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UK: "Read them the Riot Act": Supreme Court holds that insurers cannot recover consequential losses from the police
In the culmination of a test case on the extent of local police authorities' statutory liability to compensate victims of riot ("Victims"), the Supreme Court (the "UKSC") has held, unanimously, that consequential losses are not recoverable from the police.
The issues on appeal arose out of the 2011 London riots (the "Riots") during which Sony's Enfield warehouse had been looted and ultimately burnt to the ground.
As a result of the destruction of the warehouse, an action was brought against the Mayor's Office for Policing and Crime (the "MOPC") for compensation under s.2(1) of the Riot (Damages) Act 1886 (the "1886 Act"). Section 2(1) provides that, in the event of a riot, the police shall pay compensation to any person "who has sustained loss by such" riotous activities.
By the time the case reached the UKSC it was no longer in dispute that the MOPC was liable to pay compensation; the sole remaining issue was whether, as well as being liable for direct losses, the respondents (subrogee insurers and other – uninsured – claimants: the "Insurers") could pursue the appellant MOPC for consequential losses.
So the key issue between the parties was whether the MOPC was liable to reimburse the Insurers for the sums they had paid out to their insureds under business interruption ("BI") policies for loss of profit/rent.
The legal and historical background
Purpose of the 1886 Act
The Insurers had argued before the UKSC – and the Court of Appeal (the "CoA") had accepted – that the 1886 Act causes the police to act as surety or guarantor, standing in the shoes of the rioters, such that whatever (consequential) losses could be recovered from a rioter in tort (albeit theoretically, given the likely impecuniosity of such rioters) could be claimed from the MOPC.
However, after embarking on a close historical analysis of the underlying purpose of the 1886 Act (and predecessor legislation dating as far back as the late sixth century during the reign of King Aethelbert of Kent), the UKSC concluded that the 1886 Act did not impose suretyship on the police but actually operated as "a self-contained statutory scheme which did not mirror the common law of tort."
Rather than reflecting rioters' tortious liability, what was mirrored by the 1886 Act's "self-contained statutory scheme" was the limiting effect of predecessor legislation which had confined "statutory compensation…to physical damage to property."
As a result, the UKSC found that:
"There is nothing in the wording of the 1886 Act that supports an intention to extend the scope of the compensation to cover consequential losses."
The anomaly point
Finally, the UKSC dismissed an argument which had found favour in the CoA that failing to extend police authority liability to consequential losses resulted in an anomalous situation where Victims can recover loss of profits if they choose to sell a riot-damaged building, but not if they opt to restore and retain the property.
So the argument goes, if a building suffers riot damage and is sold before being restored then it is undisputed that the seller Victim can claim under the 1886 Act for the reduction in market value of the property. If that damaged building happens to be a commercial property of income-earning potential, then part of that reduced market value which the Victim is able to recover from the police will necessarily constitute a reflection of the fact that the purchaser will not be able to make profit until the building is restored: i.e. the building's temporary loss of profit earning potential. The respondents argued that, if lost profits are recoverable in the reduction in market value way, surely they should be equally recoverable as a free-standing head of claim?
The UKSC disagreed, holding that: a) reduction in market value and free-standing loss of profits are simply "different heads of loss", b) the diminution in value will normally be capped at the cost of restoring the building anyway, and c) even if an anomaly existed, the words of the statute (read in the light of its historical context) still govern.
Commentary: the Riot Compensation Act 2016
While Mitsui saw the courts finally put the consequential loss question to bed after 130 years (or, if like the UKSC you prefer to start your counting from the sixth century, almost 1500 years), Parliament has now stepped once more unto the breach and put the issue beyond doubt for future riots. Section 8(2) of the Riot Compensation Act 2016 (most of which will be brought into force by statutory instrument at a date to be confirmed: the "2016 Act") precludes Victims from recovering consequential losses from the police.
So the combined effect of Mitsui and the 2016 Act will be to prevent insurers from passing on to the police losses incurred after riots as a result of having indemnified insureds for loss of profit/rent under BI-type policies.
Mitsui and the 2016 Act also serve as a stark reminder to the prudent businessperson to actually take out such BI cover lest he/she suffer a similar fate to that of the uninsured – and now insolvent – respondents.
For insureds, on the other hand, the result of this saga may be that BI insurers are prompted to raise premiums should the insured desire coverage against losses consequent on riot damage.
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