The Supreme Court has held that consequential losses, such as loss of profits or rent, cannot be recovered under the statutory compensation scheme governed by the Riot (Damages) Act 1886. The Supreme Court’s ruling is in line with the new statutory regime that will be introduced by the Riot Compensation Act 2016. 

Our previous Law Nows have monitored the case of Mayor’s Office for Policing and Crime (MOPAC) v Mitsui Sumitomo Insurance Co (Europe) Ltd and Others, the timing of which has been noteworthy in the midst of the progress through Parliament of the Riot Compensation Act 2016. To read our Law-Now on the Court of Appeal’s decision click here.

Background

Briefly, in the midst of the London riots in August 2011, a group of youths broke into, looted and petrol bombed a Sony warehouse in Enfield, completely destroying the building and its contents. Insurers sought recovery of indemnified losses under s.2(1) of the Riot (Damages) Act 1886. The judge at first instance found there was liability under s.2(1) but that liability did not extend to consequential losses. The Court of Appeal dismissed MOPAC’s appeal on liability and upheld the insurers’ cross appeal, finding that consequential losses were recoverable. MOPAC appealed the issue of the recoverability of consequential losses.

Supreme Court’s decision

In the eagerly anticipated judgment, on 20 April 2016 the Supreme Court overturned the Court of Appeal decision on the scope of quantification of claims under the 1886 Act. 

Lord Hodge, delivering the Court’s unanimous judgment, summarised that the issue was to be resolved by reference to the wording of the 1886 Act and prior legislation, and not by reference to the liberal interpretation applied by the Court of Appeal: that s.2(1) provided a right to compensation for all losses recoverable at common law, including consequential losses, caused by physical damage of property. 

The Supreme Court decided there was nothing in the 1886 Act to support an intention to extend the scope of compensation for riot damage to consequential losses. This view was supported by reference to the fact that there was no provision for compensation for personal injury or for injury to property other than buildings and contents under the 1886 Act, and therefore compensation under the 1886 Act was, in any event, limited. The Court found that, on any interpretation of the 1886 Act, it provided for only partial compensation for damage caused by a riot. 

Having considered the legislative history, Lord Hodge made reference to the original legislation, the Riot Act 1714, which failed to specify the scope of “damage”, resulting in guidance provided by the courts which only narrowly extended the liability for damage to household furniture and goods but no further, restricting compensation to physical damage only. 

The Court summarised that the wording of the 1886 Act, and its predecessor legislation, created a “self-contained statutory scheme” for compensation for property damage caused by riots which “did not mirror the common law of tort” and thus allowed MOPAC’s appeal.

Riot Compensation Act 2016

The decision in MOPAC v Mitsui comes in the wake of the 2016 Act receiving royal assent on 23 March 2016, the provisions of which will come into effect on a date set by the Secretary of State by way of regulations yet to be released. At that stage, the provisions of the 1886 Act will be repealed. 

The new legislation was borne out of the aftermath of the 2011 riots, when it was considered that the 1886 Act was outdated and no longer fit for purpose. The 2016 Act was introduced to bring clarity to what riot compensation can be claimed and to introduce a prescribed compensation scheme. 

The 2016 Act does the following:-

  • Prescribes the form of, and timing in which, a claim for compensation may be made against the police;
  • Clarifies the test by the use of more modern wording, for example dispensing with the need to interpret “persons riotously or tumultuously assembled”;
  • Allows compensation to be claimed from the police for property that is damaged, destroyed or stolen in the course of a riot, including where the property is not insured or inadequately insured;
  • Continues to allows insurers who have settled claims in respect of loss or damage caused by rioters to reclaim the indemnities paid;
  • Expands the class of property damage for which compensation can be claimed to include damage to permanent or semi-permanent structures or buildings being constructed, and certain vehicles;
  • Introduces a £1 million cap on compensation that may be paid out in any single claim, where there was previously no cap under the 1886 Act;
  • Finally, the 2016 Act provides that consequential losses are not recoverable.

Consequential loss claims are expressly excluded from eligibility for compensation, save in very narrow circumstances: for costs incurred where alternative accommodation is required (s.8(1)). 

This clarifies the position as to Parliament’s intention for the compensation scheme, after years of uncertainty following the 2011 riots and the progress of MOPAC v Mitsui through the courts.

Comment:

The consensus reached between the legislature and the judiciary in the past month has ended speculation over whether consequential losses are recoverable under the statutory compensation scheme. 

The result is that any loss of rent, loss of trade/profit and other consequential losses recoverable in common law cannot be recovered under either the 2016 Act or the 1886 Act. 

The decision will be welcomed by the police authorities, who, following the Court of Appeal’s decision, faced the burden of potentially spiraling costs for settlement of compensation claims encompassing a head of loss for consequential losses. 

However, the lack of recoverability of loss of rent and loss of trade/profit will come as a concern to, particularly, small to medium sized business owners, many of which, it will be recalled, suffered considerably as a result of the 2011 riots. For many business owners, the loss of trade will be just as, if not more considerable than any physical property damage, leaving what many may find to be a gaping hole in the compensation scheme. 

Additionally, these developments will come as a blow to the insurance industry, which will be faced with an inability to recover the cost of indemnities for consequential losses. This may give rise to a change in the underwriting of riot damage risks and the availability of such cover and may lead to higher premiums in the knowledge that these sums cannot be recovered from the police authorities. 

As to other aspects of the 2016 Act, there is a concern insofar as the decision making process on claims will be devolved to the local policing authorities - the same bodies liable to pay out on claims - leading to a potential conflict of interest. It seems the police will be under scrutiny to ensure claims are handled justly and fairly. 

Property owners may also consider reviewing their insurance arrangements in view of the compensation cap of £1m, to ensure they are not left out of pocket for losses exceeding this sum. To put this into context, MOPAC v Mitsui concerned the recovery of almost £70 million of losses.