11.4 Claims, Coordination of Benefits, and Subrogation

Getting the Right Claim Paid Once

The claims provisions, coordination of benefits, and subrogation all serve one principle: indemnity - the insured should be restored to their pre-loss financial position but never profit from a loss. When a person is covered by two plans, or recovers from a negligent third party, these clauses prevent duplicate payment and route money correctly. The exam tests the order in which plans pay and the mechanics of recovery.

Coordination of Benefits (COB)

When an insured is covered by more than one group health plan, the COB provision designates one plan as primary (pays first, up to its normal benefit) and the other as secondary (pays the balance, so total payment never exceeds 100% of allowable charges). Order-of-benefit rules:

1. The plan covering the person as an employee/subscriber is primary; the plan covering them as a dependent is secondary.
2. For a child covered under both parents, the Birthday Rule applies: the plan of the parent whose birthday falls earlier in the calendar year (month and day, not year of birth) is primary.
3. If parents are divorced, a court decree controls; otherwise the custodial parent's plan is primary.

Worked COB Example

A child is covered under both parents' group plans. The father's birthday is March 12; the mother's is September 4. Because March comes earlier in the calendar year, the father's plan is primary regardless of who is older. Suppose an allowable medical bill is $1,000:

• Father's plan (primary) pays its normal benefit, say 80% = $800.
• Mother's plan (secondary) pays the remaining $200 so total reaches but does not exceed the $1,000 allowable charge.

The family is made whole, with no profit. If the secondary plan would normally have paid only $700 on its own, it still pays just $200 here - COB never pays more than the gap up to 100%.

Subrogation

Subrogation lets an insurer that has paid a claim step into the insured's legal shoes to recover from the negligent third party who caused the loss. If a driver injures your client and your client's health insurer pays the medical bills, the insurer may pursue the at-fault driver (or their liability carrier) to recoup what it paid. This prevents the insured from collecting twice - once from the health plan and again from the wrongdoer - and ultimately keeps premiums lower.

Subrogation is a feature of reimbursement (indemnity) contracts, not valued contracts. Life insurance has no subrogation because it is a valued contract paying a fixed sum, and the insured cannot be "made whole" against a third party for a life. Tie this back to the indemnity principle: health is reimbursement-based, so subrogation fits; life and most disability income are not.

Assignment, Facility of Payment, and Time of Payment

A few related claim clauses round out the topic:

• Assignment of Benefits - the insured directs the insurer to pay the provider (hospital/physician) directly.
• Facility of Payment - lets the insurer pay a relative or anyone who incurred funeral or last-illness expenses if no beneficiary is named (common in industrial/credit health).
• Time of Payment of Claims - benefits paid immediately for lump-sum losses and at stated intervals (e.g., monthly) for periodic disability income.
• Payment of Claims - benefits go to the insured; death benefits to the named beneficiary, or to the estate if none survives.

Full Order-of-Benefit-Determination Rules

Beyond the employee-first and Birthday Rule tests, COB uses a tie-breaker ladder when both plans could be primary. The standard order: (1) the plan covering the person as a non-dependent (employee/subscriber) before the plan covering them as a dependent; (2) for dependent children of married parents, the Birthday Rule; (3) for separated or divorced parents, any court decree, then the custodial parent's plan, then the custodial parent's spouse's plan, then the non-custodial parent.

When no other rule applies, the plan that has covered the person longer is primary. Active-employee coverage is also primary over COBRA or retiree coverage. These cascading rules ensure exactly one plan is identified as primary so the secondary plan can calculate its share without overpaying.

Subrogation, Reimbursement, and the Indemnity Principle

Subrogation flows directly from the principle of indemnity: because health insurance is a reimbursement (indemnity) contract, the insured may be restored but not enriched. If the insured recovers medical costs from both the health plan and the at-fault party, they would profit, so the insurer's subrogation right lets it recoup what it paid. Many policies also include a reimbursement clause requiring the insured to repay the plan from any third-party settlement they personally collect.

Contrast this with life insurance and most disability income, which are valued contracts paying a stated sum - there is no "actual loss" to measure and no third party to subrogate against, so neither subrogation nor COB applies to them. Tying the two contract types back to indemnity is a recurring exam theme that explains why duplicate health coverage is coordinated but multiple life policies all pay in full.