The D.C. Board of Education has paid nearly $3.5 million to private lawyers to handle a lawsuit against manufacturers of insulating materials containing cancer-causing asbestos, an amount that has prompted an investigation by the D.C. auditor.

Meanwhile, the rest of the city government has decided against using outside lawyers in the same asbestos suit and instead is being represented by the D.C. corporation counsel's office. But some lawyers in the office, concerned that not enough resources are being spent, have suggested privately that their efforts are doomed.

The litigation dates to December 1984, when the District government filed a suit claiming $400 million in damages from more than 40 companies involved in manufacturing and supplying asbestos, which was used routinely in buildings as an insulator and fire retardant until it was found to cause cancer. Such lawsuits have become common around the country and have often produced multimillion-dollar awards for local governments.

Shortly after the D.C. lawsuit was filed, the school board and the city parted ways. Each has taken an approach that carries great risks.

The school board's private counsel is Leftwich, Moore & Douglas, headed by Willie Leftwich, a lawyer with strong ties to the administration of Mayor Marion Barry and with substantial real estate development interests in the city.

In many other jurisdictions, such asbestos-related lawsuits have been handled by lawyers working on a contingency basis -- meaning they will get paid only after the litigation is over. The school board has gambled by paying Leftwich, Moore its money -- more than $3 million, so far -- up front. And the meter is still running.

The rest of the city government decided to avoid paying such high legal fees by doing the work in-house with the corporation counsel's office. But asbestos cases are enormously complicated, and the city has gambled that its own lawyers will be able to develop the expertise and marshal the resources needed to win.

Some lawyers familiar with the efforts of the corporation counsel's office describe a confused and underfunded project that has made little apparent progress in assembling the city's case. Some suggest the city might not even be able to remain in the case.

With the first phase of pretrial work slated for completion in September, lawyers for the school board have collected more than 3 million documents in their attempt to show when asbestos-containing materials were placed in school buildings and by whom.

"I think the school system can prove its case," said school board President R. David Hall. "I don't know what the city can do."

Corporation Counsel Frederick D. Cooke Jr., who was appointed to the post by Barry this year, declined to comment on the city's handling of the suit. "It couldn't do us very much good to tell the other side what we're doing in the newspaper," Cooke said. "We'd just as soon have our court papers talk for us."

But lawyers familiar with the suit contend that the corporation counsel's office -- despite claims it has made in court -- continues to be far behind in its work following a series of patchwork attempts to document the city's asbestos problems, including:Unsuccessful use of teen-aged job trainees, some with only third grade reading levels, to review thousands of ancient, complicated construction documents.

The forced removal of the office's asbestos team from rented quarters when it had no more money to pay rent. The team's evacuation from new offices because of an infestation of rats. Refusal or delay by some city agencies in collecting documents needed for the case because money for the work was not provided in their budgets. Inability to computerize millions of pieces of needed information because officials from the corporation counsel's office rebuffed in-house recommendations to hire an outside firm for the job, then found that the city's computer workers were unable to do it.

"It was nothing but frustration," said one former corporation counsel attorney who worked on the suit and who asked not to be identified. "I was prosecuting a major case with no money and basically just watching it go down the tubes. I never got the impression that there was a commitment from anybody to see the thing through."

The city's suit is one of about 200 such claims filed nationwide by jurisdictions, mostly school boards, seeking to recover money spent to remove or encapsulate asbestos in public buildings. Only a few of the suits have been decided, and many are expected to drag on for years, partly because of the work involved in documenting which companies were responsible for making and installing the asbestos in a given building.

"It's a gigantic undertaking," said Patricia Donovan, assistant general counsel for the Philadelphia school district, which hired a private firm to handle its asbestos suit, which involves more than 500 buildings.

"We couldn't afford to do it otherwise," Donovan said. "We simply don't have the staff."

