IAG settles Swann Insurance class action for $138m

IAG’s settlement of the class action over junk add-on car insurance is far below the insurer’s earlier estimates.

Mr Hawkins last month told The Australian local insurers never intended for business interruption to be covered in a pandemic scenario. Picture: NCA Newswire / Gaye Gerard

IAG will pay $138m to settle a class action brought against its subsidiaries Swann Insurance and Insurance Australia Ltd over junk add-on insurance sold through motor dealerships between 2008 and 2017.

The settlement, subject to approval by the Federal Court of Australia, comes days before the case was due to go to trial and will see the ASX-listed insurer take an after-tax hit of $50m on its first-half earnings.

The settlement is a fraction of the $1bn IAG last year said the class action could be worth.

“Inclusive of all related costs and after insurance recoveries, IAG anticipates a net after tax impact from this settlement of less than $50m. This will be reflected in IAG’s reported earnings for the six months ended 31 December 2020,” the insurer said on Tuesday.

The action, brought by Johnson Winter & Slattery in April 2019 and funded by litigation funder Balance REV, alleged that Swann engaged in misleading or deceptive conduct and unconscionable conduct in breach of Australian consumer law and the ASIC Act.

“The settlement is a great outcome for group members, enabling them to recover a significant proportion of their alleged financial loss without going to court,” Johnson Winter & Slattery said in a statement on Tuesday.

The case was set to go to trial in Federal Court on October 12.

The action against IAG came after the banking royal commission in 2018 heard how Swann sold 850,000 of the junk policies for a total $1bn over the previous decade. Fewer than 10 per cent of customers made a claim.

At the royal commission, IAG head of business distribution Ben Bessell admitted Swann had no oversight of how its authorised representatives in dealerships were selling the insurance, which was marketed in conjunction with car and motorcycle sales using high-pressure sales tactics.

Commissioner Kenneth Hayne in his final report said Swann had committed three breaches of legislation but none were not referred to the regulator for further action.

ASIC in December 2017 announced that Swann would refund 67,960 customers $39m paid for the junk insurance which was sold through car and motorbike dealerships and was “of low or no value”.

The remediation program ran until the start of 2019, while IAG ceased offering the add-on insurance products in the 2018 financial year.

The settlement comes weeks after IAG named Nick Hawkins as its new chief executive.

Mr Hawkins, who takes on the top job on November 2, was the insurer’s chief financial officer for 12 years before being appointed its deputy chief executive in April, when Mr Harmer announced his retirement.

He comes into the role as the industry is facing a crucial test case over business interruption insurance through the COVID-19 pandemic.

Mr Hawkins last month told The Australian that local insurers never intended for business interruption to be covered in a pandemic scenario.

“It was not our intention to cover in the scenario of a pandemic. We never indicated we were (providing cover for a pandemic) and we didn’t collect a premium that covered that risk.

“I’ve seen contract law disputes around the mechanisms and mechanics of policy wording, but our strong view is that we don’t cover business interruption on a pandemic scenario.”

UBS last month warned that IAG would be the most exposed local insurer if the test case doesn’t go in the industry’s favour.

IAG shares ended Tuesday’s session up 1c, or 0.65 per cent, at $4.66.