11.4 Claims, Coordination of Benefits, and Subrogation

Paying Claims Without Over-Indemnifying

Health insurance is built on the principle of indemnity — the insured should be restored to their pre-loss financial position but not profit from a loss. Three mechanisms enforce this when more than one source could pay: the claims-handling process, Coordination of Benefits (COB), and subrogation. The exam tests the claim timeline, the COB primary/secondary rules (especially the "birthday rule"), and the difference between COB and subrogation.

The Claims Process

Claim handling mirrors the uniform provisions but adds operational steps:

1. Notice of claim — within 20 days (or as soon as reasonably possible).
2. Claim forms — insurer sends within 15 days; if not, a written statement suffices.
3. Proof of loss — within 90 days.
4. Time of payment — paid immediately for lump sums; periodic benefits at least monthly.
5. Payment of claims — to the insured (death benefit to beneficiary).

States impose unfair claims settlement rules: insurers must acknowledge claims promptly, investigate reasonably, and pay or deny within set windows. Failing to do so, or denying without a reasonable basis, is an unfair trade practice subject to penalties.

Coordination of Benefits (COB)

When a person is covered by two group plans, COB prevents collecting more than 100% of the actual expense. One plan is primary (pays first, up to its normal benefit) and the other is secondary (pays the balance up to its own limit).

Order-of-determination rules:

• The plan covering the person as an employee/member is primary over the plan covering them as a dependent.
• 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/day, not year of birth) is primary.
• For divorced parents, a court decree controls; absent that, the custodial parent's plan is usually primary.
• A plan covering an active employee is primary over one covering them as retired/laid-off.

Worked Example — COB and the Birthday Rule

A child is covered under both parents' group plans. The father's birthday is March 3; the mother's is September 12. A claim of $1,000 is incurred. The father's plan covers 80% of allowed charges; the mother's covers 90%.

• Primary plan = father's, because his birthday (March 3) falls earlier in the calendar year. It pays 80% × $1,000 = $800.
• Secondary plan = mother's. It pays the remaining $200, since total reimbursement is capped at the $1,000 actual expense — the family is reimbursed in full but does not profit.
• Without COB, both plans might each pay their share and the family could collect $800 + $900 = $1,700 on a $1,000 loss, violating indemnity. COB exists to stop exactly that.

COB Carve-Backs and Excess Provisions

Two refinements appear on harder COB items. First, secondary plans often use a non-duplication (carve-out) rule rather than paying the full remaining balance: the secondary pays only the amount, if any, by which its own normal benefit exceeds what the primary paid. If the primary paid 80% and the secondary would also have paid 80%, the secondary owes nothing — there is no extra balance under its own schedule.

Second, some individual policies carry an excess (other-insurance) provision that pays only after all other coverage is exhausted. Read whether the item describes group COB or an individual excess clause — they yield different numbers.

Subrogation vs Coordination of Benefits

Subrogation is the insurer's right, after paying a claim, to step into the insured's shoes and recover from a liable third party. If a negligent driver injures your insured and the health insurer pays $20,000 in medical bills, subrogation lets the insurer recoup that $20,000 from the at-fault driver (or their liability insurer). The insured cannot collect twice — once from the health plan and again, for the same bills, from the tortfeasor.

Both uphold indemnity by preventing the insured from profiting from a single loss.

Assignment, Facility of Payment, and Time of Payment

Payment mechanics generate several exam items:

• Payment of Claims directs benefits to the insured; if the insured dies, any unpaid benefit goes to the beneficiary, or absent one, to the estate.
• A Facility of Payment clause lets the insurer pay a small capped amount to a relative who appears equitably entitled when no beneficiary is named.
• Assignment lets the insured direct payment to a provider (assignment of benefits), but it transfers the right to the proceeds, not ownership of the policy.
• Time of Payment of Claims requires lump-sum benefits to be paid immediately on proof, and periodic indemnities (disability income) at least monthly. Unreasonable delay triggers interest and unfair-claims penalties.

Unfair Claims Settlement Practices

State versions of the NAIC Unfair Claims Settlement Practices Act make it a violation to do any of the following as a general business practice:

• Misrepresent pertinent facts or policy provisions.
• Fail to acknowledge and act promptly on communications about claims.
• Fail to adopt reasonable standards for prompt investigation.
• Refuse to pay claims without a reasonable investigation.
• Compel insureds to litigate by offering substantially less than amounts ultimately recovered.
• Deny a claim without a reasonable basis or fail to provide a prompt, written explanation of a denial.

A single inadvertent error is generally not a violation; the law targets a pattern. Penalties include fines, license suspension, and required restitution.