(Adds Medibank and watchdog comment, share move)
MELBOURNE, June 16 (Reuters) - Australia's consumer watchdog has filed a lawsuit in the Federal Court against the country's largest private health insurer, Medibank Private Ltd MPL.AX , alleging it failed to notify customers in advance about a move to limit benefits for pathology and radiology services while in hospital.
The Australian Competition and Consumer Commission (ACCC) said Medibank decided not to give advance notice about the policy change in 2014 because its members might have opted to switch to other providers and that might have hurt its initial public offering.
"Consumers are entitled to expect that they will be informed in advance of important changes to their private health insurance cover," ACCC Chairman Rod Sims said in a statement. "These changes can have significant financial consequences at a time when consumers may be vulnerable," Sims said.
Medibank shares fell as much as 7 percent while the broader market .AXJO was up 0.7 percent.
The company said it "refutes claims by the ACCC related to activities that took place in 2014", adding in a statement that it had cooperated with the commission throughout its investigation. The company declined to comment further given the matter was now before the court.
The insurer faces potential penalties of A$1.1 million ($816,000) per breach of Australian consumer law, a commission spokeswoman said, however it was too early to say what the maximum fine would be if the consumer watchdog won its case.
($1 = 1.3483 Australian dollars)