Independent Insurance's panel solicitors will take the Financial Services Compensation Scheme (FSCS) to the High Court to decide who will cover the costs of legal action taken on behalf of commercial policyholders.

Last August Davies Arnold Cooper (DAC), Davies Lavery and Berrymans Lace Mawer wrote to Independent's policyholders, demanding they pay fees for work done on claims at Independent's instruction.

They said Independent was acting as the agent of the policyholders in making the instructions, so rendering the policyholder liable for the cost when the insurer could not pay.

The three have now reached an agreement with the FSCS that it will cover up to £2m in legal costs on behalf of personal policyholders, believed to number around 1,500.

However, the legal firms and the FSCS have not been able to agree on the fate of some of the 2,000 commercial policyholders.

DAC will take a test case against the FSCS to the High Court later this month to attempt to resolve the issue.

DAC partner Gerald O'Mahoney has led the negotiations on behalf of all three firms.

He said that the judgment on the case would have a significant impact on recoverability of legal costs from policyholders in other situations where the insurance company is insolvent.