16.3 Claims Handling and Fraud Prevention
Key Takeaways
- Uniform health claim provisions follow the 20/15/90 sequence: notice of claim within 20 days, claim forms supplied within 15 days, written proof of loss within 90 days.
- Coordination of benefits caps total reimbursement at the actual expense; the secondary plan pays only the unpaid balance, and the birthday rule sets a dependent child's primary plan.
- Unfair claims settlement practices (e.g., failing to investigate, not settling clear-liability claims in good faith) are violations when flagrant or a general business practice — not a single isolated error.
- Fraud is classified as soft (padding a real claim) or hard (fabricating a loss); SIUs and fraud-warning statements are common controls.
- Under 18 U.S.C. 1033, anyone convicted of a felony involving dishonesty cannot work in insurance without the written consent of the state insurance commissioner.
Claims handling is the moment the insurer's promise is tested. State unfair claims settlement practices acts — modeled on the NAIC Unfair Claims Settlement Practices Act — require insurers to investigate, evaluate, and pay valid claims promptly and in good faith. Exam questions focus on the policy provisions that govern claims and on the prohibited behaviors that constitute unfair claims practices.
Claim Provisions on Health Policies
| Provision | Rule |
|---|---|
| Notice of claim | Insured must notify the insurer, typically within 20 days of a loss (or as soon as reasonably possible) |
| Claim forms | Insurer must supply forms within 15 days; if not, the insured may submit proof in any form |
| Proof of loss | Insured must furnish written proof, generally within 90 days of the loss |
| Time of payment of claims | Benefits paid immediately (or within a stated number of days) after proof of loss |
| Payment of claims | Benefits go to the insured; death benefits to the named beneficiary |
Exam Tip: Memorize the sequence 20 / 15 / 90: notice within 20 days, forms within 15 days, proof of loss within 90 days. These are uniform mandatory provisions on individual health policies.
Coordination of Benefits (COB)
When a person is covered by more than one group health plan, coordination of benefits prevents the insured from collecting more than 100% of the actual expense. One plan is primary (pays first as if no other coverage existed) and the other is secondary (pays the remaining allowable expense up to its limits).
Worked example. An insured incurs a $1,000 covered expense. The primary plan pays 80% ($800). The secondary plan, which would otherwise pay 70%, instead pays only the remaining balance.
Total expense: $1,000
Primary pays (80%): $ 800
Remaining balance: $ 200
Secondary pays: $ 200 (limited to the unpaid balance)
Insured out of pocket: $ 0
The secondary plan pays $200, not $700, because COB caps total reimbursement at the actual expense. The birthday rule typically determines which parent's plan is primary for a dependent child: the plan of the parent whose birthday (month and day) falls earlier in the year is primary.
The Claim Timeline, Specific Prohibited Practices, and Anti-Fraud Tools
Good-faith claims handling follows the required-provision clock: the insured files Notice of Claim (20 days), the insurer supplies Claim Forms (15 days), the insured submits Proof of Loss (90 days), and the insurer pays under Time of Payment of Claims. Missing these insurer deadlines, or paying late without explanation, can itself be an unfair claims practice.
Examples of prohibited unfair claims practices
| Prohibited act | Why it violates the law |
|---|---|
| Failing to acknowledge/act on claims promptly | Denies the insured timely payment |
| Not attempting a prompt, fair settlement once liability is clear | Bad-faith delay |
| Forcing insureds to sue by lowballing | Coerces litigation |
| Misrepresenting policy provisions to a claimant | Deceptive |
| No reasonable standards for prompt investigation | Arbitrary handling |
These mirror the NAIC Unfair Claims Settlement Practices Act and are enforced by the state insurance department through fines, orders, and license action.
Anti-fraud infrastructure
Insurers maintain Special Investigation Units (SIUs), file fraud warning statements on applications and claim forms, and report suspected fraud to the state's fraud bureau. Insurance fraud requires intent — a knowing material misstatement to obtain a benefit. A worked distinction the exam tests: an honest mistake on a claim form is not fraud (no intent), whereas a staged injury or inflated bill submitted knowingly is fraud, exposing the claimant to criminal penalties and the producer to license revocation if complicit.
An insured has two group plans. A $2,000 covered expense is incurred. The primary plan pays 80%. Under coordination of benefits, how much does the secondary plan pay?
Unfair Claims Settlement Practices (Prohibited)
The following acts, when committed flagrantly or with such frequency as to indicate a general business practice, are violations:
- Misrepresenting pertinent facts or policy provisions.
- Failing to acknowledge and act promptly on communications about claims.
- Failing to adopt reasonable standards for prompt investigation of claims.
- Refusing to pay claims without conducting a reasonable investigation.
- Not attempting in good faith to settle claims where liability is reasonably clear.
- Compelling insureds to litigate by offering substantially less than amounts ultimately recovered.
- Failing to provide a prompt, reasonable explanation for a denial.
Trap: A single, isolated error is generally not a statutory violation — the standard requires the conduct to occur with such frequency as to indicate a general business practice, or to be committed flagrantly.
Fraud Prevention
Insurance fraud is a deliberate deception to obtain an improper payment, committed by applicants, insureds, providers, or producers.
- Soft fraud (opportunistic): padding an otherwise legitimate claim.
- Hard fraud: deliberately fabricating a loss (faked disability, staged death).
Controls and legal backdrops tested on the exam:
| Control / Law | Purpose |
|---|---|
| Fraud warning statements | Applications/claim forms warn that fraud is a crime |
| Special Investigation Units (SIUs) | Investigate suspected fraudulent claims |
| Insurance Fraud Prevention Act / state statutes | Make insurance fraud a felony in most states |
| Federal Fraud and False Statements (18 U.S.C. 1033/1034) | Bars anyone convicted of a felony involving dishonesty from working in insurance without written consent of the regulator |
Exam Tip: Under 18 U.S.C. 1033, a person convicted of a felony involving dishonesty or breach of trust cannot engage in the business of insurance unless granted written consent by the state insurance commissioner. This is a frequently tested federal rule.
Which of the following would most clearly violate the Unfair Claims Settlement Practices Act?