Most insurance companies will not pay out on business interruption claims for companies that have had to shut down due to the coronavirus pandemic, regulators and insurers have said, after accusations that some were failing to pay out on “valid” claims.

The Financial Conduct Authority (FCA) said most policies held by small firms were unlikely to provide cover for such disruption.

Over the weekend, group of companies were reported to be considering legal action against insurer Hiscox Ltd (LON:HSX) after it refused to pay out on business interruption policies, with one firm organising a joint letter to business secretary Alok Sharma to call for the government to investigate.

The FCA sent a letter to insurance companies on Wednesday saying it would not intervene in most circumstances as the majority of business interruption insurance policies did not include pandemics.

Christopher Woolard, the FCA’s interim chief executive, said insurers should be assessing and settling other claims quickly and if there were ground not to pay claims in full, an interim payment should be made.

“Many firms are already doing this,” he said in the letter. “If you disagree with doing so, we would like you to send to us the grounds for reaching that decision, including how you believe it represents a fair outcome for customers.”

Hiscox speaks

FTSE 250-listed Hiscox said in a statement that its “core policy wordings do not provide cover for business interruption as a result of the general measures taken by the UK government in response to a pandemic”, though it suggested that it was paying out on some SME policies.

The companies that were considering legal action pointed out that the insurer’s business interruption policies insure against financial loss arising from an inability to use an insured property because of “an occurrence of any human infectious or human contagion disease”.

Hiscox has argued that the policy was designed to respond to incidents where “you can’t access your property due to a localised event” and that the government lockdown was “not directly aimed at limiting access to an individual business’s premises”.

In its statement on Wednesday, the Bermuda-headquartered company said it reviews each case individually and noted that business interruption cover is taken out by around one in 10 of its UK SME customers, with roughly 10,000 having been directly impacted the government’s lockdown measures. 

With more than 70% of these smaller customers normally generating monthly revenues of less than £40,000, with a significant proportion below £10,000 per month, Hiscox argued that “the level of economic loss experienced by these businesses is likely to be materially lower than revenues in a normal trading environment”.

Its business interruption exposure to the Covid-19 pandemic is “limited” in Europe and “negligible” in the US.

Hiscox said it “is proactively paying claims” for lines of business such as event cancellation, entertainment and travel, “and the claims are progressing in line with its expectations”, noting that it had published a disaster scenario that estimates a net loss of US$175mln for losses emanating primarily from such event cancellations in a global pandemic scenario.

The company said it will provide a further update to the market clarifying its potential exposures “within the next week”.