A Hagerstown man who received a radiation overdose during treatment for prostate cancer was awarded $3 million at an arbitration hearing yesterday in Bethesda, in what was called the largest medical malpractice award in Maryland history.

James L. Kline, who has been confined to a hospital bed at the Washington County Hospital in Hagerstown since May 1978, was awarded compensatory damages after a hearing before a panel composed of a doctor, a lawyer and a layman under provisions in the Maryland Health Claims Arbitration Act.

After a nine-day hearing in the Bethesda Ramada Inn, the panel declined to award punitive -- punishing -- damages to Kline, who followed the proceedings by special telephone hook-up and testified from his hospital bed. But it did rule that radiologist Alfonso Lazo and Associated Radiologists, P. A. were guilty of negligence, and they said the Washington County Hospital Inc. was "vicariously liable for the negligence of its agents."

Lazo's attorney, John King, said he would file an appeal that would send the case into state or federal courts. The 1976 Arbitration Act specified that all malpractice claims must first be arbitrated before they could be taken to court. The law has been criticized as cumbersome and time-consuming because once a case finally gets into the courts, the parties start from scratch, although the finding of the arbitration panel can be entered into the new record.

"I'm going to appeal, I'm going to beat my breast and do everything I possibly can to rectify what I think is an outrageous and punitive award," said King.

Kline, a 64-year-old acetylene cutter at the Pangborn Corp. in Hagerstown, filed his claim with the Health Claims Arbitration Office in Baltimore in September 1979 after he had undergone a series of radiation treatments during the summer of 1977 at Washington County Hospital.

The radiation therapy, according to his attorney, Marvin Ellis, was prescribed merely as a precaution following surgical removal of Kline's prostate.

"He was healthy, active, youthful and he went back to work after the surgery," said Ellin. "The radiation was just to be doubly sure they didn't miss any cancer cells."

After reviewing evidence presented by the plaintiff, the panel found that Lazo administered "excessive radiation over and above the standards of care," and made the award for medical expenses, pain and suffering, and disability.

"They burned him," Ellin said. "They burned away his buttocks. They destroyed his right hip. He's had a permanent colectomy [removal of part of the colon]. He's hopelessly and totally disabled."

King, the radiologist's attorney, said, "While the panel concluded there was negligence, it didn't conclude it was reckless. It was simply a mistake. But the award was punitive. It's the biggest one of any kind I've heard. I'm still in shock."

Despite the size of the award, Kline, a longtime foe of arbitration, criticized the system as a waste of time. "If we had gone into court in the first place, it could have been avoided," he said. "Now we'll go to a jury trial which will take another year. The old system of going to court worked for 200 years."