Force Majeure

Force Majeure, a French term meaning "superior force," refers to unexpected events beyond anyone's control that prevent someone from fulfilling a contract. In the context of insurance and business contracts, Force Majeure describes circumstances like natural disasters, pandemics, wars, or other major disruptions that can fundamentally impact business operations and contractual performance.

What is Force Majeure in Insurance?

In insurance, Force Majeure clauses are provisions in contracts that free parties from liability or obligation when extraordinary events occur—events that neither party could foresee or prevent. These events, often called "acts of God," include things like earthquakes, floods, pandemics, or government-imposed lockdowns.

For example, if a business is unable to operate due to a major earthquake, a Force Majeure clause could relieve them from performing certain contractual duties, such as delivering goods on time or meeting service level agreements. Essentially, it acknowledges that the event was beyond their control and makes allowances for the extraordinary impact of such events. This protection works both ways, safeguarding both insurers and policyholders from liability when genuinely unforeseeable circumstances arise.

Key Components of Force Majeure

Unpredictability

The event must be unforeseen and beyond reasonable anticipation. For instance, whilst seasonal storms might be expected in certain regions, an unprecedented cyclone of extraordinary magnitude would qualify. The key test is whether a reasonable person could have anticipated the specific event occurring at that particular time.

Externality

The event must be outside the control of the parties involved in the contract. This means neither party could have caused, influenced, or prevented the event through their actions or inactions. Examples include a sudden government lockdown, volcanic eruption, or international armed conflict.

Irresistibility

The event must be unavoidable and impossible to prevent or mitigate despite best efforts. This means that even with all reasonable safety measures and contingency planning in place, the event's impact couldn't have been avoided. For instance, even with comprehensive earthquake-resistant construction, a severe earthquake causing significant structural damage would meet this criterion.

Types of Force Majeure Events Covered

Natural Disasters

Events like earthquakes, floods, hurricanes, tsunamis, volcanic eruptions, and wildfires fall under this category. These are significant natural events that can cause extensive damage and completely disrupt business operations. In New Zealand and the Pacific region, earthquakes and volcanic activity are particularly relevant Force Majeure considerations.

Human Actions

These include war, civil unrest, riots, strikes, sabotage, or terrorist attacks. Whilst caused by humans, such events are considered beyond the control of the businesses affected by them, provided the business itself wasn't involved in causing or contributing to the disruption.

Government Actions

Unexpected regulatory changes, government-imposed lockdowns (such as those implemented during the COVID-19 pandemic), states of emergency, or changes in legislation can also constitute Force Majeure events. The key factor is that these actions were unforeseeable and significantly impact contractual performance.

Technological Failures

Significant technological breakdowns, such as widespread internet outages, major cyber-attacks affecting critical infrastructure, or catastrophic power grid failures, can also disrupt business operations and may be included under Force Majeure provisions.

Exclusions and Limitations

Whilst Force Majeure clauses provide significant protection, there are important exclusions and limitations to understand:

Predictable Events: If an event is reasonably predictable, such as seasonal flooding in a known floodplain or regular hurricane seasons in affected areas, it may not be covered under Force Majeure. Businesses are expected to take reasonable steps to anticipate and mitigate such foreseeable risks through proper planning and insurance.

Negligence: If the business's negligence contributed to the damage or disruption, the Force Majeure clause might not apply. For example, if a business fails to maintain its property to reasonable standards and it suffers avoidable damage during a storm, the clause may not provide coverage.

Scope of Coverage: The specific terms of the Force Majeure clause in your insurance policy or contract will precisely define what is covered. It's essential to read and understand these terms carefully, as they can vary widely between policies, insurers, and jurisdictions.

Duration and Notice Requirements: Some policies require businesses to notify the insurer or contractual counterparty within a specific period after a Force Majeure event occurs. Failure to meet these notification deadlines can result in denial of coverage or loss of protection under the clause.

Understanding Force Majeure is crucial for businesses, especially when it comes to protecting your operations from unforeseen events and managing contractual risk effectively. Proper legal advice should be sought when drafting or reviewing Force Majeure clauses to ensure adequate protection.