Reading the Riot Act

Many commercial property owners and occupiers whose businesses have been destroyed or impacted during this summer's riots are just beginning to come to terms with the true cost of the damage caused. A number of individuals whose homes have been affected also face the severity of the impact. Businesses and individuals not directly affected may now also be aware, following the riots, that their properties might be at risk in the future and seek to know the types of compensation and support available in times of civil unrest.

Insurance and insured risks

11 November 2011

Many commercial property owners and occupiers whose businesses have been destroyed or impacted during this summer's riots are just beginning to come to terms with the true cost of the damage caused. A number of individuals whose homes have been affected also face the severity of the impact. Businesses and individuals not directly affected may now also be aware, following the riots, that their properties might be at risk in the future and seek to know the types of compensation and support available in times of civil unrest.

Insurance and insured risks

The Association of British Insurers (ABI) was prompt to respond to the riots. It published guidance for those whose property or business may have been impacted and offered a question and answer guide on their website to assist potential claimants with the process. In doing so it is assuring victims of the ABI's support for a speedy recovery. The ABI has also been working closely with the Government to ensure the smooth restoration of the communities impacted by the riots.

It is likely that any owner or occupier will immediately turn to the terms of their buildings insurance policy when there has been damage to property and there are a number of matters to take account of when doing so. First, they will need to establish that the cover under their policy is adequate and that the "insured risks" include riot as one of the risks insured against. The list of insured risks is different from one policy to another and there may be circumstances where policies exclude liability for acts of civil unrest, commotion or riot. It may also be necessary to consider specifically what caused the damage in every particular circumstance.

Second, insured persons should always be aware of the terms and conditions relating to notification. It may be that some policies have strict time limits for informing insurers of a claim. There may also be a need to permit assessments to be carried out, which can slow down the timeline from damage to reinstatement, something particularly pertinent to those businesses who wish to start trading almost immediately again after any violent disorder.

A third factor is whether the policy extends to a right to claim for business interruption. In current economic times businesses will be dependent on such cover to meet the immediate liabilities during the spell they are unable to trade.

The Riot (Damages) Act 1886

Proprietors may find that as a result of the riot, they are unable to restore their property due to being under-insured or not insured at all. In such cases there may be scope to revert to an application for compensation offered under a 125 year old statute. The Riot (Damages) Act 1886 ("1886 Act") applies to any house, shop or building that may have been destroyed or property that has been stolen or destroyed, in both instances "by any persons riotously and tumultuously assembled together", but does not extend to business interruption. Compensation authorities are set up in each police area to administer claims and the authorities are responsible for determining the level of compensation, having regard to the conduct of the claimant and any potential involvement in the riot as well as ascertaining whether any precautions had been taken that might have reduced the level of destruction. The 1886 Act also provides that if the claimant was entitled to compensation from an insurer or some other source, the claimant would not be entitled to claim that amount under the 1886 Act but the payer of that compensation, be it an insurer or otherwise will be able to submit a claim.

However, it should be kept in mind that the success of any claims under the 1886 Act depends on the circumstances. Location and timing are important and so also is whether the police agree that riots as referred to in the 1886 Act were underway at all. In legal terms, the definition of a riot (set out in the Public Order Act 1986) is a gathering of twelve or more people who use or threaten unlawful violence for a common purpose and give rise to a fear for personal safety. There was some debate whether there was any common cause shared by the rioters this past summer, however the Government has publicised the fact that it has set up a full compensation fund to support the police authorities. The acts of damage to which the 1886 Act applies is restricted as set out above and so compensation for damage to person and items not listed under the 1886 Act will not be recoverable unless there is separate insurance dealing with such risks.

The procedure for making a claim under the 1886 Act includes an obligation to lodge the claim within 14 days of the incident. However, speaking to the House of Commons on 11 August, David Cameron announced that the deadline for submitting claims arising from the riots in August would be extended to 42 days. There is no stated maximum limit to the amount that can be claimed, although there is no entitlement to claim for interruption to business under the 1886 Act. The 1886 Act also provides for the right to challenge the amount or any refusal of compensation fixed by an authority.

Landlord and tenant concerns

Where a business tenant occupies a property, obligations to insure and reinstate the property will be governed by the provisions of the lease. It will be necessary to review the insurance clauses both in terms of the risks insured against and to ascertain who is liable for repair to property for damage caused by risks insured. Where the tenant occupies the whole of a property there is every likelihood that the responsibility for insuring and reinstating the property after damage or destruction has been passed to the tenant under the terms of the lease. Where the property is in multiple occupation, the landlord may have retained the obligation to insure and reinstate subject to the tenant paying the insurance premiums and acting throughout the lease term so as not to cause the insurance policy to be compromised in any way.

The provisions of the lease might also provide for a suspension of rent during the period that property cannot be occupied. This is of comfort to the tenant who is unable to trade but who is still tied into the lease. The procedure for the reinstatement of the property is likely to be set out in the lease, governing applications for planning permission and building consent and detailing the period during which the relevant party must endeavour to rebuild so that the lease is not terminated. The lease is also likely to provide for the party whop is to be responsible for any shortfall between the insurance money recoverable and the costs of rebuilding or repairing the property. Landlords and tenants will no doubt be seeking legal and commercial advice to steer them through the process contained in the lease contract they have agreed.

