As I understand, Landlord insurance covers landlord’s contents including damage being the result of an “escape of liquid”. It does not cover the renter’s contents.
Cover for damage to a tenant’s contents including by “escape of liquid” is covered through renters insurance. If it is taken out by the renter.
You should call your insurer to confirm.
Also, you Google renters insurance with the name of an insurer so you can read if understanding above is correct.
If the above is correct then your tenants lose little by applying to the Tribunal (only the small application fee). Their claim of lawyer saying you’re liable may just be them seeking to further rattle your cage. Did you receive a letter from the lawyer stating on what grounds you are liable?