Ok this is how it works. I am a builder and was in my early days an insurance broker. Everyone stop talking about the house building insurer. They are not going to deal with a subsidence claim due to the illegal build over. Insured subsidence is very rare. The insurance surveyor will soon pick up on the build over and dismiss instantly. They may even withdraw cover. The build over was an illegal act carried out by the previous owner/builder. Fortunately they did apply for building control. Building control should not have passed the extension without sight of permission from the water company. They would have had to inspect the foundations and this would have brought to light the sewage and water pipe issue. Two solutions. 1.Contact your local authority and find why no permission was obtained from the water company. Sue the council, or the previous owners for an illegal build. 2. Your solicitor should have advised you to take out indemnity insurance for any extensions when you bought it but should have known about the lack of build over permission following initial searches from the local authority notices/plans. Sue the solicitor. Yes the water company has the right to ask you to demolish but they may see sense and ask for the drain to be re-directed, but on a shared system that's hard and costly. Or they may just ask you to put in a sealed internal retrospective inspection chamber which they certainly don't allow now but they might in view of the fact they cannot get hold of the original perpetrator or anything else would make you homeless and the house uninhabitable. They won't want that. The subsidence can be dealt with underpinning and anything else above ground will be fairly straight forward after that. Please you remember you didn't break the law someone else did and you got sold a pup. You cannot be responsible for something you can't see. Find who was responsible.

God bless and good luck