Suncorp charged premiums for home and contents insurance to people whose properties were destroyed in Victoria's Christmas Day 2015 bushfires.
The insurer offered people whose homes were lost in the Wye River bushfires cash settlements that in some cases were hundreds of thousands of dollars less than the estimated rebuilding cost.
An investigation into Suncorp's handling of the bushfire claims led to it being fined $43,200 for misleading advertising, when it could have faced criminal charges and up to $7.2 million in penalties.
The Christmas Day bushfires destroyed 116 properties, many of them holiday homes, in Wye River and Separation Creek.
Suncorp's general insurance business AAI received 63 claims, half under its AAMI brand, the banking royal commission heard on Thursday.
The insurer was criticised over delays in handling claims and accused of underquoting on the cost of rebuilding and pressuring people into accepting cash settlements.
Suncorp's group CEO Michael Cameron drafted a letter, but did not send it, to then prime minister Malcolm Turnbull in November 2016 saying the allegations were flawed.
Mr Cameron admitted that regrettably policy renewals were sent to customers whose properties were lost the Wye River fires, pledging to refund the cost of the premiums.
The royal commission was shown an internal report on seven Wye River claims that had not been resolved by November 2016.
At least three of the policyholders had obtained their own quotes to complete the works that were considerably higher than the cash settlements offered.
One customer was offered a $499,000 cash settlement in September 2016 when the independent quote was $659,000, the inquiry heard.
After complaining that AAMI may be "hiding something", the insurer revealed it had a second quote for $862,000.
Another customer was offered a $677,000 cash settlement when their own quotes ranged between $973,000 and $1.1 million.
After an Australian Securities and Investments Commission investigation, AAMI paid $43,200 in penalties over what the regulator maintained were false or misleading statements on its website and in radio ads for home insurance.
The ads promised that under its complete replacement cover, destroyed or damaged homes would be rebuilt or repaired "no matter the cost to us".
ASIC's concerns included that the statements were misleading because AAMI could also choose to pay the policyholder the assessed cost of repairing or rebuilding.
Suncorp's chief executive officer for insurance Gary Dransfield said the insurer maintained the ads were not misleading.
The royal commission calculated the $43,200 penalty represented just 0.001 per cent of the $426 million in premiums AAMI received in a year from policies with complete replacement cover.
Mr Dransfield said irrespective of the size of the financial penalty, there was a significant impact on AAMI's reputation.
Royal commissioner Kenneth Hayne QC said one view could be that it was "a very low cost of doing business".
Mr Dransfield said: "I accept what you say but I would add that the reputation impact is taken seriously by organisations like ours and boards and risk committees of boards take those matters seriously."
Australian Associated Press
