Record Penalty against Insurer for Failure to Honour Promised Discounts

Key takeaways:‍

• Insurance Australia Limited (IAL) ordered to pay $40 million penalty
• Penalty is largest ever imposed by a court on an insurer for breach of financial services consumer protection laws
• IAL offers products under the NRMA brand
• Penalty relates to failure to deliver on discount promises to customers

The Federal Court has ordered Insurance Australia Limited (IAL), the company which issues insurance products under the NRMA insurance brand, to pay a penalty of $40 million for its failure to honour discount promises to customers. This is the largest ever penalty imposed by the Court against an insurer for breaches of financial services consumer protection laws.

When calculating and renewing customers’ annual premiums, IAL applied an algorithm (the Cupping Mechanism) which was triggered when a renewal premium (after applicable discounts) fell by an amount greater than a set percentage limit compared to the prior year premium. Once triggered, the customer’s base premium before the discounts was recalculated and increased, so the final premium after applying discounts would fall above the limit. This had the effect of reducing the discounts applied at renewal to less than what was promised, and the existence, application and consequences of the Cupping Mechanism was not disclosed to customers.

The record penalty figure was agreed between IAL and ASIC, and the Court approved it as an appropriate remedy in the circumstances. This reflects the scale of IAL’s contravention, which affected a total of over 700,000 policies over a period of over 5 years. IAL’s customers lost discounts of over $60 million, and the total premiums paid on the affected policies were over $1 billion. The Court also noted that IAL intentionally designed, approved and implemented the Cupping Mechanism but stopped short of finding that IAL had any intent to mislead customers when it failed to disclose the Cupping Mechanism to them. Though IAL was cooperative throughout ASIC’s investigation, it was an external service provider and not IAL itself which initiated the chain of events leading to the contraventions being reported to ASIC.

This judgment follows hot on the heels of ASIC’s commencement of a civil penalty action against another insurer RACQ for alleged pricing discount failures, though in slightly different circumstances.

ASIC is focusing on pricing failures describing them as an “industry-wide issue” for insurers. Given this we expect continued ASIC enforcement action for similar alleged contraventions.  Insurance companies should pay extra scrutiny to their internal processes to prevent systematic pricing failures, and to rectify, remediate and report to ASIC promptly if it was found that contraventions have already occurred.

‍

The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.