D.C. school officials, whose suit involves about 180 buildings, made a similar decision. "The size of the suit was so great. And there were so many buildings {the corporation counsel} already had to worry about that we decided we needed our own attorney," said George Margolies, general counsel to the schools.

The school board, then headed by the Rev. David Eaton, negotiated a contract with Leftwich, Moore & Douglas. According to a source close to Leftwich, board members rejected proposals that the firm handle the case on a contingency basis, as has been done in many other jurisdictions.

Board members have since swallowed hard over the more than $3 million Leftwich's firm has charged in the past three years, mostly for collecting and collating more than 3 million documents relating to schools construction. The firm also represents the school board's claim in New York bankruptcy proceedings involving a primary asbestos manufacturer, Johns Manville.

"The cost is far greater than anything I think the board thought it would be," said board president Hall. "But the extent of the asbestos problem also is bigger than anybody thought it would be."

Hall and other schools officials, who maintain that Leftwich has provided thorough documentation for his bills, are hoping that the cost of hiring the firm will be recovered if the city prevails in its suit.

Evaluating legal fees is difficult because most jurisdictions have hired firms on a contingency basis. "If they {D.C. schools} were successful and recovered $35 million or $40 million, nobody would question $3 million," said Ed Westbrook, a lawyer in Charleston, S.C., whose firm represents about 20 government jurisdictions in asbestos suits around the country.

Westbrook's firm last year won a $6.8 million verdict in federal court there involving asbestos found in one building: the city hall of Greenville, S.C. He declined to specify the firm's contingency share of the award, but he said such arrangements typically run between 25 percent and 40 percent, or, in this case, between $1.7 million and $2.7 million.

D.C. school board member R. Calvin Lockridge (Ward 8), though, contends that the board at one point decided to limit expenditures on the case to $10,000 a month, which Hall and other members deny. Lockridge maintains that hiring Leftwich was premature, and he has asked D.C. Auditor Otis H. Troupe to investigate. "The law says very clearly that the school board is to be represented by the corporation counsel" unless that is not possible, Lockridge said.

Troupe last week informed the school board that an audit was in progress and suggested that the board consider suspending payments to Leftwich.

The corporation counsel's case involves about 2,000 buildings. Sources familiar with the litigation said the city's top legal officials were advised in 1984 that the city was not prepared to file suit because they had not done the required background work.

Inez Smith Reid, then the corporation counsel and now in private practice here, said the city's lawyers were prepared and had been looking into asbestos "for one solid year." She acknowledged, though, that "there was some pressure on my office" to file the complaint.

Shortly after the suit was filed, attorneys assigned to the case within the corporation counsel's office began complaining about insufficient preparation, staff and funds to proceed, and they suggested that the office seek more money from City Administrator Thomas M. Downs. Estimates on the cost quickly escalated from $50,000 annually to at least $1 million.

According to sources, a lead attorney for the city told a supervisor that the case was in "deep trouble" because of the lack of resources and suggested that the city ask the court to dismiss the suit in a way that would allow the city to file it again later.

Sources said that last September, a second lead attorney for the District told a supervisor he was concerned that the city's schedule for compiling necessary documents could not be met. The same month, the District in court papers told D.C. Superior Court Judge Peter Wolf it was making "substantial progress."

In February, the city and attorneys for the defendants reached an agreement that the major portion of construction documents would be furnished by September, with some companies complaining that -- apart from the schools -- the District had provided only a relatively small amount.

One company, Georgia Pacific, has asked the court to impose sanctions against the city for allegedly failing to hold up its end of the litigation. "They had not done any work to indicate there was a Georgia Pacific product in any building," said the firm's attorney here, Tim Russell.

In February, Wolf ruled that the statute of limitations barred the city from claiming damages in buildings built before 1970. Since then, the D.C. Council has passed legislation that would overrule Wolf, but the issue is likely to end up in the D.C. Court of Appeals, meaning a possible delay of months or years. The District has asked Wolf to suspend production of documents in the meantime.