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I fear that you do need to retain a lawyer here.
I do think that you are being defrauded (and I don't know what these people told the lawyer - any decent lawyer wouldn't have taken the case if they had any idea what actually happened), but the best way to extract yourself from this situation is to hire a civil litigation attorney to contact their attorney and help get this matter dealt with now.
You have 2 options to do this:
If you do tender the claim (just contact your insurance agent, and send them a copy of the letter (send your own 'cover letter' with it), and the insurance will deal with the problem.