The fire that ripped through Jack Wanamaker's store in 1977 may have dealt him a devastating blow, but he could at least take comfort in the fact that he was fully covered by insurance. That is, he thought he was. According to Wanamaker, his insurance carrier, S&H Insurance Co., offered him a settlement of only $290,000 -- on a loss that he estimated at $1.5 million (the value of his Burbank Calif., building and its contents). So, like a growing number of businesspeople, he took his insurer to court.

"Had I known what I know today, I would have told them to take their damn insurance and shove it," says the 68-year-old Wanamaker, now owner of three equipment-rental stores employing 90 people. "I would have never sifted through the ashes and waited one and a half years to do paperwork for the insurance company before I could even begin thinking about a new building." In December 1982, Wanamaker and S&H settled out of court for $1 million.

Industry observers say that more and more businesses are confronting their insurers in court, because of several factors that have converged in the last few years: Insurance underwriters are getting more tightfisted with their claim-handling; at the same time, policyholders, concerned about rising premiums, have been growing more sophisticated about managing their insurance; and a growing number of states are allowing the award of punitive damages in these lawsuits, placing a potent weapon in the policyholder's hands.

"It's a brand new trend in the business world that wasn't there two years ago," says William M. Shernoff, a plaintiffs' attorney who has specialized in insurance litigation. He speaks from personal experience. Three years ago, Shernoff had no business clients; today his offices in San Diego and Claremont, Calif., represent about 10 businesses. A lawsuit, he explains, "gives small businesses the economic clout to force an insurance carrier to take timely care of their problems."

They may need that clout more than ever, according to Jon Harkavy, attorney for Risk & Insurance Management Society Inc., a professional organization representing 3,800 small and large companies that use risk managers. "Insurance carriers have been known to sit on a legitimate claim for investment purposes," he says,"or drag a settlement out hoping that a small insured [business] will settle for less money or drop the claim completely. There are cases which make punitive damages a valid concept."

Evidently, judges and juries share that view, as witnessed by the recent explosion of punitive awards in bad-faith damage suits against insurers. The California courts were the first to allow such awards, about a decade ago; now the concept has spread to more than 20 states. Under the punitive damage doctrine, a court may require an insurance company to pay damages as a punishment -- in addition to damages for the identifiable economic loss -- if the insurance company has breached its obligation to deal fairly with a client.

Insurance company executives blame this doctrine for the overall trend toward more and more lawsuits, and they are worried by the multimillion-dollar awards. "Limitations will have to be placed on the jury awards if the industry is to survive," argues Charles Carpenter, a partner in the Los Angeles law firm of Kegal, Tobin & Hamrick. Carpenter is representing National Union Fire Insurance Co. of Pittsburgh in a major bad-faith damage suit in California.

But another factor in the growth of small businesses suing insurance companies may be a new aggressiveness among entrepreneurs. "Compared to 20 years ago, the entrepreneur today is well educated, technically oriented, and very aggressive," says Jack Curtin, president of The Francis H. Curtin Insurance Agency Inc. in Cambridge, Mass., which represents a number of small business. Curtin maintains that entrepreneurs are applying their aggressiveness and intelligence to attain the returns they think they deserve on their premium dollars. "If the only remedy available is the court, they'll take that remedy," notes Curtin.

That remedy is far from simple, however. The National Union suit, for example, turns largely on the question of "occurrence," which is "probably one of the most complicated areas of insurance law," according to Harvey R. Levine, a professor of law specializing in insurance bad-faith litigation at the University of San Diego School of Law and a partner in the law firm of Shernoff & Levine.

The National Union case goes back to 1959, when William Berk entered the swimming-pool franchise business in California, and his franchisor asked that he buy comprehensive liability insurance. Through his broker, Berk acquired an "occurrence policy," underwritten by National Union, which would provide coverage for any accident resulting from the products built during the policy period. Almost two decades later, in 1977, Berk was sued by a couple claiming that a faulty swimming pool design caused their son's tragic accident. Mark Faubert dove backwards off a diving board, hitting his head on an underwater love seat, which resulted in paralysis in his four limbs.

As it turned out, the Fauberts' swimming pool had been constructed in 1963 or 1964, when Berk's National Union policy was in effect. Nevertheless, the insurance company refused to defend Berk in his costly 1978 trial.

Arguirig that this refusal constituted a flagrant act of bad faith, Berk sued the carrier. A central issue in the Berk case involved the policy's definition of "occurrence." National Union insisted that the policy only covered bodily injury during the policy period of 1963 and 1964. The carrier said that, before 1966, its standard comprehensive liability policy did not specifically define "occurrence."

Berk, however, testified -- and his insurance agent confirmed -- that his policy provided protection for negligent acts, such as faulty pool design, which occurred during the term of the policy, even though bodily injuries resulting from those negligent acts didn't occur until after the expiration of the policy -- a common agreement in such policies. The Los Angeles Superior Court judge ruled that the insurance language was ambiguous and that Berk had a "reasonable expectation of coverage." Last June, a Los Angeles Superior Court jury awarded Berk and his wife, Jacqueline, $659,231 in compensatory damages and more than $13 million in punitive damages.