Additional Insured Coverage for Vendors

Q

We have a question about a denial of coverage based on the wording of an exclusion in endorsement CG 20 15 07 04, additional insured—vendors. Our insured sent its product to the vendor who then unpacked the product and assembled it for display. A bodily injury claim arose out of the product and our insured submitted the claim to the insurer, seeking coverage for both itself and the vendor. The insurer denied coverage for the vendor and cited the following exclusion: the insurance afforded the vendor does not apply to any physical or chemical change in the product made intentionally by the vendor.

We are having a hard time accepting the idea that unpacking and assembling a product to sell it is physically changing the product. What do you think?

Massachusetts Subscriber

A

We believe that the insurer is misreading the exclusion. Just taking the product out of its package and setting it up in order to sell it is not a physical change within the meaning of the exclusion. This activity does not change the nature or the basic identity of the product; it merely puts the product in its intended state, making it attractive to customers who want to see what they are buying. The additional insured vendor did not physically change the product into something else or alter its physical makeup; the vendor did not engage in an activity that would have created a product that the insurer did not have knowledge of or did not intend to insure.

Since the term “physical change” is not defined on the endorsement, the insurer can interpret the words as it wishes. However, that means the insured can reasonably do likewise and, in that case, the insured is entitled to the benefit of the doubt. We do not believe that the insurer is following the intent of the exclusion in its interpretation.

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