As if a lecture at the Police Federation Conference  from the Home Secretary wasn't enough, the police  have also this week received the Court of Appeal's  reading of the riot act.  In a decision that opens the  door for insurers and businesses to claim further  compensation from the police for losses incurred in  the 2011 English riots, the Court of Appeal has  overturned last year's High Court ruling that  compensation under the Riot (Damages) Act 1886  ("RDA") is only for direct physical damage caused to  a building and its contents.

Under the ruling the police are also liable for  consequential losses including business interruption  and loss of rent.  The Court has also clarified what  qualifies as a "riot".

Confirmation of the broad scope of compensation  payable under the RDA will strengthen calls for the  RDA to be reformed.  If that happens insurance  premiums are likely to increase and property in  riot-prone areas will become more difficult to insure.

COURT OF APPEAL DECISION

The judgment in Mitsui Sumitomo v The Mayor's  Office for Policing and Crime (which concerned the  largest single location loss in the 2011 riots, the  looting and arson of the Sony Distribution Centre in  Enfield, North London) made the following key  points:

  • The test for liability under the RDA - the High  Court had been right to hold the police liable.  The  issue was whether property has been damaged or  destroyed as a result of mob violence.  Whether an  assembly is "riotous and tumultuous" so the RDA  is triggered is a question of degree for the trial  judge to evaluate in the light of the primary facts  found.
  • The Court of Appeal disagreed with the judge in  the High Court that the test for liability should,  even notionally, be whether the police should have  prevented the damage.  The police have a strict  liability to compensate.
  • What losses are recoverable?  In overturning the  High Court's finding on the extent of liability, the  Court of Appeal sought to determine Parliament's  intention in passing the RDA.
  • It held that compensation was potentially  recoverable for all heads of loss caused by damage  to property by trespassers in the course of a riot,  including consequential loss eg lost rent and  business interruption.
  • Nothing in the RDA supported the first instance  judge's interpretation of RDA section 2(1) as  excluding consequential losses.  The purpose of  the RDA was remedial so it ought to receive a liberal (ie generous) construction.
  • In the RDA Parliament had struck a balance between  the interests of owners of damaged property and the  wider community (who would effectively bear the  cost through police funds).  Parliament could have  shifted that balance by wording the statute to exclude  consequential losses altogether but did not do so.

IMPLICATIONS FOR BUSINESS

Businesses in London and elsewhere in England suffered  significant disruption following the 2011 riots and will  have large claims for lost profits and lost rents - the  Association of British Insurers reported that by  September 2013 its members had paid business  interruption claims totalling £30.5 million.  The business  interruption claim for the Sony Distribution Centre alone  is believed to be £10-15 million.  If the decision is not  overturned by the Supreme Court (the police will almost  certainly seek a further appeal) compensation for these  losses, and for uninsured business interruption and lost  rent, will be payable out of public funds.

Businesses and their insurers are likely by now to have  settled with the police for direct physical damage losses  incurred in the 2011 riots.  Most insurers are understood  to have reserved rights in those settlements to claim  further sums if police liability for consequential losses  was confirmed by the courts.  However, not all claims  may have been settled on the same basis and the police  may argue that rights to pursue further losses have  already been compromised.

Businesses and insurers should therefore revisit claims  they have already made to consider whether further sums  can be claimed.  Where relevant consequential losses  were not covered by insurance, businesses may then have  to pursue those claims separately from their insurers.   They should also make sure that any relevant evidence  has been preserved - the police can be expected to adjust  further claims carefully, and faced with wider liability for  consequential losses may dispute quantum more  aggressively.

REFORM TO THE RDA?

The opportunity for further compensation means that this  decision will be welcomed by affected insurers and  corporates.  However, many argue that a statutory  scheme under which such financial losses for large  businesses are compensated out of public money is unfair  and anomalous in the 21st Century.  The Court of Appeal  judgment acknowledges these arguments but says that  this is an issue for Parliament.  If Parliament does now  revisit this legislation, compensation rights for large  businesses and their insurers following future riots can be  expected to be reduced substantially, if they survive at all.That would likely make insuring commercial property  risks, particularly in what are perceived to be riot-prone  areas, more difficult and expensive