When honesty is the best policy

Exaggerating insurance claims has, for a long time, been a convenient way for thousands of people to milk a few extra pounds on the back of a burglary or holiday theft.

But be warned - being found out can lead to the entire claim being rejected, or even to arrest.

This week, the financial ombudsman threw down the gauntlet to cheats when it rejected petitions by two individuals whose claims were thrown out because they exaggerated or lied.

In one case, detailed below, a man who said his DVD player and 14 DVDs were stolen was later found never to have owned them. In another, a man who was claiming for disability was discovered lifting heavy shopping and driving long distances when he said his illness prevented him from doing so. In both cases, the ombudsman ruled that the insurance company was right to withhold payment of the entire claim.

It is a murky and complex area. It has historically been difficult to detect fraud and even harder to prove, and the scale of the problem has mushroomed into a billion-pound nightmare affecting the whole industry.

Some estimate that around 10% of claims are fraudulent, while 70% say they would cheat an insurance company if they knew they could get away with it.

Steven South, of Admiral Insurance, says dealing with the problem is notoriously difficult: "Fraudsters are always one step ahead. When we announce new initiatives they are obviously aware of them, too," he says.

There are two main types of insurance fraud. The first is "bogus" claims where the instigator has simply made up an accident or injury and filed a claim - most likely to be chosen by criminal gangs.

The second, and most common, is "exaggerated" claims where people making otherwise legitimate claims - perhaps after a burglary or a minor car crash - invent some items stolen, or injuries sustained, or who overstate the value of the claim.

According to the Association of British Insurers (ABI), 38% of the UK's £1bn insurance fraud falls into this category, thanks to people propelled by a misguided be lief that they are not really doing much wrong.

But when the claims are large, or frequent, insurers are certain to investigate.

ABI spokesman, Malcolm Tarling says: "Insurance fraud is a criminal act, but people don't really seem to see it this way. There is no common profile of what type of person is likely to make a fraudulent claim." He adds: "The biggest driver seems to be the perception that insurance companies are easy targets because they are large and profitable. They are opportunists. The strongest message we can put out is that there is a risk of getting caught, and if you are, there is a possibility of a custodial sentence."

Honest customers pay the price in higher premiums and suffer increasingly intrusive and sophisticated techniques to pinpoint cheats.

Some insurers now use lie detector technology when policyholders call to make a claim, while others increasingly use private detectives.

Greater sharing of information between insurers, as well as closer links with the police, has also led to more scams being uncovered.

In addition, the high profile conviction last month of a garage owner who had swindled insurers out of £900,000 after claiming for car repairs he had never done, has served as a signal to those involved with premeditated fraud that they are being watched.

But the ombudsman has also warned insurers that using overzealous methods in the pursuit of a fraudster - especially if they impact on legitimate claimants - is unacceptable. "The fact that members of a firm's staff are personally satisfied of the claimant's bad faith is not sufficient proof of dishonesty," the ombudsman says in this month's report.

Insurers must be able to prove that the customer intended to defraud, he adds.

For example, many people might think their car is worth more than the insurance company says it is and apply for a pay-out based on their own valuation. This is not deliberately misleading, or fraud.

Neither is it a reason for withholding a payment.

Dead man who renewed his motor policy

Insurance companies see it all when it comes to handling claims. Here are some of the cases they have been asked to payout on. Well, would you believe it? The smile was wiped off the face of one volunteer on a Richard and Judy televised viagra trial when it emerged he was the recipient of thousands of pounds for lost earnings after his back was injured in car accident.

The claimant lost most of his payout after a judge ruled that it had been unwise to report back to the programme that the trial had been very effective.

A policyholder who claimed for six months recuperation after suffering a heart attack was later observed by insurance investigators repeatedly frequenting a brothel while supposedly still ill.

A man who made a claim for medical treatment abroad to cover the cost of having his appendix removed was found to have claimed to have the same organ removed on seven other occasions.

A travel insurance policyholder made a claim for the loss of the same suitcase and designer suits which he valued at thousands of pounds four years in a row before being detected.

A policyholder who had died in the US magically renewed his motor insurance a month after his alleged death.

A bus driver who was claiming to be unfit for work because of a wrist injury was filmed using the same arm to fix a light outside his house ... with a hammer drill.