All insurance professionals have heard of "acts of God" relative to insurance. But what does this phrase mean, and what implications are there for builders risk insurance?
The purpose of this article is to provide (a) an overview of what is meant by an act of God, and (b) examples of how this phrase touches on construction contracts and builders risk coverage.
The phrase "act of God" dates at least to the sixteenth-century case, Wolfe v. Shelley, 76 Eng. Rep. 199 (1581), which found that the death of a party to the contract made performance impossible due to an "Act of God." 1
Black's Law Dictionary's definition is helpful in better understanding the meaning of an act of God.
An overwhelming, unpreventable event caused exclusively by the forces of nature, such as an earthquake, flood, or tornado.
Source: Black's Law Dictionary, Eleventh Edition
International Risk Management Institute, Inc. (IRMI), also has the following definition in its glossary.
An accident or event resulting from natural causes, without human intervention or agency, and one that could not have been prevented by reasonable foresight or care—for example, floods, lightning, earthquake, or storms. This is a peril terminology found in ocean and inland marine policies.
Source: "Act of God," IRMI, accessed on January 8, 2022.
As respects construction projects, an act of God has important meanings in two areas: construction contracts and builders risk insurance.
All construction projects have a schedule to which the contractor is expected to adhere. This will include an agreed-upon project start date and the date of substantial completion. The contract will include a definition of "substantial completion." Generally, it means the point in time when the project can be utilized for its intended purpose (e.g., after an occupancy permit is issued and the architect/designer makes a determination of substantial completion).
A delay results if the project is not completed according to the scheduled completion date. However, in some cases, an "excusable delay" may result in a change in the scheduled completion date. The contract documents will list the types of delays that are excusable. The general rule is that a delay will be excused if it results from a cause beyond the control of the contractor. Contractors generally do not get relief from delays that are within their control or that of a subcontractor or supplier.
Most construction contracts, including standard form contracts (e.g., American Institute of Architects (AIA), ConcensusDocs, Engineers Joint Contract Documents Committee (EJCDC), and Design-Build Institute of America (DBIA)), include provisions addressing excusable delays (see below). While each form contract noted below encompasses "acts of God," DBIA specifically references this phrase. 2
It should be noted that acts of God are a subset of "excusable delays." Also, many contracts specifically mention "force majeure" events. Black's Law Dictionary, Eleventh Edition, defines "force majeure" as an event or effect that can be neither anticipated nor controlled, especially an unexpected event that prevents someone from doing or completing something that they had agreed or officially planned to do. The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars). However, when one sees this term or provision in a construction contract, it is usually accompanied by a definition. And with large projects, this definition can be both long and expansive. It is not unusual for contractors to believe that they are insured for all force majeure events. But that is unlikely to be the case. Insurance practitioners realistically can't provide meaningful advice on this issue until they review the force majeure definition in the contract documents and the applicable builders risk insurance policy.
When an act of God clause is considered in construction litigation, courts will look closely at the contract documents, facts, and circumstances. Two Ohio cases illustrate different outcomes based on these factors. In Taylor Constr. v. Ohio Dept. of Transportation, 61 Ohio App. 3d 222 (Ct. App. 1988), 1.84 inches of rain fell in 28 hours, damaging portions of the project. The contractor sought relief under the construction contract for the repair costs it incurred. The court concluded that 1.84 inches of rain is a rainfall with a 1-year frequency and did not constitute an act of God, as it was foreseeable. In W.G. Lockhart Co. v. City of Alliance, Case No. 97-CO-28 (Ohio Ct. App., 7th Dist. 2000), over 2 days, heavy rainfall and melting snow increased the water level of a reservoir, which overflowed and damaged construction improvements. The contractor sought reimbursement for the repair work. The construction contract required the project owner to keep the water level of the reservoir at a specific elevation, except in the case of an act of God, flood, heavy rains, and other actions beyond the owner's control. The contractor argued the water damage did not meet the legal definition of "act of God" (an event that could not have been reasonably anticipated, guarded against, or resisted). The court ruled for the owner because of the "heavy rains" exception in the contract.
Builders risk policies are not standardized. Insurers are free to create their own policy forms, and the major insurers do exactly that. The inclusion of acts of God clauses as exclusions in modern builders risk policies is unusual but not unheard of.
One example is an endorsement by a national US-based builders risk insurer to its Completed Value Project Builders Risk Property Damage Form. This endorsement adds coverage for direct physical damage to existing real property. The endorsement includes the following additional exclusion.
Loss or damage caused by or resulting from Acts of God including but not limited to Earthquake, Flood, and Windstorm.
While the phrase "Acts of God" is capitalized, the policy does not define "Acts of God." So, in the event of a loss, it is up to the stakeholders to try to determine if the loss-producing event qualifies as an act of God or not. This is not an easy task, and many factors come into play, including different standards used by the various courts. It is a recommended practice that if you see this phrase in a builders risk policy and it is not defined, either delete/modify the phrase (as appropriate) or arrange for the underwriter to add an acceptable definition; otherwise, you don't know what you have.
Other examples of endorsements that reference an act of God are those used by builders risk insurers to comply with California Public Contract Code § 7105. With some exceptions, this provision requires that construction contracts of public agencies do not require the contractor to be responsible for the cost of repairing or restoring damage to the work, which damage is determined to have been proximately caused by an act of God, in excess of the 5 percent of the contracted amount [emphasis added]. An act of God is defined to include only the following occurrences or conditions and effects: earthquakes in excess of a magnitude 3.5 or higher on the Richter Scale and tidal waves.
Lastly, specific exclusions or conditions are creeping into builders risk policies to address catastrophic weather events (without a reference to an act of God), particularly heavy rains and flooding. For instance, a large European-based builders risk insurer recently filed a Precipitation, Flood, and Inundation Safety Measures Endorsement. This endorsement adds an additional condition to a builders risk policy.
It is agreed and understood that otherwise subject to the terms, exclusions, provisions, and conditions contained in this Policy or endorsed therein, the Company shall only indemnify the Insured for DAMAGE by precipitation, FLOOD, or inundation if adequate safety measures have been taken in designing and executing the project involved.
For the purposes of this Endorsement adequate safety measures shall mean that, at all times during the Policy Term, allowance is made for precipitation, FLOOD, and inundation up to a return period of 20 years for the location insured on the basis of the recent statistics prepared by meteorological agencies.
One has to wonder what the phrase "adequate safety measures" means and what constitutes a "meteorological agency." But that is a question for another day.
Act of God definitions generally agree that there must be no human intervention or agency involved. But what about the future? What about climate change? Can recent and future weather-related fires, hurricanes, floods, and other disasters continue to be characterized as events with no human touch or relationship? And, if it is determined that human action is a principal cause of climate change, will enterprising insurers look to exclude losses based on the meaning of "act of God" or a lack of fortuity? Or perhaps the definition of "act of God" should be modified to include the possibility of human causality as well as the divine.
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