Thousands of policyholders face being seriously underinsured following the collapse of Drake Insurance.

Liquidator Deloitte Touche has sent out letters to 180,000 holders of Drake's motor insurance policies warning them that their cover may be “terminated”.

Fewer than that number will actually be affected because of frantic efforts by brokers and intermediaries to transfer them to other insurers.

But Jamie Smith of Deloitte warned: “I have been in discussion with a number of insurers and brokers seeking to arrange an alternative insurer to issue replacement cover. Unfortunately, in a number of instances that will not be possible.”

A Deloitte spokeswoman said all the interested parties, including the liquidator, insurers, brokers, intermediaries and the Policyholder Protection Board (PPB), were in meetings.

She added it was hoped that those who could not find other insurers would get a letter within 20 days.

Drake was forced to cease trading in May after failing to maintain the required margin of assets over its liabilities.

Chief executive David Prewer blamed weak UK motor insurance market conditions despite “rigorous pricing action”.

The big danger for policyholders is that the PPB does not provide full protection in the case of an insurer going under.

All “own damage” claims are met at just 90% of their value, although all third party claims are settled in full.

A PPB source said this was to ensure policyholders were diligent in their choice of insurer.

However, AA Insurance, which has 40,000 Drake policyholders, has written to its customers telling them it has transferred their cover from Drake to Groupama.

The letter says: “Please do not be concerned by the liquidator's letter”, adding: “We are working hard to ensure that you will not lose out if you have to make a claim.”

In the despatch from the liquidator, Smith says: “In the event that it is necessary to cancel your Drake policy, you will need to make arrangements to obtain motor insurance with another company.”

The letter also points out that it will be for the PPB to decide “whether it is able to help in respect of any particular claim”.