Angry flood victims will begin legal action against local authorities and the government next week to seek compensation.

Industry sources involved in the flooding debate, suggest that the ABI negotiations with the Treasury and Defra on who should foot the bill for the flood crisis will escalate dramatically as a consequence.

It is understood that the Treasury, ABI, Council of Mortgage Lenders (CML) and various insurers met to discuss the idea of a flood mutual, similar to Pool Re, recently. Now the debate has shifted towards an offer to flood risk homeowners to be included in the proposed Planning and Compulsory Purchase Bill.

Under this legislation, proposed by the Office of the Deputy Prime Minister (ODPM), planning strategies will be streamlined and reformed. The Bill supports policies on regeneration, which could include the worst flood risk areas in the UK, with the option for homeowners to move their homes and receive compensation.

The source said: "The CML has its own agenda because it wants insurers to stay on risk. In the US, a policy to knockdown and rebuild houses off the floodplains has led to a 77% drop in ongoing flood costs.

"The ABI also wants the Treasury to take on the cover of the 250,000 highest risk properties which are deemed uninsurable. Indications are the ABI has told the Treasury that insurers will not stay on risk if it doesn't take this on board," said the source.

The CML is pressing the government to consider high risk flood properties in its debate over new planning legislation.

A CML spokeswoman said: "One thing suggested as a minor addition to the bill was specifically considering properties in flood risk areas and whether they could be made eligible for the compulsory purchase approach. We felt it was a point worth making.

"We have made the suggestion to the government but there are lots of different strands to the flooding debate including the lenders, the insurers and different government departments.

"We want the government to think in a joined-up way."

ABI household and property manager Jane Milne said she was aware that CML had approached the ODPM concerning the flood risk aspect of the Bill.

A leading household underwriter said: "I'm not surprised this could be an element in the bill but it mustn't be made an insurer issue."

Meanwhile, insurers are unhappy with the presentation of flood risk data released last month.

A leading insurer said there had been a lack of consultation over the presentation and insurers were now faced with a "list of postcodes with flags over them".

He said: "The information is not something insurers can stick into a system as there is a lot of manual mapping and cross referencing that has to be done. There can be no instant uptake."

A spokeswoman for the Environment Agency (EA) said: "All the information has been collected to help satisfy responsibility of providing information about flood warnings and defences."