TOPEKA, Kan.-A member of Congress and the former president of National Colonial Insurance Co. are complaining about the recent settlement of a 1995 lawsuit charging a Denver consultant with losing $4 million of the insolvent insurer's assets through an "unauthorized" investment.

They claim that the settlement-reached last month between the Kansas Insurance Department and Denver-based Hugh Alexander & Associates Ltd., and under seal by a federal judge in Topeka-was improperly reached in secret and was filed in federal court, which would make it harder for parties to object.

Regulators overseeing NCIC's liquidation call the complaints a diversionary tactic. They contend that former NCIC President Gerald Zipper is trying to divert attention from a lawsuit in which the regulators charge him with driving the non-standard auto insurer into insolvency through fraud and mismanagement.

The Alexander suit, the regulators contend, is merely a sideshow to that suit, which also names Mr. Zipper's partner, NCIC Director Barry Gossett.

"Our lawyers advised us to drop the suit (against Alexander)," said Brian Moline, general counsel to the Kansas Insurance Department. "The litigation costs would be significant," and, after examining the assets of consultant Hugh Alexander, there was little chance of recovering the $4 million, he said.

The department's suit charged Mr. Alexander and his firm, HA HA Enterprises Ltd., doing business as Hugh Alexander & Associates Inc., with engaging in a series of "improper, unauthorized and unsuitable transactions" while serving as deputy liquidator of NCIC that led to the loss of one-third of the insurer's estate. The suit had sought $4 million (BI, Jan. 9, 1995).

As part of the settlement of that suit, Mr. Alexander agreed to pay an undisclosed sum-"but nothing like the $4 million"-and signed a document called a "consent judgment," which includes an agreed-upon version of the events, said Mr. Moline.

In that document, he said, Mr. Alexander "admits he made the investment and that it was lost, but it was an innocent mistake-not fraud."

Kansas Insurance Commissioner Kathleen Sebelius "wanted something in writing so she could warn others about Mr. Alexander, who apparently still solicits business at meetings of the National Assn. of Insurance Commissioners," said Mr. Moline.

Mr. Alexander did not return phone calls.

Mr. Zipper asserts that the settlement may have been politically motivated because Mr. Alexander has longstanding ties to the Kansas department-he served as deputy liquidator on numerous other insolvencies.

It was at the behest of Mr. Zipper, who lives in New York, that U.S. Rep. Jerrold Nadler, D-N.Y., wrote to the U.S. Justice Department seeking an investigation of Kansas regulators' activities in connection with the insurer liquidations.

The department will not say whether any action was or will be taken.

Citing the Jan. 9, 1995, article in Business Insurance that reported the Alexander suit, Rep. Nadler wrote in September: "In past years, when the Kansas Department of Insurance appointed receivers to manage the assets of seized insurance companies, the department permitted said receivers to squander the assets of these seized companies.

"From the information that is available in the article, it appears that this laxity substantially enriched receivers. What is not contained in the article, but possibly brings this matter to a level of criminal misconduct, is the allegation that these firms and their attorneys, in turn, made substantial contributions to candidates for political office in the state of Kansas, including a contribution of possibly as much as $40,000, or more, to the campaign of the Kansas Insurance Commissioner.

"While we cannot verify this allegation or confirm a link between the Kansas Insurance Department's laxity of supervision of the receivers or their appointment of unqualified receivers and the receivers' political contributions to Kansas politicians, we believe that an allegation of this seriousness about an agency with the extensive regulatory authority that is found in Kansas Insurance Department deserves your attention," Rep. Nadler wrote.

In response, Mr. Moline asserts that Mr. Alexander did not contribute to the commissioner's campaign. The liquidator did, though, contribute to Ron Todd, Ms. Sebelius' predecessor as commissioner and the one who seized NCIC in 1993, he said.

Had Mr. Alexander not mishandled NCIC's estate, its former president asserts, more money would have been available to pay claims.

In fact, Mr. Zipper also contends that NCIC was not really insolvent when it was seized in 1993. "The company was not insolvent," he said. "They had asked us for a rehabilitation plan, and we submitted it."

But the plan included a rate increase that Kansas regulators claimed would not be approved by regulators in California, NCIC's principal place of business, Mr. Zipper recounted. "The day we were put into liquidation, we were notified that we were granted the rate increase in California," he said.

Kansas regulators seized NCIC on July 12, 1993, and placed the company into liquidation a few days later.

In its April 1995 suit, the Kansas department charges Messrs. Zipper and Gossett with breach of fiduciary duty, alleging that they drove NCIC into insolvency through mismanagement and fraud.

Among other things, the suit alleges Messrs. Zipper and Gossett forced NCIC to pay "substantial sums to its parent company, DSN Dealer Service Network Inc., impairing the insurer's ability to fulfill its contractual obligations. Messrs. Zipper and Gossett were the principals of DSN, which also is named in the suit. Meanwhile, DSN has filed for bankruptcy protection in New Jersey, where it is based.

DSN purchased NCIC in December 1988 from American States Insurance Co., a unit of Lincoln National Corp. NCIC was formerly known as Western Indemnity Insurance Co. Inc., which was incorporated in 1964 and only did business in Kansas.

At the time of purchase, NCIC was essentially a shell corporation with approximately $8 million in surplus and no liabilities. DSN paid about $11.5 million for NCIC, most of which was borrowed from various trusts that were part of automobile and other extended warranty programs administered by DSN, the Kansas department's suit alleges.

While the majority of NCIC's business was non-standard automobile liability and physical damage insurance, it also wrote more than $1.5 million in automobile warranty business premium between 1989 and 1993.