City brokers could end up in the firing line if frustrated business chiefs fail to convince insurance companies to compensate them for profits lost during the Covid-19 pandemic.

Until now, companies that mistakenly believed business interruption policies would pay out for coronavirus disruption have directed legal threats towards the insurers that stand behind the risks on policies, including Hiscox, Aviva and QBE.

But if they fail to secure the payouts they claim they are owed, hotels, pubs, dentists and others could launch legal action against their brokers for failing to advise them correctly, experts say.

"There is every chance that certain brokers with large exposures on certain policies might also face significant claims," says Ravi Nayer, a partner at law firm Brown Rudnick.

Brokers sell insurance policies and help clients make claims against insurers but do not underwrite the risks that are insured by customers.

Industry insiders believe some brokers may have exposed themselves to liability by failing to ensure that clients who asked for pandemic cover received appropriate insurance.

Whether it comes to that may depend on the outcome of the Financial Conduct Authority’s (FCA’s) upcoming test case against insurers in the High Court. The watchdog will ask the court to interpret commonly disputed wordings in business interruption policies and to rule on whether losses caused by the pandemic should be covered.

If judges rule that insurers do not have to pay out then policyholders may instead sue the brokers who they paid to find them cover, says Nayer, who is advising dental practices on whether they are entitled to payouts.

These claims could have particular force for companies that purchased cover early in 2020 when the pandemic was known about, and policies were still available to cover losses caused by any notifiable disease, according to Bruce Hepburn of advisory firm Mactavish.

In a letter to the FCA last week, Hepburn wrote that some of the ambiguous wordings were drafted by brokers, opening up another possible avenue for claims.

Another flashpoint could occur if brokers incorrectly believed at the start of the outbreak that their clients did not have a valid claim and so failed to make a precautionary notification of a claim to the insurer. Those clients may now be out of time to notify their claims, rendering them invalid.

Some businesses have found their cover was removed when they renewed their policies but their brokers had not alerted them to this, claims Hepburn, who advises firms on buying insurance and making claims.

Hepburn, whose firm accused brokers last week of being riddled with conflicts because they receive most of their income from insurers rather than policyholders, is urging the regulator to include brokers within the scope of its test case.

"Much insurance related litigation is a three-cornered fight amongst brokers, insurers and policyholders and it would be surprising if this were any different," he wrote. "Just to deal with policy interpretations is only doing half the job if the intention is to avoid a wave of litigation and assist early resolution to the overall benefit of the economy."

Others say this would only delay and complicate the urgent FCA case. Broker negligence claims depend heavily on the facts of the individual case, making them more difficult to resolve as part of the FCA's industry-wide action, lawyers say.

"There simply would be no time to try to sandwich in any broker negligence themes," says Garbhan Shanks, an insurance lawyer at Michelmores.

"There will be some broker negligence claims but we don't expect to see a surge," he adds.

Nayer compares the possibility of a slew of claims to the situation faced by financial advisers bankrupted by lawsuits over the advice they gave before markets tumbled in the 2008 financial crisis.

In reality, most brokers' own professional indemnity insurance will cover any claims reducing the risk of them facing severe financial strain, he says. "You would need pretty systemic problems for particular brokers to go under unless it was an extremely large claim or there was inadequate insurance in place."

Brokers disagree that they could be on the hook for the losses of businesses that failed to buy proper pandemic insurance.

The FCA says about 90pc of business interruption policies clearly do not cover pandemic risk. Many firms do not have cover because they did not want to pay for it.

Risk managers rated a pandemic or health crisis as only the 60th most pressing risk for their businesses, according to a survey published last year by Aon, one of the world's largest brokers.

Responses from more than 2,600 risk managers ranked a pandemic as being of less concern than risks such as rising healthcare costs and generation gaps in the workforce.

"Hindsight is a very easy tool to operate with," says a senior source in the broking industry. Most businesses did not want cover for pandemics, he says. "No one was asking for it."

A spokesman for the British Insurance Brokers' Association (BIBA) says the current pandemic is like war or a nuclear incident and cannot be modelled by individual insurers.

"Most businesses did not seek to buy or expect to be offered cover for pandemic risk, even if such cover had been generally available to buy from insurers at commercially viable rates, which it was not. Brokers also could not be expected to sell cover which was generally not available to buy," she says.

In the minority of cases where policies do not exclude pandemics, BIBA says it is urging insurers to pay claims quickly.