When Richard B. Cheney was Halliburton chief executive, he signed documents spinning off the Texas energy giant's unprofitable insurance subsidiary, telling shareholders of both companies that the deal would give Highlands Insurance Co. "the opportunity to achieve its maximum potential."

Documents generated by Halliburton, a Dallas-based oil services and construction firm, describing the deal to Highlands investors revealed trivial items that insurance executives would lose in the spinoff, such as voice mail, computers, use of the Halliburton aircraft and access to its hunting lodge near Houston and a fishing facility in Duck Key, Fla.

They did not mention a huge potential liability for worker asbestos injuries that was looming as Highlands launched its independent business, taking along Halliburton as a major customer. Within a few years of the spinoff, Highlands found itself saddled with 23,000 claims worth about $80 million from workers at a major Halliburton subsidiary, Brown & Root. By 2000, the weight of the claims pushed the publicly traded Highlands into deep financial trouble.

For the past two years, Delaware courts have been trying to sort out a business dispute that arose over the spinoff. Simply put, the case revolves around two questions: whether Cheney and Halliburton had agreed for Highlands to take on these expensive liabilities and whether Halliburton officials understated the potential size of the asbestos claims in disclosures to Highlands stockholders and the business partner that invested $60 million in the spinoff.

The SEC is examining an aggressive accounting method used by Halliburton for one year in which uncollected debt on major construction projects was counted as revenue. Halliburton contends that the practice, approved by Cheney, is perfectly sound.

Cheney's involvement in another deal, the $7.7 billion merger with Dresser Industries in 1988, also has come under media scrutiny in recent weeks because of its impact on Halliburton stock prices. Because of the merger, Halliburton might have to honor 250,000 asbestos claims filed against a Dresser subsidiary.

Halliburton estimated its current asbestos liability at $2.2 billion over the next 15 years. Insurance covers all but $600 million, Halliburton said, but the company also is suing its insurers for failing to pay claims.

The decision to spin off its money-losing Highlands insurance division came in Cheney's first year as chief executive. Highlands was created in 1958 by Brown & Root Inc., an engineering and construction company Halliburton acquired in 1962.

By the 1990s, battered by environmental and asbestos claims, Highlands had become a drag on Halliburton's bottom line. In 1995, a firm called Insurance Partners offered to buy 43 percent of Highlands for a total investment of $130 million.

Halliburton seized the opportunity.

A series of documents accompanied the deal, including a statement drafted by Halliburton and signed by Cheney. Its purpose was to explain to shareholders that the relationship between the two companies was going forward and its expected impact on both companies.

The documents specified that Highlands would continue to honor what are known as "retrospectively rated policies" held by Halliburton. The policies have premiums that adjust up or down depending on the size of claims. As a rule, they generate income and do not transfer risk to the insurer.

The documents made no mention of what would happen to "fixed-cost" policies that Highlands had carried for Brown & Root, covering the period from 1958 to 1986. Fixed-cost policies have set premiums and provide coverage for any liabilities that occur during the period when the policy is in place.

For four years after the spinoff, Highlands continued to pay Brown & Root fixed-cost claims, which were growing.

Payments a mistake

But at a meeting in April 2000, the insurer told Halliburton that it would no longer honor the claims. It said payments under the fixed-cost policies had been a mistake, only belatedly discovered by management, and it argued that the policies had never been included in the original deal.

The day after the meeting, Highlands filed suit in Delaware, where both companies are incorporated. Highlands lawyers did not depose Cheney.

Highlands contended in the lawsuit that "after the spinoff, Brown & Root began tendering to Highlands Insurance large numbers of claims" on workers injured by asbestos exposure. This "alarming volume" continued until 23,000 claims had been received by 2000.

Halliburton argued that it did not know so many claims could surface.

Halliburton contended that estimating asbestos liability was an "inherently uncertain undertaking" and argued that there wasn't more disclosure of risks because the size of asbestos claims at the time was small.

The Supreme Court sided with Highlands in a 5-0 decision upholding the lower court. Halliburton asked for a rehearing, and the Supreme Court affirmed its earlier decision last month.

After the spinoff, Highlands foundered. After the company's stock plummeted and the New York Stock Exchange delisted it, it stopped writing insurance policies. Regulators in several states ordered it to halt new business.