defend, breached that obligation. We do not think the third party plaintiff's claims clearly show no liability on the part of the various third party defendants. As long as the Complaint filed by the plaintiff and thereafter referred to in the Third Party Complaint against Sullcraft covered an injury which "might or might not" fall within the coverage of the policy, INA was obliged to defend Sullcraft against plaintiff's claims. INA was under a duty to defend Sullcraft until it could confine plaintiff's claims to a recovery outside the policy coverage.
We also find that INA was obliged to continue defending Sullcraft to the final resolution of those actions initiated by plaintiff Mattocks with respect to the claims relating to Sullcraft and the pajamas manufactured from Dan River materials.
INA claims that the exclusions contained in the vendor's endorsement cover any physical changes in form, any labeling or re-labeling, any use of Dan River products as component parts of another product, or any re-use of Dan River products as a container for another product.
Considering the terms of the exclusions set forth in the endorsement in context with the other terms contained therein, we conclude that Sullcraft was not excluded from coverage. Section 1(b)(i) excludes coverage with respect to any bodily injury "arising out of" any intentional, physical change in form of the product by the vendor. It is clear that Sullcraft intentionally made changes in the form of the cotton flannelette by cutting and tailoring the material into finished pajamas. However, the injuries sustained by Kevin Mattocks when the pajamas ignited cannot be said to have arisen out of the changes Sullcraft made. Plaintiff's theory of liability was that plaintiff was injured due to the unreasonably dangerous nature of the pajamas constructed of non-flame retardant cotton flannelette. Plaintiff also proposed a theory of liability based on defendant's failure to warn (which was rejected by the Court because of plaintiff's failure to lay the proper factual foundation) with respect to the non-flame retardant propensities of the pajamas. No claim ever was made that Sullcraft's physical changes of the Dan River material caused plaintiff's injuries.
The "arising out of" language of Section 1(b) of the endorsement limits the applicability of Section 1(b)(i). The changes in form by a vendor must cause plaintiff's injuries before the vendor is excluded from coverage under the endorsement. If the change in form resulted in plaintiff's injuries, the vendor is obligated to provide its own defense. Any change in form causing injury would take the product out of Dan River's control. In such a case fairness demands that neither Dan River nor its carrier be held responsible for an injury causing change by a third party. However, where the change in form does not cause the injury and the injury is caused by the material itself, regardless of the form it takes, the manufacturer (and therefore its carrier) is responsible for any harm arising therefrom.
INA also claims Sullcraft has no right to a defense because of the exclusion contained in Section 1(b)(iv) of the endorsement.
Under the interpretation of Section 1(b)(iv) proffered by INA, a vendor of goods purchased from Dan River would not fall within the coverage of the endorsement unless the vendor sold the product under the Dan River label. Even the mere relabeling of the goods allegedly would preclude the vendor from coverage.
If the language of Section 1(b)(iv) was not limited in any way, INA's interpretation of 1(b)(iv) would be plausible. However, construing the language of that section in relation to the limiting language of Section 1(b), we cannot accept INA's interpretation of the scope of the exclusion contained in the endorsement.
Any labeling or relabeling, use as a component part of another product or re-use as a container for another product which causes physical or bodily injury would exclude Sullcraft from the protections given by the insurance policy. To interpret the provisions of exclusion as does INA, would effectively preclude any vendor of Dan River products (except those selling under the Dan River label) from coverage. This is not a reasonable interpretation of the contract of insurance because of the language used in the endorsement and in view of the usual impetus for securing products hazard liability insurance, i.e., to encourage vendors to purchase and sell products of the party securing the insurance.
Therefore, we conclude Sullcraft is entitled to a defense on its behalf as provided by INA. Because the defense was not provided by INA, Sullcraft is entitled to the costs incurred in defense of the matter, including reasonable attorney fees. However, Sullcraft is limited to the costs of defense of those actions brought against it relating to the injuries of Kevin Mattocks.
Sullcraft is not entitled to the reasonable attorney fees and other costs incurred in bringing the action for declaratory relief. We find that although INA's refusal to defend breached its obligation to tender a defense, INA's obduracy was due to a good faith belief that the vendor's endorsement excluded Sullcraft from coverage. Under Pennsylvania law, no attorney fees are awarded to the prevailing party in a declaratory judgment action where the circumstances show the refusal to defend was not in bad faith or unreasonable. Montgomery Ward & Co. Inc. v. Pacific Indemnity Co., 557 F.2d 51 (3d Cir. 1977).