August 2011 riots: Consequential losses not recoverable under the Riot (Damages) Act 1886

On 20 April 2016 the Supreme Court gave judgment in The Mayor's Office for Policing and Crime v. Mitsui Sumitomo Insurance Co (Europe) Ltd and others [2016] UKSC 18 allowing the appeal and reinstating the finding of Flaux J at first instance that consequential losses are not recoverable under the Riot (Damages) Act 1886 (RDA) in relation to the looting and burning down of a warehouse during the 2011 London riots.

The appeal concerned only one issue: whether as a matter of statutory construction persons who suffer loss when rioters destroy their property can in principle obtain compensation for losses, including loss of profits and loss of rent, under section 2 of the RDA, and if so on what basis. Lord Hodge (with whom Lord Neuberger, Lord Clarke, Lord Hughes and Lord Toulson agreed) gave the judgment of the Supreme Court finding that the answer to the question was not found in linguistic analysis of the RDA itself which did not provide a clear-cut answer but rather by interpreting the RDA against the backdrop of the prior legislative history which showed that the intention of Parliament had been only to cover certain categories of property damage losses.

Background

During the London riots of August 2011, a Sony distribution warehouse in Enfield was looted and set alight by a gang of youths. The warehouse and its contents were completely destroyed by the fire. Sony occupied the warehouse and its insurers paid out for losses of £49.5 million, including £9.8 million in respect of business interruption. The insurers of the building owners also paid out. Further losses were suffered by the owners of the contents (and their insurers). The insurers, and third parties who had lost uninsured stock, claimed against the compensation authority under the RDA for their losses including both property damage and consequential losses.

The RDA provides compensation for losses caused by riot damage. Under section 2(1):

"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 as hereinafter mentioned shall be paid out of the police fund of the area to any person who has sustained loss by such injury, stealing, or destruction; but in fixing the amount of such compensation regard shall be had to the conduct of the said person, whether as respects the precautions taken by him or as respects his being a party or accessory to such riotous or tumultuous assembly, or as regards any provocation offered to the persons assembled or otherwise".

At first instance Flaux J determined two preliminary issues, including relevantly whether the obligation to compensate under the RDA extended to consequential losses. He found that such losses were not covered by the Act, placing particular weight on the wording of the repealed preamble (which referred to compensation "for" property damage) and of section 7 of the RDA (which refers to loss "from" property damage in relation to the "building and property therein").

The Claimants appealed against Flaux J's finding on this issue and the Court of Appeal allowed the appeal. It applied a liberal construction and found nothing in the RDA to exclude consequential losses. Unlike Flaux J, the Court of Appeal considered it permissible to look at the legislative history behind the RDA as a guide to its construction. It considered that the RDA provided a right to compensation for all losses, including consequential losses, proximately caused by the physical damage to property by the rioter 'as trespasser' (i.e. applying the rules of causation in tort), save to the extent that such compensation was excluded or varied by the RDA.

The compensation authority appealed this finding to the Supreme Court.

The Decision and Approach of the Supreme Court

The Supreme Court held that linguistic analysis of the RDA by itself does not provide a clear-cut answer to the question of whether the RDA covers consequential losses. The resolution was rather to be found in "history rather than legal theory" by construing the words of the RDA against the backdrop of the prior legislative history. It focused on tracing the development of the RDA from its embryonic beginnings in the Riot Act 1714 under which the 'hundred' or community held the place of the compensation authority under the RDA. The open-textured wording of the 1714 Act, referring to recoverable damages suffered "by such" property destruction, was extended by 18th and 19th century case law and the following Seditious Meetings Act 1817 to include the contents of a building but no further. Over time, the class of property covered was extended still further (in part to account for the impact of the industrial revolution). However, there was no historical extension of liability for consequential loss. The RDA did not alter the basis on which compensation would be paid but rather made changes to the arrangements for the compensation scheme, such as transferring the liability to pay compensation from 'the hundred' to the local police authority as the compensation authority.

The judgment of the Court of Appeal had highlighted the fact that the statute did not exclude the recovery of consequential loss and that under the RDA the compensation authority (and previously the hundred) stood as surety for the rioter 'as trespasser' such that there was no reason to think that the rioter would not have been liable in tort for consequential losses. The Supreme Court disagreed, stressing that there was no suggestion that Parliament had ever intended that the compensation scheme should mirror the offenders' liability in tort. To the contrary, the RDA provides only partial compensation for loss (for example, there is no cover for personal injury or damage to property such as a car parked in the street). The severity of the Riot Act 1714 and following legislation (introducing the death penalty for offenders) drew a line between trespass and riot.

