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June 30 (Reuters) -

The Australian federal court fined a unit of Insurance Australia Group Ltd (IAG) a record A$40 million ($26.5 million) for failing to deliver on some discount related promises made to customers, the country's corporate regulator said on Friday.

The court said the unit, Insurance Australia Ltd (IAL), made false representations to over 600,000 customers who did not, in total, receive more than A$35 million in discounts between March 2014 and September 2019, the Australian Securities and Investments Commission (ASIC) said in a statement.

The regulator, which had initiated proceedings against the insurer, said the penalty imposed on IAL is the largest ever fine imposed by the court against an insurer for breaches of financial services consumer protection laws. The court also ordered it to cover ASIC's costs of the proceedings.

IAL failed to deliver the full amount of loyalty and discounts it had promised to customers when they renewed their National Roads and Motorists' Association (NRMA) branded insurance policies, the regulator said.

"IAL used a specific pricing algorithm that limited the discounts renewing customers could receive, ensuring their premiums did not fall below a certain price point," ASIC Deputy Chair Sarah Court said.

"This pricing method meant promised discounts were not passed on and customers paid more in premiums than they had been promised."

IAG in a separate statement said it acknowledged the court's decision and that it will also contact relevant customers with the outcome of the proceedings.

It has issued refunds to 99% of impacted customers, with the remaining refunds expected to be issued over the next two months, it added.

($1 = 1.5090 Australian dollars)