11.4 Claims, Coordination of Benefits, and Subrogation

Claims, Coordination of Benefits, and Subrogation

When an insured is covered by more than one plan—or is injured by a third party—rules exist to prevent double recovery (profiting from a loss) while still making the insured whole. Coordination of Benefits (COB) orders multiple health plans into primary and secondary payers; subrogation lets the insurer recover from a liable third party. The exam tests the Birthday Rule, the primary/secondary payment math, and the purpose of subrogation.

Coordination of Benefits (COB)

When a person is covered by two group plans, COB designates one primary (pays first, up to its limits) and one secondary (pays the remaining allowable expense, not exceeding 100% of the actual cost). Standard ordering rules:

• The plan covering the person as an employee/member is primary over the 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 (month/day, not year of birth) is primary.
• For children of divorced parents, a court decree controls; otherwise the custodial parent's plan is generally primary.

Trap: The Birthday Rule uses the earlier birthday in the year, not the older parent. If both birthdays are identical, the plan in force longer is primary.

COB is grounded in the principle of indemnity: health insurance reimburses actual loss, so a person should not collect more than they spent on covered care no matter how many plans they hold. A non-duplication clause goes one step further, letting the secondary plan reduce its payment by whatever the primary paid, sometimes to zero.

Worked COB numeric

A child incurs $1,000 in covered expenses. Both parents have group coverage.

• Father's birthday: March 12. Mother's birthday: September 4.
• Father's plan is primary (earlier birthday in the year). It pays per its schedule—say 80%, or $800.
• Mother's plan is secondary. It pays the remaining $200 allowable expense (subject to its own provisions), but total payments cannot exceed 100% of $1,000.

The family receives full reimbursement, and neither plan pays more than its share—COB's entire purpose. Without COB, both plans might pay $800 each, producing a $600 windfall the insured never lost.

How claims are paid and the COB worksheet

When two plans coordinate, the secondary plan does not simply pay its normal share. It pays only the balance of the allowable expense that the primary plan left unpaid, and never more than it would have paid as primary. Total reimbursement from both plans cannot exceed 100% of the allowable expense, so the insured is made whole but cannot profit.

Step-by-step COB worksheet (allowable expense = $1,000):

1. Determine the primary plan using the ordering rules.
2. Primary pays per its own schedule (say 80% = $800).
3. Secondary calculates what it would have paid as primary (say 70% = $700).
4. Secondary pays the lesser of (a) the unpaid balance ($200) or (b) its own normal benefit ($700). Here it pays $200.
5. The insured's out-of-pocket cost is $0; combined payments equal exactly $1,000.

Trap: if the secondary plan's normal benefit were smaller than the unpaid balance, it would pay only its smaller amount and the insured would owe the rest. Secondary never tops up beyond its own scheduled benefit.

Assignment of benefits and prompt-payment rules

Under the Payment of Claims provision, benefits are paid to the insured unless the policy allows an assignment of benefits, by which the insured directs payment straight to the provider (common with hospitals and physicians). Assignment transfers the right to collect, not ownership of the policy.

Most states layer prompt-payment (clean-claim) laws on top of the Time of Payment of Claims provision, requiring insurers to pay or deny a properly documented claim within a set window (often 30-45 days) or owe statutory interest. Failing to do so is an unfair claims settlement practice.

Worked subrogation numeric. A negligent driver injures an insured; the health plan pays $40,000 in medical bills. The insured later wins a $100,000 liability settlement. Under subrogation the plan recovers its $40,000 (subject to any make-whole or common-fund reductions for attorney costs), and the insured keeps the remaining $60,000. The plan can never recover more than the $40,000 it actually paid.

Subrogation

Subrogation is the insurer's right, after paying a claim, to step into the insured's shoes and pursue recovery from a negligent third party who caused the loss. Its purpose is to keep the insured from collecting twice—once from the insurer and again from the wrongdoer—and to place the cost on the responsible party.

Sequence:

1. A third party injures the insured.
2. The health insurer pays the insured's medical bills.
3. The insurer pursues the at-fault party (or that party's liability carrier) for reimbursement.
4. Any recovery beyond what the insurer paid is returned to the insured.

Trap: Subrogation prevents double recovery; it does not let the insurer profit—recovery is limited to amounts the insurer actually paid. It applies more often to medical/health and property claims than to life insurance, which is a valued (not indemnity) contract.

Subrogation rests on the same indemnity logic as COB: health and medical-expense coverage reimburses loss, so a recovery from the wrongdoer must offset the insurer's payout. Life insurance has no subrogation because it is a valued contract paying a fixed face amount that is not tied to actual financial loss. Many states apply a make-whole doctrine that bars the insurer from recovering until the insured has been fully compensated for the injury, and a common-fund rule requiring the insurer to share the insured's attorney fees in proportion to the amount recovered.