16.3 Claims Handling and Fraud Prevention
Key Takeaways
- Standard health provisions set timing: notice within 20 days, claim forms within 15 days, proof of loss within 90 days, and a 3-year limit on legal actions.
- After 2 years, incontestability bars contesting for misrepresentation, and the suicide clause limits payment to a premium refund only within the first 2 years.
- Misstatement of age or sex adjusts the benefit to what the premium would have bought at the correct age/sex; it does not void the claim.
- Coordination of benefits caps total payment at 100% of the loss, with the primary plan paying first and the secondary plan paying the balance.
- Unfair claims settlement violations require a general business practice (pattern), and insurers must investigate and report suspected fraud.
Once a policy is in force, the contract's claim provisions control how and when benefits are paid. The National exam draws heavily on the standard Uniform Provisions for health policies, the incontestability and suicide clauses for life, and the Unfair Claims Settlement Practices rules every state has adopted from the NAIC model.
Standard Health Claim Provisions
| Provision | Rule (typical timing) |
|---|---|
| Notice of claim | Written notice within 20 days of loss |
| Claim forms | Insurer sends forms within 15 days of notice |
| Proof of loss | Submitted within 90 days of loss (or as soon as reasonably possible) |
| Time of payment of claims | Benefits paid immediately (or within the state-set period) after proof |
| Legal actions | No suit for 60 days after proof; none after 3 years |
Life Claim Provisions
- Incontestability — after the policy has been in force 2 years, the insurer cannot contest the policy for material misrepresentation (except non-payment of premium). A claim in year 3 generally must be paid even if the application contained an innocent misstatement. Fraud may remain contestable in some jurisdictions, but the exam default is the 2-year bar.
- Suicide clause — death by suicide within the first 2 years limits the insurer to a refund of premiums, not the death benefit. After 2 years, full benefit is paid.
- Misstatement of age/sex — the benefit is adjusted to what the premium would have purchased at the correct age/sex; the claim is not denied.
- Grace period — typically 30 or 31 days to pay an overdue premium with coverage continuing; a death in the grace period pays the benefit minus the unpaid premium.
- Reinstatement — a lapsed policy may be restored within (often) 3 years with proof of insurability and back premiums; a new 2-year contestable period applies to statements in the reinstatement application.
Worked Example: Misstatement of Age
An insured understated his age by 5 years. The premium paid would have bought $95,000 of coverage at his true age, but the policy face is $100,000. At death, the insurer pays the adjusted $95,000, not the full face and not zero. The exam trap is denying the claim outright—age/sex misstatement adjusts, it does not void.
Coordination of Benefits (COB)
When a person is covered by two group health plans, COB prevents paying more than 100% of the loss. One plan is primary (pays first to its limits) and the other is secondary (pays the remaining allowable amount).
Example: A $1,000 covered expense. The primary plan pays $800. The secondary plan pays the remaining $200 (up to its allowable amount), so total reimbursement is $1,000—never more. The birthday rule decides which parent's plan is primary for a dependent child (the plan of the parent whose birthday falls earlier in the calendar year, not the older parent).
For an employee, the plan covering the person as an active employee is primary over a plan covering them as a dependent or retiree. COB applies to expense-reimbursement health plans; it does not apply to fixed-benefit policies such as disability income or a hospital indemnity policy that pays a flat daily amount regardless of other coverage.
Fraud Prevention and Unfair Claims Practices
Insurers and producers must investigate and pay valid claims promptly and fairly. The NAIC Unfair Claims Settlement Practices model prohibits a pattern of:
- Misrepresenting policy provisions relating to a claim
- Failing to acknowledge or act promptly on claim communications
- Failing to adopt reasonable standards for prompt investigation
- Not attempting a good-faith, prompt, equitable settlement once liability is clear
- Compelling insureds to litigate by offering substantially less than the amount ultimately recovered
Exam Tip: A single honest mistake is usually not an unfair claims practice—the model targets a general business practice (a pattern) of the listed behaviors.
Insurance fraud (false claims, faked deaths, padded losses) is a crime; many states require insurers to maintain a Special Investigations Unit (SIU) and to report suspected fraud. Producers who knowingly submit false claims or applications face license revocation and criminal penalties.
The federal Fraud and False Statements statute (18 U.S.C. 1033/1034) bars anyone convicted of a felony involving dishonesty or breach of trust from working in insurance without written consent from the regulator. The exam may frame this as a reason a felon cannot hold a producer license.
A distinct concept is the payment of claims provision, which directs proceeds: benefits go to the named beneficiary for death claims and to the insured for health benefits, unless an assignment or facility-of-payment clause applies. The physical exam and autopsy provision lets the insurer examine the insured (at its expense) and order an autopsy where not prohibited by law while a claim is pending.
Death Claim Settlement Options
When a life death benefit is payable, the beneficiary chooses how to receive it. The lump-sum payout is income-tax-free. Other settlement options spread payments, and any interest earned is taxable:
- Interest only — insurer holds the proceeds and pays interest.
- Fixed period — equal payments over a set number of years.
- Fixed amount — set dollar amount until proceeds plus interest are exhausted.
- Life income — payments for the beneficiary's lifetime, based on age and gender.
Exam Tip: Death proceeds paid as a lump sum are income-tax-free; only the interest portion of installment options is taxable. A trap answer taxes the entire installment payment.
An insured dies in the third policy year. The insurer discovers the application contained a material misstatement about a prior health condition. Under the incontestability clause, the insurer:
A patient incurs $1,000 in covered medical expenses and is covered by two group plans. The primary plan pays $700. Under coordination of benefits, the secondary plan will pay: