New Jersey Gov. Jim Florio signed a bill yesterday that sets the course for completion of a bailout plan for Mutual Benefit Life Insurance Co.

Gov. Florio's signature on the bill, which outlines procedures for rehabilitating life and health insurers in the state, was the last barrier to conclusion of a plan to resuscitate the failed Newark, N.J.-based company.

Insurance industry executives had sought such a measure before finalizing a tentative pact to fully guarantee benefits and account values of all Mutual Benefit policyholders and pension participants.

The new law gives Mutual Benefit policyholders' claims priority over general unsecured creditors, but it does not specifically address the claims of the holders of about $800 million of tax-exempt bonds guaranteed by Mutual Benefit.

The law also does not address the claims of three large banks - Citibank, N.A., Bankers Trust Co., and Morgan Guaranty Trust Co. of New York -- that joined with the insurer in interest rate swaps valued at between $55 million and $114 million. The banks had sought to have their claims placed on an equal footing with policyholders.

The treatment of bondholders' claims and all other liabilities of the company will be spelled out in the rehabilitation plan, now expected next week at the earliest, said Mary Ann Green, a spokeswoman for Mutual Benefit.

New Jersey Insurance Commissioner Samuel Fortunato and Victor Palmieri, deputy rehabilitator and chief executive office of Mutual Benefit, are expected to present the plan to Judge Paul Levy sometime next week, Ms. Green said. The judge is overseeing the rehabilitation of the failed insurer.

The new law, known as the Life and Health Insurers Rehabilitation and Liquidation Act, applies to agencies such as commercial life and health insurers; fraternal benefit societies; hospital, medical, health, and dental service corporations; and health maintenance organizations. The law repeals any outstanding rehabilitation and liquidation procedures pertaining to those entities.

Last week, the state Assembly voted 70 to 0 to pass the Senate version of the legislation. The state Senate passed an identical measure by a 40-to-0 vote in June.

Earlier this month, Commissioner Fortunato announced that an agreement had been reached in principle with a consortium of insurance companies and the National Association of Life and Health Insurance Guaranty Associations to guarantee payments to policyholders.

The guarantees would cover policyholders' full death, disability, and retirement benefits. The plan is contingent upon the agreement of the industry consortium and affected state guarantee funds.

Mutual Benefit was placed into rehabilitation because problems with its real estate portfolio led to a surge of withdrawals and policy surrenders that threatened its financial health. After the company was seized by New Jersey insurance regulators in July 1991, it declared a moratorium on the redemption of municipal bonds it guarantees. A court order also staved off foreclosures on mutual Benefit-backed housing projects.

The company has continued to make interest payments on the bonds. While interest on most projects has been paid in full, partial payments have been made for projects on which cash flow has not been sufficient to cover total interest payments.

The bonds were issued by state and local governments, largely to finance real estate developments.

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