Insurer IAG is contacting 150,000 of its policyholders after it found it miscalculated the sum insured in more than 600 paid-out home and contents insurance claims.
The insurer discovered the mistake in August last year while working through Canterbury earthquake claims and advised the Commerce Commission two months later. IAG admitted it may have breached the Fair Trading Act in relation to more than 150,000 home and contents policies.
The problem affects some policies offered by NZI, Lantern, ASB, BNZ and Co-operative Bank.
IAG miscalculated the sum insured in 643 previously paid out total loss insurance claims, where the policy holder may be entitled to compensation. The same error will also affect the renewal of 150,755 current policies.
The commission said it had reached a settlement with IAG.
IAG head of corporate affairs Craig Dowling said the error was regretted, customers had been or were being contacted directly, and "every effort was being made to put things right".
As at the end of August, 538 customers who had received past payouts to their policy maximums had their claims reviewed, and 198 of those received additional payouts including interest totalling around $1.35m, Dowling said.
A further $626,000 has been allocated to another 105 historic claims that are being reviewed.
There are 130 current or active claims for which IAG estimates between $1m and $1.5m in additional payments will be made based on the corrected sum insured amounts.
IAG said its systems would now correctly calculate the adjustment in the manner required.
Around 150,000 customers would receive letters during their annual renewal cycle adjusting their policy and premium to the corrected levels.
The policies affected date back to 1980 in some cases, and include a sum insured which was to be automatically adjusted each year to reflect rising inflation.
In fact the sum insured adjustments were incorrectly set below the rate of inflation for much of that period. The result has been that the sum insured for some people is less than it should be.
The commission said the error meant that some current and historic claims had been underpaid on the basis of a sum insured figure that is lower than it should have been.
All affected current policies have a sum insured figure which is too low and upon renewal this will be corrected to what the sum insured should be. This is likely to lead to an increase in premium for the policy holder.
As part of the settlement, IAG estimates that it will make payments of up to $3.48 million to customers who have previously been paid out on total loss insurance claims, and those with total loss claims, to reflect what they should have received, or are due to receive.
IAG will also offer the more than 150,755 current policyholders the option of either accepting an increased sum insured amount and therefore a higher insurance premium or agreeing a different value.
IAG has also agreed to pay the commission's costs.
"IAG's error was administrative but had potentially far-reaching effect, particularly for people at their most vulnerable, following significant personal loss,'' said Commerce Commission competition general manager Kate Morrison.
"However, the company is to be commended for advising us about this problem, and for being prepared to put matters right."
Through its proactive response IAG has avoided a potentially lengthy and costly investigation and affected customers had been, or would be, compensated, Morrison said.
"We encourage businesses to, in the first place, have compliance programmes to ensure they stay on the right side of the law.''
Concerned policyholders should contact IAG on 0800 694 694.
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