NEW YORK—The judge overseeing litigation stemming from individuals' claims that they were made ill or injured while working on the World Trade Center rescue and recovery efforts on Friday delayed a multimillion-dollar settlement reached last week between WTC Captive Insurance Co. and lawyers representing thousands of New York City and contract workers.

In a preliminary fairness hearing on the settlement, which came just months before the first cases were scheduled to go to trial, U.S. District Judge Alvin Hellerstein in New York criticized the deal as “unfair” and sent both sides back to negotiate further.

Among his concerns were that the deal would provide inadequate individual settlement amounts, and that too much money was being set aside for future claims rather than being paid out now to current plaintiffs. He also said lawyers' fees should be paid by WTC Captive separately and should not be included in the settlement amount.

In addition, Judge Hellerstein criticized the claims process as potentially confusing to injured workers and said he plans to impose judicial review on the structure of that process.

The settlement—which could have been as much as $675 million—provides a system to compensate about 10,000 plaintiffs—including police officers, firefighters and construction workers—according to the severity of their illness or injury and the level of their exposure to contaminants at the World Trade Center, officials said during a news conference last week.

The pact called for payments to be made by WTC Captive, a federally financed insurance fund established in 2004 with a $1 billion grant to provide otherwise-unavailable liability coverage to the city of New York and about 100 contractors. At least 95% of the plaintiffs must accept the terms within 90 days for the agreement to be binding, in which case the payments would total $575 million. If all plaintiffs accept the terms, the settlement would total $675 million, officials said.

The settlement required a claimant to submit proof that he or she was present and participated in the recovery or cleanup efforts, as documented by medical history. An independent third-party claims administrator—chosen by lawyers in the case—was to be announced in several weeks, officials said. The settlement also funds special insurance for any plaintiff who later contracts certain kinds of cancer.

Christine LaSala, President and CEO of the WTC Captive, said in a statement: “I am very disappointed that the judge has now made it more difficult, if not impossible, for the people bringing these claims to obtain compensation and a settlement.

“We heard people today plead for an end to this litigation that was fair and just. That is what we focused on and achieved. We will consider what the judge has said and consult with our insureds and try to find a way forward.”

A lawyer for the plaintiffs declined to comment.