Disgruntled investors in Lloyd's of London said they would launch a legal claim against the Government for £1 billion in compensation.
Around 1,100 investors - known as Names - are suing the Government, claiming they made heavy losses at Lloyd's because the Treasury, the market's watchdog before the Financial Services Authority, failed to regulate the market properly.
The Names argue the Treasury failed to implement key EU directives including a measure that dictates how much insurers should hold in reserves when writing certain types of business.
The Treasury denied it had failed to regulate Lloyd's properly, a spokesman said, and would defend the case.
Names, who use their personal wealth to provide capital for underwriters to insure risks, were hit hard by the billions of dollars of losses that Lloyd's racked up in the 1990s and early 2000s, when it was rocked by high-profile claims such as the Northridge earthquake and Piper Alpha oil platform disaster.
Names before have sued Lloyd's, alleging that senior figures in the market concealed the extent of the losses, but their claims were rejected.
This initial court case, which is expected to last around four weeks, will decide whether the Names are allowed to sue the government in a class action of this kind and whether their claim for compensation has expired.
If they are successful in the first legal stage, the group of litigants could potentially be swelled by thousands of other Names, pushing the claim for compensation well above the £1 billion mark, said Chris Stockwell, who is heading the group of litigants.
"If we win this procedural part of the case, I would anticipate a great many more Names would join the action. In which case the claim would go up correspondingly," Mr Stockwell added.
"If we win on all points, then there would be nothing to stop all other Names joining the action. They'd be nuts not to."
At the height of their participation in the market, around 34,000 people were individual investors in Lloyd's. Now fewer than 1,500 still actively participate in the market.
The Names fighting the first stage of the lawsuit are thought to include two members of the Shadow Cabinet and a number of prominent business figures. Mr Stockwell declined to comment. Yesterday's move marks the start of a long and potentially bruising battle, both sides warned.
If they are defeated on these initial procedural points, the Names will appeal the decision to the UK Court of Appeal. If they fail there, they will take it to the European Court of Human Rights.
But even if the Names win at this first stage and the case continues the trial is likely to last years, a Treasury spokesman said. ..SUPL: