 30-day waiting period.

The GAO recommended that five-day cancellation notices be permitted, with the approval of state insurance officials.

While most of the report was aimed at federal regulations, the GAO also noted that insurance companies have been lax in policing the potential for landlord arson.

"There is little real incentive for the insurance industry to do anything about arson," the report said. "One insurance company official said that even if property owners can be proven guilty of committing arson, the insurance companies must still pay mortgages on the property. Insurance companies have also adopted an attitude that money should probably not be spent to investigate suspected arsonists because the chances of conviction are only about 1 percent and the suspects may sue the companies for punitive damages."