Another area of concern will be the insurance or lack of insurance for plate glass in property. It may be the case that neither a landlord nor a tenant is obliged to insure but usually in these instances, the tenant is responsible for the repair and replacement in the event of damage or destruction, either directly or via service charge payments to the landlord for the upkeep of the building. What may emerge is that claims are split between insurance claims and claims under the 1886 Act to attempt to cover all losses. There are many instances of prompt interim payments being made by insurers but where there is debate over responsibility for costs of reinstatement, a prolonged recovery period is highly likely.

Government measures

The Government has expressed its support for businesses affected by the August riots. The Government is working closely with the ABI and the police authorities to resurrect the areas affected by the riots. In addition, David Cameron announced a temporary suspension of business rates for seriously affected properties. The costs of this are met mostly by the Government in terms of the fund set up to compensate the local authorities affected, although the local authorities themselves are covering approximately a quarter of the costs of this.
In addition, the planning authorities will give priority to applicants recovering from the riots. The Government does not wish to be criticised for the planning regulations being responsible for delaying progress. In dealing with the post-riot situation, the Government has indicated they will be reviewing planning generally to rid the system of unnecessary obstacles. The Chief Planner for the Department for Communities and Local Government (DCLG) Steve Quartermain followed this quickly by writing to councils to give practical and more specific advice to planning officers.

The letter emphasised an important aspect of planning regulation generally, by reminding councils that "It is important to ensure that a balance is struck between security and protecting the look and character of our high streets." Security and safety are "material considerations" taken into account when making a planning decision. What is visually acceptable will vary from council to council, as the starting point is that the application should be in accordance with the approved plan for that area.

Steve Quartermain's letter concluded with the statement "Finally, we also propose to consult on whether security shutters and other security measures should be permitted development." If the outcome is positive, security measures will join a class of development for which planning permission is automatically granted. At present, in some areas, roller shutters for example are not permitted. It is likely however that any change in the status of security measures will be controlled. Again taking the example of the roller shutters, the objection by councils is to avoid the appearance of a "ghetto" for a town centre or high street at night. In environmentally sensitive areas, even if instalment of security measures (including for example, roller shutters) become permitted development, a council may make an Article 4 direction under the Town and Country Planning (General Permitted Development) Order 1995, whereby development normally permitted can be withdrawn in special circumstances, to ensure the balance between safety and the visible acceptability of the area in question.

Financial help

Support has arisen in other areas too. Her Majesty's Revenue and Customs have announced that they will work with directly affected businesses to create repayment schedules for current tax liabilities and provide alternative means of dealing with any lost financial records. The usual stringent approach to submission deadlines and penalties will be looked at on a case-by-case basis for those businesses affected.

At the same time, a number of the UK's largest financial institutions have introduced emergency financial support schemes. These are designed in part to mitigate some of the cash flow pressures felt by businesses and homeowners that find they have to restock or repair buildings and homes that have been damaged. "Mortgage holidays" and no impact on credit rating are two of the measures put in place to assist in the short term.

Who pays the ultimate price?

The ABI gave an early estimate of the likely losses at a sum in excess of £200 million. More recently speculative reports suggest the final figure might double that. The majority of this will be claimed under insurance policies. However, when a property owner or occupier has made a successful claim against their insurers, the insurance company is at liberty to lodge a claim under the 1886 Act. The compensation it can claim is an amount equal to the amount paid out to its policyholder due to riot damage. The rationale behind this is to avoid any drastic increases in annual insurance premiums due to such acts and to keep insurance available on the open market for properties and businesses in areas affected by riots. What it does mean however is that the public fund is meeting the costs.

The local police authority in each case is responsible for paying compensation for successful claims under the 1886 Act whether this is to those uninsured, under-insured or the insurers themselves. There is concern that such responsibility will drain these authorities of current funds, and there is therefore a strong possibility that the cost of riotous destruction will be passed on. The Government is pledging to support the funds to make sure everyone affected is compensated. This may avoid a direct cost to local police authorities and local councils but the taxpayer will still pay.

The Government and consumer groups have clearly been quick to reassure property owners and businesses that genuine losses will be covered. What is less clear, is the long-term costs for everyone in the UK. The riots have opened up questions. Will there be an impact on investment in property in such areas? Can the businesses on the high streets sustain any potential long-term effects in the context of the economic hardships already being tackled? Will local areas suffer a loss of confidence, altering the dynamics of daily life in communities? Can the public fund continue to meet the spiralling costs?

The 1886 Act has stood the test of time for the past 125 years. In a time where all public funds are under strain and cuts in services are prevalent, it is not surprising that the Home Office spokesperson has stated that the department is considering the law in this area. The ABI have emphasised that the existence of the fund means insurers are not increasing premiums in riot affected areas year on year. The existence of the fund has also helped shape the insurance industry which could be forced to contract if payouts on such a scale for unforeseen events were not supported in some way. However the matter resolves for the future, the extensive costs of restoration affect us all one way or the other.