Underwriters will want to sharpen their pencils when it comes to adapting ‘force majeure’ clauses in their insurance policies to the modern realities of climate change and extreme weather events, McMillan LLP counsel say in a Mondaq website blog.
“[Insurance] contract clauses, particularly force majeure provisions, must evolve to reflect the realities of climate change,” Ralph Cuervo-Lorens, Annik Forristal, Emily Hush, and Martin Thiboutot write in a post published Tuesday. “These measures require precise language, scientific data, and industry-specific strategies to ensure fair risk allocation and enhanced resilience.”
A ‘force majeure’ clause in an insurance policy allows the parties to back out of their contractual obligations if “a supervening, sometimes supernatural, event, beyond the control of either party, makes performance [of the contract] impossible,” as the Supreme Court of Canada defined the term in 1975.
Elsewhere, the Government of Canada defines it as a way to “protect the parties from events outside normal business risk.”
“The force majeure clause is sometimes referred to as an ‘Act of God’ clause or an ‘excusable delay’ clause,” the Government of Canada’s Office of the Procurement Ombudsman writes on its website. “Examples of force majeure events or ‘Acts of God’ include an epidemic, flood, earthquake, or fire.”
Also in the news: Insurance firms should be cautious about how they recruit tech talent
The courts have laid out two criteria for determining a ‘force majeure’ event. First, it must be “beyond reasonable human foresight and skill” and outside the control of both parties. Second, it must make the contract impossible to execute.
Up until now, force majeure clauses in insurance contracts have often been vague, McMillan LLP counsel observe. But in the climate change era, when insurers are using increasingly sophisticated modelling to predict severe weather events, are they really “beyond reasonable foresight?”
“Traditional force majeure clauses are designed to allocate risk, not share it,” the authors write. “The vague language used to describe weather events can expose all parties to protracted litigation over semantics. In particular…litigation may arise over what constitutes a covered event and whether extreme weather is foreseeable, in light of the latest climate science.
“Relying on boilerplate force majeure language sets you up for a protracted dispute should the worst happen.”
The era of climate change means underwriters must consider risk-management clauses tailored to the specific risks facing the project, industry, or region, and they should take a long-term perspective on climate change impacts.
Insurance policies should consider defined measurement techniques that an independent expert can apply to assess whether a covered weather event has occurred and if so, whether it was foreseeable.
Feature image courtesy of iStock.com/Shutter2U
