Structure
Early insurance contracts tended to be written on the basis of every single type of risk (where risks were defined extremely narrowly), and a separate premium was calculated and charged for each. This structure proved unsustainable in the context of the Second Industrial Revolution, in that a typical large conglomerate might have dozens of types of risks to insure against.
In the 1940s, the insurance industry shifted to the current system where covered risks are initially defined broadly in an insuring agreement on a general policy form (e.g., "We will pay all sums that the insured becomes legally obligated to pay as damages..."), then narrowed down by subsequent exclusion clauses (e.g., "This insurance does not apply to..."). If the insured desires coverage for a risk taken out by an exclusion on the standard form, the insured can sometimes pay an additional premium for an endorsement to the policy that overrides the exclusion.
The insurance industry is notorious for drafting horrendously complex policies in which the layers of interactions between coverage clauses, exclusions, and exceptions to exclusions can be extremely difficult to understand. In a seminal case interpreting one ancestor of the modern "products-completed operations hazard" clause, the Supreme Court of California complained:
| “ | The instant case presents yet another illustration of the dangers of the present complex structuring of insurance policies. Unfortunately the insurance industry has become addicted to the practice of building into policies one condition or exception upon another in the shape of a linguistic Tower of Babel. We join other courts in decrying a trend which both plunges the insured into a state of uncertainty and burdens the judiciary with the task of resolving it. We reiterate our plea for clarity and simplicity in policies that fulfill so important a public service. | ” |
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