11.4 Claims, Coordination of Benefits, and Subrogation

When a loss occurs, claim provisions govern how it is reported and paid; coordination of benefits (COB) prevents an insured from collecting more than 100% of expenses when two plans apply; and subrogation lets an insurer recover from a third party responsible for the loss. Because health insurance is a reimbursement (indemnity) contract — unlike life insurance, which is a valued contract — these anti-overinsurance rules apply throughout.

The Claim Settlement Sequence

1. Notice of Claim — within 20 days of loss.
2. Claim Forms — insurer mails within 15 days.
3. Proof of Loss — insured submits within 90 days.
4. Time of Payment of Claims — paid immediately on receipt of proof; periodic benefits at least monthly.
5. Payment of Claims — to the insured or named beneficiary; a facility-of-payment clause allows payment to a relative if no beneficiary survives.

Unreasonable claim delays or denials expose the insurer to unfair claims settlement penalties under state law.

Coordination of Benefits

COB applies when a person is covered by more than one group plan. It establishes a primary plan (pays first, up to its normal limits) and a secondary plan (pays the remaining allowable expense, so total reimbursement never exceeds 100%).

Order-of-benefits rules:

• A person's own employer plan is primary over a plan covering them as a dependent.
• For a child covered by both parents, the birthday rule applies: the plan of the parent whose birthday falls earlier in the calendar year is primary (month and day, not year).
• For dependent children of divorced parents, a court decree controls; otherwise the custodial parent's plan is usually primary.

Worked example — COB math

A covered hospital bill is $10,000. The primary plan has an 80/20 coinsurance and pays $8,000. The secondary plan would normally pay 80% ($8,000) but, under COB, pays only the remaining $2,000 so the insured is reimbursed in full — never more than the $10,000 incurred.

Trap: Without COB the insured could collect $16,000 on a $10,000 bill — a profit that COB exists to prevent.

Subrogation

Subrogation transfers the insured's right to recover from a negligent third party to the insurer after the insurer pays the claim. If an insured is injured by another driver, the health insurer pays the medical bills and then steps into the insured's shoes to recover from the at-fault party. This prevents the insured from being paid twice — once by the insurer and again in a liability settlement.

Key points the exam tests:

• Subrogation arises after the insurer indemnifies the insured.
• It applies to indemnity (health, disability medical-expense) contracts, not to life insurance, which is a valued contract with no subrogation.
• The insured must not impair the insurer's recovery rights (e.g., by signing a full release with the third party).

Indemnity versus valued contracts

The reason COB and subrogation exist only on the health side is that health, medical-expense, and disability medical-reimbursement coverages are indemnity contracts — they pay to restore the insured to the pre-loss position, never to create a profit. Life insurance is a valued contract: it pays the stated face amount on death regardless of any actual economic loss, so there is nothing to coordinate and nothing to recover from a third party.

This distinction also explains why a disability income policy uses the optional Relation of Earnings clause and an overinsurance provision: paying more than the insured's actual earnings would reward staying disabled. The exam tests this as the anti-malingering rationale behind benefit caps and elimination periods.

Unfair claims settlement practices

State law layers a consumer-protection duty on top of the policy provisions. An insurer commits an unfair claims settlement practice when it misrepresents policy facts, fails to acknowledge claims promptly, denies without a reasonable investigation, offers materially less than a fair settlement, or forces the insured to sue to recover what is plainly owed.

These rules dovetail with the Time of Payment of Claims provision: once valid proof of loss is filed, the insurer must pay immediately, and recurring disability benefits must be paid at least monthly. A pattern of delay exposes the insurer to regulatory penalties even when each individual claim is eventually paid, because the standard is the frequency and intent of the conduct, not a single late check.

Working the COB Order and the Birthday Rule

Coordination of benefits enforces the indemnity principle in health insurance: combined payments from all plans can never exceed 100% of the allowable charge, so an insured cannot profit from a loss. The exam tests both the order of payment and the arithmetic.

Worked COB calculation: a procedure has a $4,000 allowable charge. The primary plan pays 80% after a $250 deductible: it pays 0.80 × ($4,000 − $250) = $3,000, leaving the member responsible for $1,000. The secondary plan then covers the remaining allowable up to 100%, paying the $1,000 still owed. Total paid = $4,000; member out-of-pocket = $0. The secondary plan never pays its full schedule on top of the primary — it fills the gap up to the allowable charge, which is the recurring exam trap.

Subrogation is the companion indemnity tool: after a health or disability plan pays a claim caused by a negligent third party, the insurer steps into the insured's shoes to recover from that party. If the insured separately sues and recovers the same medical costs, subrogation prevents a double recovery — the insurer is reimbursed from the settlement. The birthday rule rounds out the order question: for a dependent child covered by both parents, the plan of the parent whose birthday (month and day, not year) falls earlier in the calendar year is primary.

These three doctrines — COB, subrogation, and the birthday rule — all enforce the single idea that health coverage indemnifies but never enriches.