Insurer faces penalty of over $6m for misleading customers

The High Court of New Zealand recently ruled that AA Insurance New Zealand Limited (AAI) breached s. 22 of the Financial Markets Conduct Act 2013, for which it should pay a final penalty of $6.175m.

To arrive at this amount, the court applied a 35% discount to a pecuniary penalty with a starting point of $9.5m. AAI admitted to the s. 22 breach, which led to about $11.12m in overcharges

primarily due to failures and deficiencies in its systems and processes, according to a media release by New Zealand’s Financial Markets Authority.

“The $6.175 million penalty against AAI reflects the sheer scale of customers affected and level of harm caused,” said Margot Gatland, enforcement head at the Financial Markets Authority, in the media release. “AAI’s systems proved to be inadequate and its marketing was not kept in line with internal policies.”

“Customers cannot be expected to double check the precise details of transactions,” wrote Justice Laura O’Gorman for the court. “They are entitled to trust the accuracy of their insurer’s systems and processes.”

Court decision

The court determined that AAI misled some customers about its multi-policy discount offer. Specifically, its marketing material between 2015–20 misrepresented that existing policy holders who added another policy would immediately be eligible to receive a multi-policy discount when, in reality, AAI’s systems were set up to apply the discount only after the original policy was up for renewal, the media release said.

The court also decided that AAI failed to apply the multi-policy discount to some customers’ invoices, a problem which impacted 12,463 customers, who were overcharged with a total of around $4.89m.

The court added that AAI did not apply the discount promised to New Zealand Automobile Association members, which resulted in overcharging 90,129 customers with approximately $2.95m in total.

AAI failed to apply its guaranteed no claims bonus benefit on its comprehensive car insurance policies, an issue which affected 17,973 eligible customers, who were overcharged with a total of about $3.28m, the court also said.

The court then found that AAI’s marketing misrepresented that eligible customers would receive a guaranteed no claims bonus for life, without limitation.

The court explained that, until December 2011, AAI offered this bonus for each customer’s lifetime as long as that customer was still insured. However, after that point, the benefit was amended such that the bonus would only apply to the life of each customer’s policy.

“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,” said O’Gorman in the court ruling.

“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,” Gatland said in the media release.