Significant water damage to rear extension - need advice please

We’ve lived in our house for about 18 years, it’s an end terrace built in the early 1900s and is our first house.

At some point a previous owner combined what was the outside loo, and coal shed into a single storey extension that extends the kitchen, creates a utility area and downstairs shower room. We think this happened about 25-30 years ago, and it was done with the next door neighbours at that time as a joint DIY project. The rear extension has a party wall and an adjoining flat roof.

Recently our neighbour (whom we like and don’t wish to fall out with), asked if we had any problems with our roof and with damp. We said no, and told her we had our side of the flat roof and our guttering replaced more than 12 year ago, before she moved in. Our neighbour also asked if we had any drainage, because she was wondering if all the water from both sides of the roof was draining entirely on her side and she has no drain. As it happens, we do have a drain, so it’s likely the majority of the water from both roofs is draining into our drain.

Needless to say the conversation worried us, and prompted us to look more closely at some of the laminate in our utility that had started dipping underfoot. We’d thought at worst some underlay would need replacing, but when we lifted the laminate we were completely unprepared. The whole concrete floor is soaked with water and is disintegrating. This must have been going on for a long period of time, and we presume the damp proof course has completely failed. The laminate had started to dip underfoot in one small area about 5 months ago but it became more noticeable this last month.

We’ve had a builder look at the floor who confirm our thoughts on rising damp. He has also said it would cost about K8-10 to dig out and re-do. But we have lost confidence in the structure of the extension, and think if the floor is this bad then the walls are likely to have problems too and probably lack adequate foundations.

We may be looking at a complete re-build, and there is our neighbour’s property to consider too, as we have the party wall and adjoining flat roof.

We spoke to our Insurance about the floor but they say we’re not covered because they don’t cover for damp. We pointed out that their schedule does not mention damp whatsoever. They then told us that we weren’t covered because it’s accidental damage and we don’t have that policy. We would like to press this with them but don’t know what to claim under, or if we have any case with them whatsoever because as they’ve pointed out, we don’t have Accidental Damage cover.

Also, as the water is from the ground and not a leak from above, we didn’t mention to the Insurance our neighbour does not have rainwater drainage on her property from the roof.

We don’t know if our garden drain is sufficient, working properly or even if it was part of the previous owner’s DIY. We’re very unsure about what to do next, and would like some thoughts / advice on how to proceed.