Blog - 28/04/2016
London Riots – Revisiting Recoverability of Consequential Losses
No doubt the readers of this blog will recall the London riots, which took place between 6 August 2011 and 9 August 2011, causing extensive damage to a number of properties across parts of London. As a result of the damage caused by rioters, claims for compensation were submitted by various property owners (and insurers who had compensated their insureds) to the Mayor’s Office for Policing and Crime (the “Mayor’s Office”) pursuant to Section 2(1) of the Riot (Damages) Act 1886 (the “1886 Act”), which provides that:
“where a house, shop or building in a police area has been injured or destroyed, or the property therein has been injured stolen or destroyed, by any persons riotously and tumultuously assembled together, such compensation… shall be paid of the police fund of the area to any person who has sustained loss by such injury, stealing or destruction…”.
One incident which has been the subject of significant judicial consideration involved a Sony DADC distribution warehouse, located in an Enfield business park. During the course of the riots, and as well as stealing goods from the warehouse, rioters threw petrol bombs into it, causing a fire that destroyed the warehouse, together with the stock, plant and equipment within it. Sony DADC’s insurers, as well as the insurers of the freehold interest, and various companies that were customers of Sony DADC (whose stock in the warehouse had been destroyed) made claims against the Mayor’s Office for compensation under the 1886 Riot (Damage) Act.
In determining the issue of liability, the Commercial Court concluded at first instance that the warehouse in question had indeed been destroyed by persons assembled together riotously and tumultuously, but held that, in respect of quantification, the Act only provided compensation for physical damage and not for consequential losses (such as losses arising from business interruption, including loss of profit and loss of rent, for example, whilst the owner repaired the building) (see Mitsui Sumitomo Insurance Co (Europe) and others v Mayor’s Office for Policing and Crime  EWHC 2734).
However, the decision in respect of quantification was later reversed by the Court of Appeal, who concluded that the Act conferred a right to compensation for all heads of losses that were proximately caused by physical damage to property, for which the trespassing rioter was liable, thereby including consequential losses (see Mitsui Sumitomo Insurance Co (Europe) Ltd and others v Mayor’s Office for Policing and Crime  EWCA Civ 682).
Recent Supreme Court Decision
In a recent appeal by the Mayor’s Office however, the Supreme Court was required to consider further the extent of liability in claims arising from the riots, and determine, as a matter of statutory construction, whether a person who suffers loss when rioters destroy their property can, in principle, obtain compensation for consequential losses and, if so, on what basis (see Mayor’s Office for Policing and Crime v Mitsui Sumitomo Insurance Co (Europe) and others  UKSC 18).
In reversing the earlier decision of the Court of Appeal and concluding that, on any view, the 1886 Act provided only partial compensation for damages caused by rioters, the Supreme Court noted that the wording of the 1886 Act does not disclose whether the loss which the claimant has sustained is simply the damage to the property, to be compensated by payment of the cost of repair of the diminution in value of the building, or extends to consequential losses, such as the loss of rent or loss of profit which the claimant would have derived from the property.
Lord Hodge suggested that resolution to the dispute was to be found within the wording of the 1886 Act, interpreted against the backdrop of prior legislative history. He noted that Parliament had first provided for compensation for riot damage in 1714 in response to the public disorder which followed the succession to the throne of George I. The Riot Act 1714, as it was then, used open-textured wording, which required the payment of damages to persons injured or damaged by the demolition of buildings for religious worship, dwelling houses and farm buildings. Case law later clarified that, as the destruction of furniture and goods occurred at the same time as damage to the house, it was to be deemed as part of the demolition of the house, just as it would be if the pulling down of the house crushed the furniture. Accordingly, a liberal interpretation was adopted to enable recovery for physical damage to household goods and furniture (an extension which was incorporated into the Riot Act 1817).
However, it was noted that there was nothing within the 1886 Act, as it is currently drafted, to support an intention to extend the scope of compensation to cover consequential losses.
It was therefore concluded that, whilst the 1886 Act confers a self-contained statutory compensation scheme for damage caused by rioters, it does not mirror the common law of tort and consequential losses are not to be compensated by way of police funds.
Whilst this decision has helped to clarify the law in respect of riot damage, and the scope of recoverability under the compensation scheme, it does mean that those without the appropriate business interruption or loss of rent cover will seemingly be left to foot the shortfall in respect of consequential losses, given that they will not be compensated by police funds.
Indeed, it should further be noted that the relevant provisions relating to recoverability of such losses under the new Riot Compensation Act 2016, which received Royal Assent in March 2016, shall come into force on a date to be appointed by the Secretary of State. As well as repealing the 1886 Act, it will also expressly provide that consequential loss shall not be recoverable (save for those costs incurred as a result of a requirement to find alternative accommodation, where the claimant’s home is rendered uninhabitable.
Insureds should also be aware that compensation claimed from the police, that is recoverable under the compensation scheme for property that is damaged, destroyed or stolen during a riot, will be subject to a cap of £1million per claim.
The current approach to recoverability under the compensation scheme is therefore a stark reminder to insureds to ensure that the appropriate cover is in place, and to ensure that sums insured (particularly in respect of business interruption cover) have been carefully considered.
If you have any further queries, please contact Nicola Maher – Partner, Grace Harrison – Associate, or any member of our Insurance Litigation Team.
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