The Serious Fraud Office (SFO) is leading a criminal investigation into bogus policies that cite Lloyd's as the insurer.

It is thought 10,000 to 20,000 policies, including professional indemnity, employers' liability and public liability cover, were sold by CFT Group Insurance Services through the internet, without cover having been arranged.

In October, policyholders contacted Lloyd's requesting their insurance be validated. The cover had been sold predominately through a website to sole traders such as information technology contractors and small to medium-sized UK businesses.

Lloyd's then alerted the City of London Police and last Wednesday (31 October) the SFO took over the investigations.

Lloyd's spokesman Adrian Beeby said: "We had phonecalls to our regulators wanting the policies to be validated, but we were unhappy with what we found so called the police, the Financial Services Authority and the General Insurance Standards Council.

"That was the first we ever heard of it. The problem is we have the validation phone line so people can check the cover with us, but we cannot prevent people seeking to use our name to carry out fraud."

The policies, which bear the names CFT or CFT Group Insurance Services, are believed to have been sold from a virtual office registered in Canary Wharf. Lloyd's is advising policyholders to "take appropriate action to protect their interests" which may include purchasing alternative cover.

SFO head of external communications David Jones said: "There is a suspicion of fraud at this stage. This inquiry is now being led by us in close co-operation with the City of London Police and Lloyd's regulatory office."

It is thought up to 12 police officers will be involved in the investigation and a report will be published in a few months' time advising whether prosecution action should be taken.