Premiums were jacked up for more than one million insurance customers in a deliberate ploy for their loyalty, a class action will allege.
Slater and Gordon filed action in Victoria's Supreme Court over how loyalty discounts were calculated and promoted to "entice" people to renew home and contents policies between 2018 and 2024.
The law firm alleges customers were told they received discounts based on how many years they stayed with the insurer or the number of policies they held, but may have been paying a higher base premium in the first place.
Ben Hardwick, who heads up class actions at the firm, said a computer program was used to identify which customers were likely to shop around if their policies increased and which would stay loyal to their insurer.
"What hasn't been disclosed to customers is that in the backroom is a computer algorithm constantly beavering away to ascertain who is the most sticky of customers," he told reporters on Wednesday morning.
"Customers who are judged to be sticky are loyal, have had their base premiums ramped up with the effect that the loyalty discount was effectively worthless."
The class action is against RACV, SGIO and SGIC, which operate under parent Insurance Australia Group (IAG).
The company, which claims to be the largest general insurer in Australia and New Zealand, does not agree customers were misled and will defend the action.
Mr Hardick alleged more than one million Australians were victims of this misconduct.
"Customers should have been informed that this algorithm was jacking up their premiums so they could make an informed assessment on if they wanted to shop around or not," he said.
"Insurers (claimed to be) offering discounts of 10 per cent or more in circumstances. We say, these discounts were not worth the paper they were written on."
Slater and Gordon alleges the insurers' conduct breached financial services laws and they either knew or should have known it was not in the interest of customers.
In a statement provided by the law firm, lead plaintiff Angela Williams said she was shocked to find out about the allegations.
The 56-year-old had home and contents insurance with RACV for more than two decades.
"I thought I was getting a good deal," Ms Williams said.
"If I had known that RACV was actually charging me a higher base premium because of a pricing algorithm, I would have switched right away."
Insurance Australia Group said its subsidiaries Insurance Australia Limited (IAL) and Insurance Manufacturers of Australia Pty Limited (IMA) intend to defend against the Slater and Gordon action.
It is also defending related proceedings launched by the Australian Securities and Investments Commission in the Federal Court.
"IAL and IMA maintain they have delivered on loyalty promises made to customers and do not agree that they have misled customers about the extent of the discounts they would receive," IAG said in a statement.
The algorithm is the subject of ASIC's proceedings and will be a hotly contested issue in the class action, Mr Hardwick claimed.
"IAG companies either knew about the algorithm and the effect that it was having on loyal customers' premiums or it was totally ignorant to it, was totally ignorant to the conduct taking place," he said.
"The onus is on the insurance company to correct that error."
Slater and Gordon has asked customers to visit its website for more information on the class action, which it is running on a no win-no fee basis.
