'Act-of-God' Insurance: An Alternative Insurance Coverage - International Law Office

International Law Office

Insurance & Reinsurance - France

'Act-of-God' Insurance: An Alternative Insurance Coverage

April 17 2007

Background
Precedence of Contractual Coverage over Statutory Act-of-God Coverage
Precedence of Contractual Deductibles over Statutory Act-of-God Deductibles


Background

The traditional exclusion from coverage of damage caused by acts of God has sometimes had dramatic consequences for both private individuals and corporate bodies. French lawmakers intended to put an end to this situation in 1982 by introducing Articles L125(1)(ff) and A125(1)(ff) into the Insurance Code.

Under these provisions, policies insuring properties located in France must - or are deemed to - provide coverage in case of natural disaster recognized by ministerial order. Such clauses must comply with statutory standards that set out the scope and modalities of statutory 'act-of-God' insurance.

Statutory act-of-God insurance ensures that the insured under a property insurance policy is indemnified if a natural event which causes damage to the insured property is recognized as an act of God. However, as statutory act-of-God coverage was designed as an alternative to the usual contractual coverage inspired by public policy, the issue of which coverage - statutory or contractual - should inure to the insured's benefit in case of act of God may prove complex.

Even where there is no doubt that statutory act-of-God coverage applies, certain purely contractual provisions may take precedence over those set out in the statutory act-of-God standard clauses (eg, the deductibles provided in the policy). This two-tier system raises questions every time a natural event is recognized as an act of God.

Precedence of Contractual Coverage over Statutory Act-of-God Coverage

Statutory act-of-God insurance is intended to provide coverage to 'non-insurable' direct physical damage resulting mainly from the abnormal intensity of a natural event.(1) The 'non-insurability' criterion, which renders statutory act-of-God insurance secondary compared to contractual insurance, is not defined under French law and may at best be inferred from the absence of contractual coverage for the risk in question on the market.(2) However, this market test is insufficient in cases where an insurance policy covers a type of risk (eg, natural event) which may, under specific circumstances (eg, abnormal intensity), be recognized as an act of God by ministerial order. For instance, is flooding non-insurable where an insurance policy provides for flood coverage only because such coverage is unusual on the market?

In the absence of clear doctrine from the Cour de Cassation, the Paris Court of Appeal has tended to answer this question negatively and seems to interpret the phrase 'non-insurable' as 'not otherwise insurable' (as opposed to 'not generally insurable').(3) Therefore, where a policy provides explicit coverage - whether market friendly or not - for a type of risk which, under specific circumstances, may be recognized as an act of God, or may include acts of God because of its wording, such risk cannot be deemed to be non-insurable and the policy coverage takes precedence over statutory act-of-God coverage.

This was asserted both positively and negatively by Section A of the Seventh Division of the Paris Court of Appeal (which specializes in insurance matters). With regard to hailstorms, the court held that the insured could not rely on the act-of-God status recognized by ministerial order in order to benefit from statutory act-of-God insurance - and circumvent the contractual limit of liability - because the insured was covered under the policy's water damage clause.(4) With regard to ground movement, the court held that statutory act-of-God coverage applied because the insurer had failed to specify which clause could have provided insurance coverage and had specifically excluded subsidence and water damage coverage from the policy, thus suggesting that contractual coverage might take precedence over statutory act-of-God coverage.(5)

This decision highlights the fact that statutory act-of-God coverage is merely an alternative to other potentially overlapping coverage in insurance policies. However, there is likely to be increasing litigation on the issue of how specific - or broad - the wording of such contractual coverage should be in order to cover act-of-God events and thus take precedence over statutory act-of-God coverage. Underwriters may wish to avoid uncertainty by systematically and explicitly including or excluding events recognized as acts of God by ministerial order within the framework of potentially overlapping insurance clauses.

Precedence of Contractual Deductibles over Statutory Act-of-God Deductibles

Where statutory act-of-God coverage applies, certain provisions of the insurance policy (other than those reproduced from the act-of-God standard clauses) must still be given consideration. Deductibles are a remarkable illustration of the fact that statutory act-of-God insurance may serve as an alternative to provisions agreed upon by the parties. Statutory act-of-God standard clauses set out specific modes of computation for deductibles in case of act of God, as well as statutory minimum deductibles depending on the nature of the damage (ie, physical or financial).(6)

However, a statutory provision states that where an insurance policy provides for a higher deductible than the statutory deductible, the former should take precedence over the latter.(7) This original exception to the general principle that insureds should always benefit from the most favourable provision is worded broadly, which does not allow the determination of which contractual deductible may be compared with the statutory deductible.

In other words, may insurers rely on any contractual deductible that is higher than the statutory deductible, or may they rely only on a specific act-of-God deductible under the policy? Alternatively, may insurers rely on deductibles applicable to natural events or similar risks with no explicit reference to acts of God? The courts have not given particular consideration to these issues so far, and the implicit views of legal writers are conflicting. However, underwriters may avoid uncertainty and subsequent litigation by introducing systematic act-of-God deductibles in all policies covering properties located in France.


For further information on this topic please contact Carole Sportes at BOPS (SCP Bouckaert Ormen Passemard Sportes) by telephone (+33 1 70 37 39 00) or by fax (+33 1 70 37 39 01) or by email (carole.sportes@bopslaw.com).


Endnotes

(1) Articles L125(1) and A125(1) of the Insurance Code.

(2) See, for example, J-Cl Resp Civ Ass, Fasc 525, November 2001, Paragraph 14, page 5.

(3) See CA Paris, First Division, Section G, SC Résidence la Roseraie v Azur Assurances, RG No 2001/17748, which stated that statutory act-of-God insurance aims to provide coverage for direct physical damage "not otherwise insurable".

(4) CA Paris, Seventh Division, Section A, March 26 2002, Deshayes v AGF, RG 2000/9866.

(5) Deshayes v AGF.

(6) Article A125(1) of the Insurance Code.

(7) Ibid.



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