The High Court imposed the penalty after the Financial Markets Authority took legal action after the company admitted it had not delivered the multi-policy discounts and other benefits as specified in their policies.
FMA executive director, response and enforcement Louise Unger said IAG's breaches were the most extensive seen in any similar case it had taken, and justified a significant penalty.
"IAG is New Zealand's largest insurer. It is a large and sophisticated market leader and accordingly plays a vital role in upholding market standards, yet its significant underinvestment led to widespread failures of its systems and processes, to the detriment of its customers."
"It also failed to respond to and report many of the issues in an appropriate timeframe."
She said the judge had described the "nature and extent of IAG's contraventions to be the most aggravating feature of its conduct", which had been aggravated by its delay in reporting them.
IAG has the AMI, NZI, and State insurance brands, and sold policies direct as well as through several banks, with some breaches going back more than 20 years. The failings were put down to inadequate and outdated systems.
Apology, remediation, investment
IAG's New Zealand chief executive Amanda Whiting accepted it had made historic mistakes.
"Since self-identifying these issues, our priority has been to put things right for impacted customers, offering a sincere apology and issuing refunds.
"We are doing everything to prevent these issues happening again."
Repaying affected customers had been completed earlier in the year, she said.
When the issue first came to light, IAG said it had also found also a significant number of customers were undercharged.
IAG is the latest big financial institution to have fallen foul of the FMA crackdown, which has resulted in the ANZ, Kiwibank, Westpac and several finance and insurance companies being penalised millions of dollars.
The FMA has said its legal actions in recent years have resulted in more than 1.5 million customers being paid back about $215 million.
