Equitable Life, the troubled life assurer, has said it is to sue its former auditor Ernst & Young for negligence.

The decision to start legal proceedings against E&Y comes four months after it wrote to the accountants asking it to justify its conduct.

The assurer said the documents it had received from E&Y did not provide a "substantive reply" and is claiming up to �2.6bn ($3.7bn) in compensation.

The crisis-struck society is also considering suing 20 of its former directors, but has decided not to proceed with legal action against its former lawyers, Denton Wilde Sapte.

Equitable Life's current board and the financial regulators have expressed anger and concern that the society's troubles were not flagged up sooner.

An E&Y spokesman said they were confident there was no basis for the legal proceedings and called the claim "opportunistic".

The announcement came in a letter sent to policyholders setting out the future direction of the society.

No stranger to court

Equitable's problems came to light in 1999 when it admitted that it could no longer afford to pay policyholders with guaranteed pensions the amount they had originally promised when interest rates were higher.

These policyholders took the company to court when it tried to back out of its previous commitments.

Equitable Life lost the court battle and was left with huge legal bills.

As a result, it was forced to close to new business in December 2000 and sold part of its business to the Halifax, now part of HBOS.

The firm agreed a compromise deal in February, where policyholders with guaranteed pension returns will give up their guarantees in return for a one-off 17.5% boost to the value of their investments.

This will allow Equitable to cap its future liabilities and, the company hopes, avoid financial collapse.

Policyholder dismay

But many thousands of policyholders have already withdrawn their funds.

In its announcement on Monday, the society moved to avoid further desertions by raising the exit penalty to 14% from 10%.

The society said it was solvent but not financially strong, and said that the decline of the stock markets had added to its troubles.

Equitable Life added it would not announce an interim bonus for 2002, and would wait to see how the fund performs during the year.

It also announced the appointment of two non-executive directors to the board, including Ron Bullen, chairman of the Policyholders Action Group.