A federal court jury has awarded a District contractor $2 million in punitive damages after finding the contractor's insurance company guilty of "outrageous conduct." It was the first time an insurer has been assessed punitive damages in the District.

The case involved Central Armature Works Inc., an electrical contractor, and American Motorists Insurance Co., a subsidiary of Kemper Corp., of Illonois. The jury took an hour and a half to decide that American Motorists had falsely told Central Armature that its policy did not provide liability coverage in a suit where Central Armature was being sued by a third party. During the course of the trial, lawyers for Central Armature discovered internal memoranda showing that insurance company executives recognized that the contractor was covered but failed to tell him so.

Central Armature's president, Robert H. Dorr, said he thought American Motorists was hoping his company would go bankrupt so the insurance company wouldn't have to settle its claim.James C. Gregg, attorney for American Motorists, said his client had not yet decided whether to appeal.

Central Armature's troubles began in 1975 when it sued Joseph Smith & Sons, an automated salvage business that shreds metal, for $48,000 due on work performed at the yard. Smith countersued for $1.8 million, claiming Central Armature had done the work improperly, causing the scrap yard to spend a lot of money to replace damaged electrical equipment.

The contractor, who had a paid-up $500,000 liabilty policy with American Motorists, plus an umbrella policy with another company turned the suit over to the insurer. After 13 months of discussion, American Motorists agreed to defend American Armature against Smith, but fefused to admit its liability was covered.

A year and a half later, the insurance company's attorneys advised Cental Armature to settle out of court with Smith, who, they believed, had a strong case and was likely to win $250,000 if the case went to trial. Central Armature settled in December 1977, agreeing to pay Smith $158,000.

When Central Armature asked its insurer to pay part of the setlemnt, American Motorists offered $30,000 on the condition it drop all other claims. Since the sum offered would not have paid even Central Armature's $60,000 in legal costs, the contractor filed suit against its insurers. aking for compensatory damages. It also asked $3 million in punitive damages to be paid by either one of them. Last year Central Armature was awarded compensatory damages amounting to about $400,000.

Wednesday, in Judge Barrington Parker's coutroom, a jury awarded Central Armature $2 million in punitive. damages. John P. Arness, attorney for the contractor, said his research showed this is the first time any such award has ever been made in the District against an insurance company.