Court case for rent arrears turned into counter claim for disrepair

Possession - Section 8 and Section 21

I have recently had to take my tenants to court for rental arrears on a section 8. They have turned up to court and cited disrepair at the property, so the judge has adjourned the case and given the tenants 2 weeks to file a counter claim. The insurers have said that legal expense cover will only be provided for the section 8 hearing and if the tenants were to file a counter claim I would be liable for the legal expenses. This is because the letting agents I signed with provided 6 months free legal cover and rental guarantee. The tenants contract expired on april 22nd (started october 2009) and have been put on a rolling 2 month contract since as per the agents standard procdure apparently. The insurers would not re-insure me because of arrears and the fact they have not paid me properly. Does anybody have any experience with this kind of insurance cover and this situation?

The disrepair issues they had already informed me of were in my opinion, minor, such as cracked plaster, loose window boards (the PVC kind) a "defective" door handle (no further details), perished seal round the bath and others. All of which except the door handle, plaster and window boards I have had repaired. I have also already spent over £1000 on other works and a new washing machine.

I was wondering if this kind of situation had been seen before, and if there was any advice or help anyone had?

Many thanks