The Financial Conduct Authority has warned the majority of small and medium sized businesses will not be covered by their insurance to deal with the coronavirus fallout, but it does not intend to intervene.
The warning comes as the regulator today (April 15) set up a dedicated small business unit intended to support regulated firms through the current crisis, with a team sheet featuring executive director of supervision Jonathan Davidson and interim executive director of strategy and competition Sheldon Mills.
In a Dear CEO letter sent to insurers today the FCA said it was collecting information from companies to assess how they are interpreting business interruption insurance policies amid the international lockdown and market turmoil caused by the coronavirus pandemic.
According to the Association of British Insurers, business interruption insurance covers a firm for loss of income during periods it cannot carry out business as usual due to an unexpected event.
The regulator said insurers and brokers had an "essential role" to play in supporting firms unsure of their cover, but warned the majority would not qualify for a payout in light of the pandemic.
The FCA said: "Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic.
"While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances."
But the watchdog said where insurers were obligated to pay out on a policy, it expected them to do so quickly to ensure financial pressures on small firms were not "exacerbated by slow payment".
The FCA also said it expected some disputes over policies would land on the doorstep of the Financial Ombudsman Service rather than the courts, if a policyholder was a small business with an annual turnover of below £6.5m with fewer than 50 employees or annual balance sheet below £5m.
According to the regulator, the ombudsman is set to share details of its approach to deciding complaints about business interruption insurance in "due course".
Earlier this month Chancellor Rishi Sunak extended the government's Coronavirus Business Interruption Loan Scheme to include all viable small and medium businesses which have faced financial difficulty due to pandemic, meaning they no longer had to be rejected by their bank first.
The CBILS allows UK-based small businesses with revenues of less than £45m to apply for loans of up to £5m.
According to the Treasury, about £90m of loans to nearly 1,000 SMEs had been approved under the scheme in the first week of its launch.
But the British Chambers of Commerce warned a mere 2 per cent of UK firms had so far secured the loans.
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