Insurance company IAG will pay out up to $3.48 million in compensation after admitting it may have breached the Fair Trading Act in relation to more than 150,000 insurance policies.
The Commerce Commission today announced a settlement with IAG after the insurer discovered an error last year while assessing Canterbury earthquake claims.
IAG found it had miscalculated the sum insured in 643 previously paid out total loss insurance claims. The same error would also affect the renewal of 150,755 current policies.
Up to $3.48 million would be paid out to affected customers to reflect "what they should have received or are due to receive".
More than 150,755 current policyholders would also be given the option of either accepting an increased sum insured amount and therefore a higher insurance premium or agreeing a different value.
The problem affected some house and contents insurance policies offered by NZI, Lantern, ASB, BNZ and Co-operative Bank.
IAG's error was administrative but had a "potentially far-reaching effect, particularly for people at their most vulnerable, following significant personal loss," said Kate Morrison, Commerce Commission general manager of competition.
"However, the company is to be commended for advising us about this problem, and for being prepared to put matters right," she said.
"Through its proactive response IAG has avoided a potentially lengthy and costly investigation and affected customers have been, or will be, compensated."
Some of the policies affected dated back as far as 1980 and included a sum insured which was to be automatically adjusted each year to reflect rising inflation.
IAG incorrectly made adjustments at a level below the rate of inflation for much of that period, the Commerce Commission said.
The result was that the amount insured for some people was less than it should have been.
IAG said it notified the Commerce Commission last October and had been working to identify and make direct contact with all affected customers since.
The company regretted the error and was making every effort to "put things right", said head of corporate affairs Craig Dowling.
"All customers have visibility of their sum insured at the time of annual renewal of their policies, but that doesn't change the fact that some policies should have shown higher levels of increase each year."
Dowling said that as of the end of August, 538 customers who had received past payouts to had their claims reviewed.
Of those, 198 received additional payouts including interest totalling around $1.35 million.
A further $626,000 was allocated to another 105 historic claims being reviewed.
There were 130 current or active claims for which IAG estimated between $1m and $1.5 in additional payments will be made based on the corrected sum insured amounts.
IAG had corrected the indexation rates so that its systems now correctly calculate the adjustment.
Those affected were being contacted directly by their broker or IAG. They did not need to contact the Commerce Commission, whose role now was to ensure the terms of the settlement were met by IAG.
Only the courts could decide if the Fair Trading Act had been breached. Penalties under the Act could be up to $60,000 for an individual and up to $200,000 for a company, per offence.