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Proposed update to the Riot (Damages) Act – what it means to insurance industry and its customers

Insurers are closely watching a legal case relating to the riots that took place in August 2011. The widespread rioting resulted in insurers paying out around £200 million in claims to affected households and businesses. The extent of the rioting, regarded as the worst for a generation, also served to highlight the need to update and clarify the legislation that determines compensation, the Riot (Damages) Act 1886.

The case, Mitsui Sumitomo Insurance Co (Europe) Ltd, Royal and Sun Alliance plc and others vs The Mayor’s Office for Policing and Crime concerns the damage sustained at the Sony distribution warehouse in Enfield. The judge, Mr Justice Flaux, ruled that consequential loss was not covered by the Act, but his decision was overturned at the Court of Appeal, placing state compensation for consequential loss as well as physical damage with the remit of the Riot (Damages) Act.

However, with the Act now more than 125 years old, society has moved on considerably since it was conceived and it is widely accepted that it is in need of an update. The government commissioned an independent review to bring it up to date. This was reported in September 2013, setting out 20 recommendations which form the basis of a consultation.

Two of the recommendations are particularly relevant to the insurance industry and its customers. These are the proposal to limit compensation under the Act to those businesses with an annual turnover of less than £2m, and that business interruption insurance (which isn’t mentioned in the Act) is formally excluded.

Removing insurers’ ability to claim back compensation from the police for businesses with annual turnovers in excess of £2mwill affect the cover insurers provide. Insurers may need to fully underwrite the riot risk for clients where the annual turnover is over, or close to, £2m a year. As well as resulting in a charge for cover, this may mean the introduction of limits on the cover available.

Only the smallest companies would still be able to access compensation under the Act. Figures from the Association of Business Insurers show that businesses with a turnover of less than £2m accounted for only 9% of the total value of commercial property material damage claims in the 2011 riots. Businesses with an annual turnover close to or in excess of £2m could see the cost of cover increase or terms and limits applied. Some may even struggled to get cover.

The recommendations were put out for consultation in June 2014 and more details of the reform of the Act – and the implications for the insurance industry and its customers – is expected later this year.

Tax mitigation

SPA PI scheme members will already be familiar with answering questions on the PII renewals about tax mitigation schemes. We have been in ongoing discussions with the insurers of the scheme, Zurich, who have confirmed that they will continue to underwrite existing SPA PI members in this respect.