British insurer Equitable Life takes its former directors and auditors Ernst & Young to court today, seeking €5.5 billion damages for alleged failure to warn of impending collapse because of over-generous guarantees.

The claim is the largest ever to be brought against private individuals or an auditor in the UK and sets a precedent by targeting non-executive directors as well as their executive counterparts.

Over the past few months, Equitable and E&Y have engaged in a phoney war, each expecting victory, but they have also said the case will cost them £30 million (€44 million) or more each, and with reputations also at stake, an expensive battle looms.

"There is the legal cost if the case dragged on, and the litigation risk of not getting a good result," said Victoria Cochrane, legal counsel for E&Y, who also highlighted the downsides of a settlement.

"A settlement would set a precedent, others may interpret E&Y as a soft touch." Equitable Life has also put a brave face on the prospective tussle.

"We have a very strong case and we will see them in court on Monday," said an Equitable Life spokesman on Friday. "We have always said that we would not rule out a settlement but any offer would have to be serious and substantial." Equitable closed its life fund to new business in 2000 after being forced by Britain's highest court, the House of Lords, to honour high guarantees on policies it sold in the 1970s and 1980s.

The House of Lords said the company could not continue a strategy of paying lower bonuses on policies with guaranteed annuity rates (GARs), which it had tried to do because they had become prohibitively expensive.

The move pushed Equitable to the verge of bankruptcy in 2000, as it tried to recoup £1.5 billion by stopping paying terminal bonuses and closing to new policyholders. Equitable is suing E&Y for up to £2.05 billion and 15 of its former directors for up to £1.7 billion, in a trial expected to last nine months, cost over £80 million, and involve at least eight barristers, 10 law firms and 12 expert witnesses.

However, E&Y says the directors knew of the potential size of the liabilities and a much larger charge would have only resulted in a change in accounting policies. E&Y say Equitable Life is simply finger-pointing with the benefit of hindsight.