The House of Lords has decided not to grant the Financial Services Compensation Scheme (FSCS) permission to appeal against a ruling that it is liable to pay the legal costs of corporate policyholders of insolvent insurers.

The decision relates to a case brought against the FSCS by Geologistics Ltd, a policyholder of Independent Insurance.

Geologistics successfully argued that the FSCS's refusal to pay the pre-liquidation legal costs resulting from an employers' liability claim was illegal.

The company's lawyer, Davies Arnold Cooper, said the decision could cost the FSCS up to £60m relating to insurer insolvencies currently going through schemes of arrangement.

An FSCS spokeswoman said that the ruling had the potential to cost insurers, who fund the FSCS's payouts through an industry levy, "tens of millions" in the long term.

Prior to the House of Lords decision, the FSCS announced a £130m levy on general insurance firms for 2004/05, primarily to fund compensation claims from the collapse of Independent Insurance and Chester Street.

The spokeswoman said it had made "some provision" for losing the ruling in the levy and it was unlikely that additional funds would be raised this year.

The FSCS said it had already paid out £190m in claims due to the collapse of the two firms.

It raised £150m from general insurers in 2002 but there was no levy in 2003.