Here’s why the IAG (ASX: IAG) share price is down 3% on Friday

IAG shares are in the red after ASIC announced it’s taking the company to court

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The Insurance Australia Group Ltd (ASX: IAG) share price is sliding on Friday after the Australian Securities and Investments Commission (ASIC) launched a Federal Court case against the company’s subsidiary.

ASIC alleges IAG’s subsidiary, Insurance Australia Limited, failed to honour discounts promised to some NRMA policyholders between March 2014 and November 2019.

The watchdog is arguing IAG misled customers by increasing insurance premiums while applying discounts for customer loyalty and ‘no claim bonuses’. Thus, some NRMA customers didn’t receive the full benefit of advertised discounts.

The news of legal action has seemingly sent the insurance provider’s stock plummeting today. At the time of writing, the IAG share price is $4.92, 3.05% lower than its previous close.

Let’s take a closer look at the case ASIC has brought against IAG.

What’s the court case about?

The IAG share price is slipping as ASIC takes the company to court, claiming it withheld more than $60 million of discounts from some of its customers.

The corporate watchdog alleges Insurance Australia Limited’s conduct was deceptive and misleading. The Federal Court will be determining if such behaviour contravened the ASIC Act and the Corporations Act.

According to ASIC, at least 596,000 NRMA home, motor, caravan, and boat Insurance customers were affected by the practice.

In a release to the ASX, IAG stated it reported itself to ASIC when an internal review found the behaviour in 2019.

It’s working closely with ASIC to undergo a remediation program. ASIC states the company’s remediation program will see $377 million returned to customers. IAG has already compensated 80% of the customers affected by the potentially misleading discounts.

It is worth noting, IAG is just the latest company to be caught up in payback programs.

According to ASIC, since 2018, QBE Insurance Group Ltd (ASX: QBE) has returned $15 million to customers. Westpac Banking Corp‘s (ASX: WBC) General Insurance Limited (now owned by Allianz Australia) has also remediated around $13 million. Finally, Commonwealth Bank of Australia‘s (ASX: CBA) Commonwealth Insurance Limited has handed back around $590,000 to customers since 2018.

IAG share price snapshot

The IAG share price has risen 4.4% this year to date, and around 3% over the past 12 months.

For comparison, the S&P/ASX 200 Index (ASX: XJO) is up around 10% and 18% for the corresponding periods.

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Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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