AA Insurance hit with $6.1m penalty for overcharging, misleading customers

AA Insurance customers were overcharged about $11.12 million due to system and process errors by the insurer. Photo / 123RF

AA Insurance New Zealand (AAI) has been ordered to pay a $6.175 million penalty for misleading conduct resulting in more than $11m being overcharged to customers.

The High Court found the insurer had failed to apply multi-policy and membership discounts, as well as guaranteed no claims bonuses.

AAI also misled customers about its multi policy discount offer in marketing material and misrepresented that certain eligible customers would receive its guaranteed no claims bonus for life.

AAI admitted its conduct after self-reporting system and process errors to the Financial Markets Authority (FMA).

“When mistakes happen, our commitment is to make things right and put our customers at the heart of our response,” AA Insurance chief executive Michelle James said.

“We have apologised for the errors made and between 2020-2022, carried out comprehensive remediation programmes to fully refund more than $15.6m to past and present customers, including with interest.

“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.”

Approximately $11.12m in overcharges were charged to hundreds of thousands of AAI customers.

In its ruling, the High Court found that AAI had misled some customers about its multi policy discount in marketing material between 2015 and 2020.

While AAI’s marketing material represented existing policy holders who added another policy would receive the discount immediately, AAI’s systems were set up to apply the discount only once the original policy was up for renewal.

Separately, AAI also failed to apply the multi policy discount to some customers’ invoices. The issue affected 112,463 customers, who were overcharged approximately $4.89m.

AAI was also found to have failed to apply a discount promised to New Zealand Automobile Association (NZAA) members, which affected 90,129 customers, who were overcharged approximately $2.95m.

AAI also overcharged 17,973 eligible customers approximately $3.28m after it failed to apply its guaranteed no claims bonus benefit on its comprehensive car insurance policies.

In addition, AAI misled customers in its marketing, claiming that eligible customers would receive its guaranteed no claims bonus “for life”. Until December 2011, AAI offered the bonus for each customer’s lifetime, providing the customer remained insured with AAI. After that date, the benefit was amended so that the bonus was applicable to the life of each customer’s policy only.

However, some of AAI’s marketing continued to use the same “for life” language without limitation.

In breaching section 22 of the Financial Markets Conduct Act (FMC Act), Justice O’Gorman imposed a pecuniary penalty with a starting point of $9.5m before applying a 35% discount.

“Customers are entitled to feel secure that insurance premiums will be charged, and discounts applied, in accordance with policy terms and as represented in marketing material,” Justice O’Gorman said.

“Customers cannot be expected to double-check the precise details of transactions. They are entitled to trust the accuracy of their insurer’s systems and processes.”

Margot Gatland, FMA head of enforcement, said the penalty against AAI reflected the sheer scale of customers and level of harm caused.

“AAI’s systems proved to be inadequate and its marketing was not kept in line with internal policies. This judgment sends a strong message to the industry that companies need to ensure their systems and processes are fit for purpose and customers’ interests put first.”