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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, Force Majeure describes circumstances like natural disasters or other major disruptions that can impact business operations.

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, or pandemics. 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, like delivering goods on time. Essentially, it acknowledges that the event was beyond their control and makes allowances for the impact of such events.

Key Components of Force Majeure

  1. Unpredictability: The event must be unforeseen and beyond reasonable anticipation. For instance, while seasonal storms are expected, an unprecedented cyclone would qualify.

  2. Externality: The event must be outside the control of the parties involved in the contract. This means neither party could have caused or influenced the event. Examples include a sudden government lockdown or a volcanic eruption.

  3. Irresistibility: The event must be unavoidable and impossible to prevent. Despite the best efforts, the event’s impact couldn’t have been mitigated. For instance, even with all safety measures in place, a severe earthquake causing significant damage would meet this criterion.

Types of Force Majeure Covered

Natural Disasters

Events like earthquakes, floods, hurricanes, and tsunamis fall under this category. These are significant natural events that can cause extensive damage and disrupt business operations.

Human Actions

These include war, riots, strikes, or terrorist attacks. Such events, while caused by humans, are considered beyond the control of the business affected by them.

Government Actions

Unexpected regulatory changes or government-imposed lockdowns (like those seen during the COVID-19 pandemic) can also be considered Force Majeure events.

Technological Failures

Significant technological breakdowns, such as widespread internet outages or major cyber-attacks, can also disrupt business operations and may be included under Force Majeure.

Exclusions and Limitations

While Force Majeure clauses provide significant protection, there are important exclusions and limitations to be aware of:

  1. Predictable Events: If an event is predictable, such as seasonal flooding in a known floodplain, it may not be covered under Force Majeure. Businesses are expected to take reasonable steps to anticipate and mitigate such risks.

  2. 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 and it suffers avoidable damage during a storm, the clause may not cover it.

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

  4. Duration and Notice: Some policies require businesses to notify the insurer within a specific period after a Force Majeure event occurs. Failure to meet these deadlines can result in denial of coverage.

Understanding Force Majeure is crucial for businesses, especially when it comes to protecting your operations from unforeseen events.