Admin errors cost Australian insurance giant $3.48m

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Australian insurance giant IAG will pay a multi-million dollar compensation bill in relation to more than 150,000 insurance policies in New Zealand, some dating back to 1980.

IAG discovered an error in August 2011 while assessing Canterbury earthquake claims and advised the New Zealand Commerce Commission in October 2011.

The problem affects some house and contents insurance 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. The same error will also affect the renewal of 150,755 current policies.

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.

As part of the settlement, IAG estimates that it will make payments of up to $3.48 million to affected 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. However, the company should be commended for advising us about this problem, and for being prepared to put matters right,” said Commerce Commission general manager, competition, Kate Morrison.

She added, however, that the company has managed to avoid the risk of running through a potentially lengthy and costly investigation through its “proactive response” to the discovery of the admin errors.

“Affected customers have been, or will be, compensated," she said.

Morrison added the Commission encourages businesses to, in the first place, have compliance programs to ensure they stay on the right side of the law, but if things go wrong, acting quickly to put matters right, and raising the issue with the Commission is the best way to resolve matters to the satisfaction of all concerned.

The people who hold policies that are affected are being contacted directly by their broker or IAG.

  • david mitchell on 19/09/2012 5:04:26 PM

    The issue of under-indexed sum insured values is part of a larger issue. The larger issue is represented by the vexing question: "how to establish sum insured values". The customer has little hope of determining the replacement value of their home short of an expensive surveying exercise. Some insurers have sought to solve this problem by offering insurance policies that do not reference a sum insured value but instead agree to pay whatever is required to re-build the home. Care needs to be taken in choosing an indexation factor to apply to sum insureds in that building cost inflation can run differently than the basket of goods that define the general inflation statistic.

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