I think your first stop is a CAB with the letter
I dont understand the use of the word 'freehold' in your question about an insurance claim
you should check it is the small claims court and that the losing side is never charged with the fees of the winner
[xc when they are alleging unreasonable behaviour] and the other xc is actions in trespass which I cant think you are doing
the rules as far as I am concerned is that each side pays its own costs whatever
I suspect that they have sent you a standard terms threatening letter
in which case I would wait
and tell the judge they have been deliberately mis-stating the law in order to induce you to follow a course of action ( cease or settle ) which you would not otherwise have followed
but I agree you certainly dont wanna be dinged with the other sides costs
there is very little point in ringing up the other side and saying 'are you sure?'