Insurer hit with hefty penalty for misleading discounts and overcharges

Insurer hit with hefty penalty for misleading discounts and overcharges | Insurance Business New Zealand

Insurance News

Insurer hit with hefty penalty for misleading discounts and overcharges

Regulator emphasised gravity of breaches

Insurance News

By
Roxanne Libatique

AA Insurance has been ordered to pay $6.175 million following a High Court decision for misleading practices and overcharging customers.

The penalty arises from actions taken by the Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko, after AA Insurance admitted to breaching section 22 of the Financial Markets Conduct Act.

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Why did AA Insurance get penalised?

The company failed to properly apply discounts and bonuses, leading to overcharges totalling around $11.12 million.

Specifically, AA Insurance’s marketing incorrectly suggested that multi-policy discounts would be applied immediately to existing customers who added new policies. However, in practice, the discount was often delayed until policy renewal or not applied at all. This oversight resulted in overcharges amounting to NZ$4.89 million, affecting 112,463 customers.

Additionally, AA Insurance failed to apply discounts promised to New Zealand Automobile Association (NZAA) members, resulting in further overcharges of NZ$2.95 million to 90,129 customers.

The insurer also failed to honour its guaranteed no claims bonus on comprehensive car insurance policies, affecting 17,973 customers, who were overcharged approximately $3.28 million.

Moreover, some of the insurer’s marketing material inaccurately claimed that eligible customers would receive this bonus “for life,” though the conditions had changed after December 2011, applying the bonus only to the life of the policy rather than the lifetime of the customer.

AA Insurance’s penalty

Justice Laura O’Gorman imposed the $6.175 million penalty after considering the scope of the breaches.

The court initially set the penalty at $9.5 million, later reduced by 35% in recognition of AA Insurance’s cooperative conduct during the investigation.

In her ruling, O’Gorman said that customers should be able to trust their insurer’s systems and that insurers must ensure their processes align with their representations to customers.

Margot Gatland, FMA head of enforcement, described the case as significant given the number of customers affected and the scale of the harm caused.

She emphasised that this ruling highlights the need for companies to prioritise the accuracy of their systems and to put customer interests at the forefront of their business practices.

“AAI’s systems proved to be inadequate, and its marketing was not kept in line with internal policies,” she said.

AA Insurance’s response to the penalty

AA Insurance responded to the ruling, acknowledging its mistakes and issuing a public apology.

She said that AA Insurance has since implemented improvements to its systems and processes, with additional investments being made to prevent future occurrences of similar issues.

“We are committed to being better and are confident that today we have stronger systems and processes in place, which we continue to build on. We are also investing heavily in the transformation of our core systems, which will help to further improve the experiences our customers have with us,” she said.

The proposed regulatory returns will be required under the Financial Markets Conduct Act 2013 to ensure ongoing compliance with licensing conditions.

Submissions on the proposed framework are open until Oct. 25, with the FMA aiming to collect feedback on the scope and frequency of reporting requirements.

This consultation is part of the FMA’s broader efforts to enhance regulatory oversight and ensure financial institutions maintain the necessary standards to meet their obligations under New Zealand law.

The FMA has assured participants that commercially sensitive information will be handled with care, though aggregated data may be made public.