IAG will pay nearly $7 million in refunds to customers and donations to emergency organisations over charging errors related to the NSW emergency services levy (ESL).

The insurer discovered an ESL overcharge of $6.8 million in the 2013 financial year after an internal review of collections, plus a more recent error caused by the transition to a property-based charge.

It intends to refund about $1.1 million to more than 27,000 NRMA Insurance customers eligible for payments of $30 or more due to the 2013 error.

It will also make payments totalling $5.7 million to organisations including the NSW Rural Fire Service, St John’s Ambulance, the State Emergency Service and the National Parks and Wildlife Service.

Separately, IAG-owned Swann Insurance has attracted the ire of ESL Insurance Monitor Allan Fels after removing the levy from more than 3000 NSW motor vehicle and motorcycle policies but failing to reduce its total premiums to customers.

Swann has refunded customers more than $17,000 and made a donation to Lifeline. It must also give the monitor an independent review of its remediation actions.

NSW is scrapping the ESL on insurance from July 1 next year in favour of a property-based charge, and has appointed Professor Fels to ensure savings are passed on to policyholders.

Under the transition Swann decided to remove the 1% ESL it charges for new and renewing motor vehicle and motorcycle policies this year.

“During our regular quality check we discovered a system error that resulted in an incorrect premium calculation where the 1% ESL remained on some customer policies,” an IAG spokesman told insuranceNEWS.com.au. “This error has now been corrected.”

IAG says the property levy provides a fairer and more sustainable approach to funding fire and emergency services, while collection of the ESL is complicated and difficult to administer.

“Where we have got it wrong, we have rectified this by refunding the affected customers,” the spokesman said. “Where the amounts were smaller, we have donated to service organisations that protect our communities.”

Professor Fels says Swann self-reported the problem, but he is “surprised that such a basic error in pricing was made” after insurers were informed of their obligations.

The monitor has warned insurers that pricing errors when removing the ESL from premiums can lead to tough penalties.

“Should we take court action in relation to future incidents of this kind, there are potential penalties of up to $10 million,” Professor Fels said.