The AA was in turmoil this week after the Policyholders Protection Board announced the cancellation of 31,000 policies the intermediary had placed with failed insurer Drake.
The AA had around £4.5m in premium income from the policyholders, and is now in a desperate fight to keep them.
The problem stems from the wording in the AA's policies with Drake that meant it is not possible for the intermediary to transfer its policyholders in the same way as its rivals have been able to.
Other brokers and intermediaries including Endsleigh, Hill House Hammond and Swinton, had a total of 100,000 policies. These said return of premiums were calculated from the date that policies were cancelled.
They were able to transfer their policies to new insurers with 60% up front funding from the PPB and further payments as policyholders returned their premiums.
But the AA's policies said return premium must be calculated from the date policyholders returned their insurance certificates.
PPB claims manager Roger Clements said: “Theoretically we were in a position where no returns of certificates would be made, and therefore, we could have made no payment.
“We are a statutory body and what we do is therefore linked to the wordings of each policy”
But the AA's director of insurance George Lowe said the situation left his company in an impossible position.
He said: “There has been total intransigence on the part of the PPB. We were trying to organise a smooth transfer of our policyholders, but they have not helped. Our policy says any returned premium will be calculated from the date the certificate of insurance is returned. If we didn't get any certificates back, we would have been funding the transfer of our policyholders.”
Lowe claimed the PPB's position could have left the intermediary to fund all its policyholders' premiums, something the PPB did not deny.
The AA has now been forced to write to all its policyholders and offer them two weeks temporary cover with Groupama, in which time they can transfer their policies to the insurer.
Lowe said: “There is a risk we could lose some customers, but it is one we are prepared to take.”
He added that the AA is likely to extend the temporary cover deadline by another two weeks to give policyholders the chance to return from their holidays.