As a result of this historical interpretation of the statute, the Supreme Court held that the RDA represented a self-contained statutory scheme to compensate specific losses in the event of riot. The RDA was not intended to mirror the law of tort but instead to legislate to ensure that the local authority supported those who suffered loss from a rare and specific event. Consequential losses fell outside of the statutory schemes that preceded the RDA for these events and therefore should be interpreted as falling outside of the statutory scheme of the RDA.

The appeal was accordingly allowed, restoring Flaux J's decision on this point at first instance.

Commentary

The decision of the Supreme Court conclusively answers the question of whether the RDA covers consequential – or 'business interruption' – losses, in the face of vacuum of previous authority on the point. The outcome is bad news for insurers and uninsured property owners and occupiers pending the Riot Compensation Act 2016 (RCA) coming into force (see below) although it is perhaps unsurprising in view of the generally perceived wisdom prior to this case that the RDA does not extend to consequential losses.

As we have commented previously, the proper construction of the RDA is far from black and white. The RDA compensates victims who have "sustained loss by" injury, destruction or theft in respect of buildings and contents. The relevant provisions of the RDA do not provide for compensation against all losses suffered by the victim (for example, personal injury and some property damage losses are not covered) but nor do they expressly exclude consequential losses. As in the Yarl's Wood litigation (see Yarl's Wood Immigration Ltd v Bedfordshire Police Authority [2009] EWCA Civ 1110), this case further illustrates the willingness of the courts to look back into history and trawl through predecessor legislation and case law – in this instance as far back as the time of King Cnut prior to the Norman conquest – to establish what Parliament intended.

Insurers may however already be steeled against the impact of this decision which brings forward their inability to recover such consequential losses under new legislation. In that regard, due to the unprecedented impact of the 2011 riots and archaic language of the RDA, the Government commissioned an independent report on the RDA published on 8 November 2013 leading to a public consultation in 2014 on the reform of the RDA. A response to the consultation was published on 12 March 2015 along with a draft Bill. The RCA received Royal Assent on 23 March 2016 and will come into force when commencement regulations are passed (as yet there is no indication as to when this will be). The RCA repeals the RDA and creates a new compensation scheme which in many aspects continues to reflect the RDA but has been substantially overhauled and updated.

Among the key reforms provided for by the RCA, compensation will be capped at £1 million per claim (although this can be changed by regulations) and consequential losses will be expressly excluded (except for the cost of alternative accommodation if the victim's home is rendered uninhabitable).

Other key reforms include as follows:

• The scope of the property covered is increased. The RDA covers only loss or damage to a house, shop or building (and loss, damage or theft of contents). The RCA encompasses a wider class of property, including for example certain motor cars, buildings being constructed and property kept on land being used for the purpose of the claimant’s business;
• Compensation will be excluded in respect of damage to prisons, immigration centres and similar locations from the scheme. This last reform was made to counter the effect of the decision of the Court of Appeal in the Yarl's Wood litigation which determined that claims could be made by claimants even if they had custodial powers in relation to the rioters;
• Regulations may prescribe in detail the basis upon which compensation will be calculated, the aim being consistency with the insurance industry. It appears contemplated in particular that claims may be paid on a new-for-old basis rather than old-for-old under the RDA;
• Interim payments may be made in respect of a claim under the RCA;
• There will be minimum time periods for notifying a claim to the relevant authority (42 days from the date of the riot) and, thereafter, submitting evidence and details in support of a claim (90 days from the date when the claim has been notified); and
• The claims process will be streamlined and decision making authority may be delegated – for example, claims handling may be outsourced to loss adjusters.

The 2011 riots laid the public purse open to a huge volume of claims under the RDA. The underlying object of the RCA is to limit that exposure and focus compensation on the public policy aim of protecting those who most need such support. The question for insurers is whether, or at what price, they are prepared to cover riot damage losses that do not fall for compensation under the RCA. The RCA – and indeed the decision of the Supreme Court in the Mitsui case – may, therefore, impact the availability, pricing or other terms of insurance against property damage caused by riot, not least in high risk areas. In the long-run, the new legislation could have adverse implications for property owners and occupiers – particularly SMEs – who cannot obtain or afford insurance cover against riot damage losses, absorb property damage losses in excess of the £1 million compensation cap or fund business interruption losses which may well significantly exceed property damage losses.