The claimants alleged that they had been injured in a car accident caused by the negligence of the defendant. The insurer did not accept that the accident happened (or that, if it did, not in the way that the claimants alleged).

However, the insurer did not go so far as to plead fraud in its defence. That is now a common approach for insurers, following guidance given by the Court of Appeal in Kearsley v Klarfeld [2005] that a defendant "does not have to put forward a substantive case of fraud in order to succeed".

There are various reasons why insurers might prefer this approach, including that they lack direct knowledge of the relevant events and that their lawyers are subject to professional obligations which result in them being slow to allege fraud.

The issue in this case was whether, the judge at first instance having dismissed the claim, the claimants were entitled to the benefit of QOCS ("Qualified one-way costs shifting" which applies in personal injury litigation and results in the claimant having no liability to pay costs if it loses (whereas the defendant must pay costs if it loses)). CPR r44.16 states that QOCS will not apply, with the permission of the court, "where the claim is found on the balance of probabilities to be fundamentally dishonest".

The judge had found that this exception applied, even though fraud was not pleaded in the insurer's defence. The Court of Appeal has now dismissed the claimants' appeal from that decision.

It has held that "the mere fact that the opposing party has not alleged dishonesty in his pleadings will not necessarily bar a judge from finding a witness to have been lying" and that where an insurer has put facts inviting the judge to draw an inference, the judge can conclude not just that the claimant has proven its case, but also (for example) that the accident did not happen: "The key question in such a case would be whether the claimant had been given adequate warning of, and a proper opportunity to deal with, the possibility of such a conclusion and the matters leading the judge to it rather than whether the insurer had positively alleged fraud in its defence".

Here, the insurer had adverted to the possibility of the court finding "elements of fraud to this claim" and had stated that the insurer did not believe the accident had taken place and that credibility was in issue. That had given the claimants adequate notice of the possibility that the judge might reach the findings which he did. They could not therefore suggest that they had been ambushed.

Nor did it matter that the claimants had not been cross-examined at trial on the basis that their claim was dishonest: "what ultimately matters is that the witness has had fair notice of a challenge to his or her honesty and an opportunity to deal with it. It may be that in a particular context a cross-examination which does not use the words "dishonest" or "lying" will give a witness fair warning. That will be a matter for the trial judge to decide".