Insurance company IAG will pay out millions of dollars to its claimants after admitting it underpaid them.
The Australian-owned insurance company says it picked up an error when assessing Canterbury earthquake claims which found 643 customers were not paid what they were due, an error which also impacts on the renewal of more than 150,000 current policies.
The error affects some house and contents policies offered through State, NZI, Lantern, ASB, BNZ and Co-operative Bank.
IAG avoided a potentially lengthy investigation by alerting the Commerce Commission in October 2011, two months after discovering the error.
The error dates back to 1980 in some cases where the sum insured should have been automatically adjusted each year for inflation. But the adjustments were regularly below the rate of inflation, meaning the sum insured for some people was less than it should be.
IAG estimates it'll pay out up to $3.48 million across its affected customers who have previously been paid out on total loss insurance claims.
"IAG's error was administrative but had potentially far-reaching effect, particularly for people at their most vulnerable, following significant personal loss," Commerce Commission competition general manager Kate Morrison said.
"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 have been, or will be, compensated."
IAG corporate affairs head Craig Dowling said every effort was being made to put the error right.
"All customers have visibility of their sum insured at the time of annual renewal of their policies, but that doesn't change the fact that some policies should have shown higher levels of increase each year."
Affected policy holders will be contacted directly by their broker or IAG and don't need to contact the Commerce Commission, Ms Morrison said.