Insurers liable for claims to cover business interruption due to coronavirus must pay out “as soon as is possible” to help small businesses survive the lockdown, the City watchdog has warned.

In a letter to insurance bosses, the Financial Conduct Authority (FCA) said it wants firms to also make interim payouts in cases where a claim in full may not immediately be possible, or explain to the regulator why this has not been done.

The FCA said it believes most firms only have basic insurance policies, which do not cover pandemics and will therefore not pay out.

But it said there are cases where it is clear insurers are liable to pay out and must do so swiftly.

It comes as a raft of insurance firms are facing legal action after declining payouts for business interruption claims, despite stating that they would cover firms forced to shut due to a notifiable disease.

Hiscox is one of the insurers in the firing line, with the Hiscox Action Group set up by a group of brokers and loss adjusters to look at whether or not they have a case to take legal action.

FCA interim chief executive Christopher Woolard said: “There are policies where it is clear that the firm has an obligation to pay out on a policy.

“For these policies, it is important that claims are assessed and settled quickly.

“A key objective of the FCA is to ensure that financial pressures on policyholders are not exacerbated by slow payment; rather, such claims should be paid as soon as is possible.”

The FCA said it also “expects firms to deliver” in supporting their small business policyholders in communicating with them clearly and quickly on whether their policies cover business interruption due to the pandemic.

Mr Woolard added that small firms – with an annual turnover of less than £6.5 million and fewer than 50 staff – can turn to the Financial Ombudsman Service in cases of dispute as a quicker alternative to legal action through the courts.

The FCA has set up a new unit, headed by Andrew Wigston, to co-ordinate its activities across small business issues, looking to support firms and gather intelligence about how they are treated by financial services firms during the crisis.