Liberty Mutual Group, a Boston-based insurance company, said yesterday that it will pay $3.25 million to a Washington fair-housing group to settle charges by housing organizations that it discriminated against residents of poorer, urban neighborhoods in providing homeowners insurance.

The civil settlement, part of the largest ever by an insurance company of a fair-housing matter, results from a 1997 complaint filed with the Department of Housing and Urban Development. The National Fair Housing Alliance, a Washington-based group comprising 80 nonprofit housing organizations throughout the country, charged the company with redlining -- or discriminating against some neighborhoods.

As part of the agreement, Liberty Mutual agreed to provide replacement-cost insurance coverage to homes built before 1950. The company's refusal to provide such coverage was the main practice the housing groups had cited in their complaint. The groups claimed that by failing to offer replacement-cost homeowners insurance to older houses, the insurance company had discriminated against poorer, urban residents who tend to live in such homes.

Liberty Mutual did not acknowledge wrongdoing.

"I don't view it as a settlement," said Robert Muleski, Liberty Mutual's senior vice president. "We needed to go forward in our business, and this is the way to go ahead. There was no wrongdoing."

Fair-housing advocates praised Liberty Mutual for its quick action to address the complaint.

"Liberty Mutual has gone beyond what other insurance companies have done to put right what was wrong," said Shanna Smith, executive director of the National Fair Housing Alliance. She said similar cases are pending against Prudential Insurance Company of America and Travelers Property Casualty Corp., which have also denied discrimination.

The group said it will use the funds to provide below-market loans, down-payment assistance, and counseling and outreach programs for D.C. residents through the Fair Housing Council of Greater Washington. The National Fair Housing Alliance also will receive a $1 million donation from the company.

Del. Eleanor Holmes Norton (D-D.C.) said the Liberty Mutual money "could not come at a better time" for the District.

"This investment program is one more valuable tool in the package that is spurring homeownership in the District of Columbia," Norton said at a news conference announcing the settlement.

In addition, Liberty Mutual has said it will provide $4.25 million to fair-housing groups in Milwaukee and Richmond, and tomorrow it is expected to announce it will pay $3.25 million to an organization in Toledo.

The U.S. insurance business has been under a microscope since 1995, when HUD provided a $1.5 million grant to five housing groups to test whether insurance companies were offering the same policies at the same price to minority homeowners and residents of urban neighborhoods as they were to suburban homeowners.

Last October, Nationwide Insurance Co. was hit with a $100 million punitive-damages award by a Richmond jury in a redlining case. American Family Insurance Group, Allstate Insurance Co., State Farm Insurance Co. and Nationwide, which together account for about 40 percent of the country's homeowners insurance market, have settled housing complaints between 1995 and 1997. All have launched urban investment programs to try to turn discrimination and redlining charges into favorable publicity about revitalization programs for the nation's cities.

As part of the settlement, Liberty Mutual also has opened an office in the District, at 1620 L St. NW. Company officials said they wanted to increase their business in the city.

Smith of the National Fair Housing Alliance said many insurance companies aren't even aware of the effect of some of their policies.

"The industry is still evolving," she said. "And it still has a ways to go."