Business interruption insurance is designed to pay out when firms are required to close owing to a local outbreak of disease but not for a national lockdown, the London High Court was told yesterday.
The UK's markets watchdog has taken eight insurers, including Hiscox, RSA, QBE and Zurich, to court to resolve a dispute over policy wordings.
Small businesses such as restaurants said they face ruin after insurers rejected attempts to claim millions of pounds collectively in compensation for lost business.
The UK's Financial Conduct Authority says the coronavirus pandemic should trigger payments under the policies, which provide cover when insured premises cannot be used because of restrictions imposed by a public authority and in the event of a notifiable disease in the local area.
The policies typically use a radius of 25 miles to represent the local area.
Gavin Kealey, a lawyer representing the insurers, said the policies did not cover a wider outbreak, such as the coronavirus pandemic which triggered a country-wide lockdown in March.
"That is not the peril insured against or remotely the peril insured against."
This was in contrast to a recent local lockdown due to a resurgence in cases in the Midlands city of Leicester.
"There is no doubt in my mind that, according to the correct wording, there will be coverage for that," Kealey said. "The lockdown is within a circle of 25 miles."
The FCA, which is concerned customers should be treated fairly, said in its skeleton argument last week that policyholders in the case were "generally not sophisticated or well-resourced insurance buyers".
Kealey said the insurers should also be treated fairly.
Around 370,000 policyholders could be affected. The hearing is due to conclude next Thursday.