11.4 Claims, Coordination of Benefits, and Subrogation

When a loss occurs, the claims provisions govern who gets paid and when, coordination of benefits (COB) prevents an insured from collecting more than 100% of expenses across multiple plans, and subrogation lets an insurer recover from a negligent third party. These concepts rest on the principle of indemnity — health expense insurance reimburses actual loss and is not meant to create a profit.

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Claim Settlement Basics

• Payment of Claims runs to the insured; for death benefits, to the named beneficiary; medical expense benefits may be assigned directly to the provider.
• Time of Payment of Claims requires the insurer to pay immediately upon receipt of proof; periodic (disability) benefits at least monthly.
• A facility-of-payment clause lets the insurer pay a relative or whoever incurred expenses if no beneficiary survives — commonly up to a small stated amount.

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Coordination of Benefits (COB)

COB applies when a person is covered by more than one group plan. One plan is primary (pays first, as if no other coverage exists) and the other is secondary (pays the remaining allowable expense, up to its own limits). Total recovery cannot exceed 100% of allowable expenses.

Order-of-benefit-determination rules:

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Worked numeric: COB

An insured incurs $10,000 in allowable hospital charges. Plan A (primary) has an 80% coinsurance after a $500 deductible. Plan B (secondary) would pay 100%.

• Plan A pays: ($10,000 − $500) × 80% = $9,500 × 0.80 = $7,600.
• Remaining allowable: $10,000 − $7,600 = $2,400.
• Plan B (secondary) pays: the remaining $2,400, bringing total payments to $10,000 (100% of allowable, no more).
• The insured's out-of-pocket from Plan A ($2,400) is wiped out by Plan B — but the insured never collects more than the $10,000 actually incurred.

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Subrogation

Subrogation transfers the insured's right to recover from a negligent third party to the insurer, after the insurer has paid the claim. It prevents the insured from being paid twice — once by the insurer and again by the at-fault party — and supports indemnity.

• Example: a health insurer pays $40,000 for injuries from a car crash caused by another driver. The insurer may subrogate against that driver's auto liability insurer to recover the $40,000.
• Subrogation applies to expense-reimbursement (indemnity) coverage. It generally does not apply to valued/stated-amount coverages such as life insurance or fixed-benefit accident policies, because those are not reimbursement contracts.

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Comparison table

Trap: Subrogation and COB both enforce indemnity, but they are different. COB coordinates among the insured's own plans; subrogation pursues an outside, at-fault party. And neither applies to life insurance, which is a valued contract paying a stated face amount regardless of other recoveries.

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The Indemnity Backbone

Everything in this section traces back to a single idea: medical expense insurance is a contract of indemnity, not a wager. The insured may be made whole but not enriched. COB, subrogation, the average-earnings clause, and "other insurance" provisions are all anti-over-insurance devices serving that principle. Life insurance and fixed-benefit accident policies are valued contracts — they pay a stated sum on the event, so coordination and subrogation simply do not attach.

Applying the order-of-benefit rules

The order rules are mechanical once memorized, and the exam likes edge cases:

• A working person covered by their own employer plan and as a spouse on another plan: their own employee coverage is primary.
• A child of married parents covered by both: the birthday rule — earlier birthday in the calendar year is primary (the month and day, not the older parent).
• A child of divorced parents: the parent with custody or named in the court order is primary; absent that, the custodial parent's plan leads.
• A retiree with both an active-employment plan and a retiree plan: active coverage is primary.

When the secondary plan pays, it pays only the remaining allowable expense up to what it would have paid on its own — it never tops the insured up beyond 100% of incurred cost, and it is not obligated to exceed its own benefit ceiling.

Subrogation mechanics and limits

Subrogation arises only after the insurer has actually paid, and only against a third party legally responsible for the loss. The insurer steps into the insured's legal shoes, which means it inherits the insured's defenses and cannot recover more than the insured could have. If the insured settles with the at-fault party and signs away the right to sue without the insurer's consent, the insured may forfeit benefits or owe reimbursement.

Assignment versus payment of claims

Finally, separate assignment from the payment of claims provision. Payment of claims dictates to whom benefits are legally owed (insured, beneficiary, or estate). Assignment is the insured's voluntary transfer of the right to receive payment — most often to a hospital or physician so the provider is paid directly. Assignment changes the payee, not the contract.