16.3 Claims Handling and Fraud Prevention

The Claims Process and Mandatory Provisions

A claim is a request for payment of benefits under the policy. Health policies contain standardized claim provisions, several of which appear on every exam:

• Notice of claim – the insured must notify the insurer of a loss, usually within 20 days of the loss or as soon as reasonably possible.
• Claim forms – the insurer must supply forms within 15 days of receiving notice; if it fails to, the insured may submit proof in any written form.
• Proof of loss – written proof must be furnished within 90 days of the loss (or as soon as reasonably possible, not to exceed one year except for legal incapacity).
• Time of payment of claims – benefits are paid immediately, and periodic disability benefits at least monthly, after proof is received.
• Physical examination and autopsy – the insurer may, at its own expense, examine the insured as often as reasonably necessary while a claim is pending.

Standard Claim Timeframes

These timeframes are designed to give the insured fair access to benefits while letting the insurer investigate. Memorize the 20 / 15 / 90 sequence — it is a high-frequency exam item.

Coordination of Benefits (COB)

When an insured is covered by more than one health plan, the coordination of benefits provision prevents recovery of more than 100% of the actual covered expenses. One plan is primary (pays first, as if no other coverage existed, up to its limits) and the other is secondary (pays the remaining allowable charges up to its own limits).

The birthday rule often determines order for dependent children: the plan of the parent whose birthday falls earlier in the calendar year is primary (the year of birth is irrelevant). For the insured's own coverage, the plan where the person is an active employee is generally primary over a plan covering them as a dependent.

Worked Example: Coordination of Benefits

An insured incurs $4,000 of covered medical expenses and is covered by two plans.

• Primary plan pays 80% of covered charges: 0.80 × $4,000 = $3,200.
• Remaining balance = $4,000 − $3,200 = $800.
• Secondary plan would normally pay 80%, but COB limits total recovery to 100% of the $4,000. The secondary pays the remaining allowable $800, not another 80%.
• Total paid across both plans = $3,200 + $800 = $4,000 (exactly 100%).

The insured cannot profit from holding two policies; COB ensures the combined payment never exceeds the actual covered loss.

Insurance Fraud and Its Prevention

Insurance fraud is an intentional deception to obtain a benefit not owed, and it raises costs for every honest policyholder. Two categories are tested:

• Hard fraud – deliberately staging, faking, or fabricating a loss or claim that never occurred (for example, a faked injury or a fictitious insured).
• Soft fraud (opportunistic) – padding or exaggerating an otherwise legitimate claim, or omitting material facts on an application to lower premium.

Fraud can be committed by applicants, insureds, providers, or producers. Producer fraud includes fictitious claims, premium theft, and rebating disguised as a claim.

Fraud-prevention statutes require:

• A fraud-warning statement on applications and claim forms notifying signers that knowingly providing false information is a crime.
• Insurers to maintain anti-fraud plans and special investigation units (SIUs).
• Mandatory reporting of suspected fraud to the state fraud bureau, generally with civil immunity for good-faith reports.

Federal law adds criminal penalties; the Fraud and False Statements provisions and the Violent Crime Control Act prohibit a person convicted of a felony involving dishonesty from working in insurance without written regulatory consent.

Subrogation and Recovery

Many health and disability contracts contain a subrogation clause. After paying a claim caused by a third party, the insurer may step into the insured's shoes and recover from the responsible party. Subrogation prevents the insured from collecting twice — once from the insurer and again from the at-fault party — and works alongside coordination of benefits to enforce the principle of indemnity in expense-based health coverage. Note that life insurance is valued, not indemnity, so subrogation does not apply to a death benefit.

The Producer's Role in Claims

Producers are often the policyholder's first contact when a loss occurs. Their duties are to help the insured file timely notice and complete proof of loss, explain which expenses are covered, and forward documentation promptly. Producers must never advise an insured to inflate or fabricate any part of a claim — doing so is fraud and grounds for license revocation.

Producers must also recognize fraud indicators (claims filed soon after coverage begins, inconsistent loss details, pressure for fast cash settlement) and report suspected fraud through the insurer's special investigation unit. Acting in good faith on these duties protects both the insurer and the integrity of the risk pool that keeps premiums affordable for honest insureds.