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I dont do P&C, so cant speak to the insurance side of this, but I used to do a lot of litigation years ago. I've tried over a hundred cases personally in small claims and been party to 3 times that in state court.
And I'm not a lawyer, but IMO you need to counter sue this guy ASAP. And put each and every thing you can think of in the complaint that could cost him money, INCLUDING your attorney fees, time at your hourly rate (which you wont get), all fees associated with defending the claim and list them out in detail- make it sound expensive. Personally, I'd name the lawyer in the suit for bringing the frivolous claim (again, not very winable, but will definitely scare him), but thats just me. Just scare the bejezus out of them, let them know they stand to lose something if they lose.
They are bullying you and they only way to deal with a bully is to punch them in the face.
Not sure about the rules in your state, but I'd start discovery requests too. You can ask them a bunch of questions they are required to answer, and I'd list a LOT of stuff to eat up the lawyers time.
You just gotta push back on this stuff and you can do a lot of it yourself with a little advice and gumption. If they really know they dont have a claim, then just the fear of loss on their end will probably get them to drop the case. Just make sure you lawyer up before it goes to court if you cant get them to back off. You should NEVER walk into a courtroom without a lawyer.
That is a good way to run up some billables with your attorney. Remember, while you may have the right to defend yourself in criminal court, you don't have the right in civil court. You particularly don't have the right to represent yourself as the plaintiff in civil court.