16.3 Claims Handling and Fraud Prevention

The Claims Process and Required Provisions

Health and life claims follow a sequence governed by the Uniform Provisions found in health policies and by life policy settlement rules. The mandatory health provisions the exam tests by their day-count triggers:

Trap: If the insurer fails to furnish claim forms within 15 days, the claimant satisfies the proof-of-loss requirement simply by submitting written proof of the nature and extent of the loss.

Two more provisions guard the claimant. The Legal Actions provision bars a suit against the insurer until 60 days after proof of loss, and after 3 years (in many states) no suit may be brought. The Physical Examination and Autopsy provision lets the insurer examine the insured during a pending claim, and require an autopsy where not prohibited by law, at its own expense. These protect against both premature litigation and fraudulent claims.

Coordination of Benefits (COB) — Worked Example

When a person is covered by more than one health plan, coordination of benefits prevents the insured from collecting more than 100% of the actual expense. One plan is primary (pays first up to its limits) and the other is secondary (pays the remaining allowable amount).

Worked example: An insured incurs a covered hospital bill of $8,000. The primary plan pays 80% of allowable, or $6,400. The remaining $1,600 is submitted to the secondary plan, which under COB pays the balance up to what it would have paid. Total reimbursement equals the $8,000 expense — never more.

For dependent children covered by both parents, the birthday rule determines the primary plan: the parent whose birthday (month and day, not year) falls earlier in the calendar year provides primary coverage.

COB also defines order among other coverages. For an active employee, the employer group plan is primary over a retiree or COBRA plan, and over coverage as a dependent on a spouse's plan. A government program such as Medicaid is the payer of last resort, paying only after all other coverage. The goal throughout is the same: the insured is made whole for the actual covered expense but is never permitted to profit by stacking benefits beyond 100% of the loss, consistent with the principle of indemnity.

Disability Claims and the Elimination Period

Disability income claims show how the elimination period delays — and reduces — benefit payments. The elimination period is a deductible measured in days; no benefits accrue during it.

Worked example: A policy pays $3,000/month with a 90-day elimination period and a 2-year benefit period. The insured is disabled for 5 months (about 150 days). Benefits are payable only for the days after the elimination period: roughly 60 days, or about 2 months, totaling about $6,000. The first 90 days pay nothing. A longer elimination period lowers premium because the insurer pays fewer claims and avoids short-duration disabilities.

Because disability benefits are typically paid monthly in arrears, the first check generally arrives about 30 days after the elimination period ends. Note also the recurrent disability provision: if the insured returns to work but the same disability recurs within a stated window (often 6 months), it is treated as a continuation of the original claim, so a new elimination period is not imposed. Exam items test whether a new or continued elimination period applies — the recurrent-disability window is the deciding fact.

Fraud Prevention and Federal Law

Insurance fraud is a deliberate deception to obtain an unfair gain — by applicants (false statements on applications), claimants (staged or inflated claims), or producers (premium theft, fictitious policies). Controls and laws the exam tests:

• Fraud and False Statements (18 U.S.C. § 1033/1034): It is a federal crime for anyone convicted of a felony involving dishonesty to work in insurance affecting interstate commerce without written consent from the state regulator. Penalties include fines and imprisonment.
• Contestable period: A life policy is contestable for the first 2 years; after that the insurer cannot contest for misstatements except in cases of outright fraud (where state law allows) or non-payment.
• Material misrepresentation vs. fraud: A misstatement is material if it would have changed underwriting; proving intent to deceive elevates it to fraud.
• SIU and red flags: Insurers maintain Special Investigation Units; red flags include altered receipts, claims soon after issue, and reluctance to provide documentation.

Trap: Under §1033, a producer with a disqualifying felony cannot simply disclose it — they need written consent from the regulator to remain in the business.

The Fraud and Abuse Control Program under HIPAA criminalizes health-care fraud against any benefit program, and the NAIC Insurance Fraud Prevention Model Act is the template many states follow to make insurance fraud a specific crime, grant insurers immunity for good-faith fraud reporting, and require anti-fraud plans. For producers, the practical duty is concrete: report suspected fraud through the insurer's SIU, never participate in inflating a claim or backdating an application, and recognize that even passive cooperation in a fraudulent scheme can trigger license revocation and federal prosecution.