16.3 Claims Handling and Fraud Prevention
Key Takeaways
- Uniform claim provisions set fixed deadlines: Notice of Claim 20 days, Proof of Loss 90 days, claim forms furnished within 15 days, and a 60-day/3-year window for legal action.
- Coordination of Benefits prevents collecting more than 100% of actual expense; the birthday rule (earlier calendar birthday) sets a child's primary plan.
- The elimination period is a time deductible with no benefits paid during it; benefits are usually paid in arrears.
- The Unfair Claims Settlement Practices Act targets acts done with enough frequency to be a general business practice, not isolated incidents.
- Federal law (18 U.S.C. 1033/1034) bars felons convicted of dishonesty from insurance work without written consent and criminalizes interstate insurance fraud.
Claims handling is where the insurer fulfills its promise. The policy's standard provisions set strict timelines and proof requirements, and unfair claims practices laws prohibit the insurer from delaying or underpaying valid claims. Producers must understand the mechanics because they often help insureds file and explain claim decisions.
Standard Claim Provisions (Uniform Provisions)
Health policies contain uniform provisions with set deadlines. Memorize the numbers:
| Provision | Timeline |
|---|---|
| Notice of Claim | Within 20 days of loss (or as soon as reasonably possible) |
| Claim Forms | Insurer sends forms within 15 days of notice; if not, insured may submit proof in any form |
| Proof of Loss | Within 90 days of loss (or as soon as reasonably possible) |
| Time of Payment of Claims | Immediately / promptly upon proof; periodic disability benefits at least monthly |
| Legal Actions | No suit before 60 days after proof; none after 3 years (some states use a different period) |
Exam trap: Notice of Claim is 20 days; Proof of Loss is 90 days. Do not swap them. The insurer's duty to furnish claim forms is 15 days.
Coordination of Benefits (COB)
When a person is covered by more than one health plan, the Coordination of Benefits (COB) provision prevents the insured from collecting more than 100% of the actual expense. One plan is primary (pays first, as if no other coverage existed) and the other is secondary (pays remaining eligible expenses up to its limits).
The birthday rule decides primary coverage for a child covered by both parents: the plan of the parent whose birthday falls earlier in the calendar year (month and day, not year of birth) is primary.
Worked COB Example
A covered procedure costs $2,000.
- Plan A (primary) pays 80%: 0.80 x $2,000 = $1,600
- Remaining eligible expense = $2,000 - $1,600 = $400
- Plan B (secondary) covers the remaining $400 (up to its limits)
- Total paid = $1,600 + $400 = $2,000 — the insured nets $0 out of pocket, but never more than the $2,000 actual cost.
COB exists to prevent overinsurance and the moral hazard of profiting from a loss — a core principle of indemnity.
COB Ordering Rules to Memorize
- A plan with no COB provision is always primary over one that has a COB provision.
- For an employee, the plan covering the person as the employee is primary over the plan covering the same person as a dependent.
- For a child of separated/divorced parents, a court decree controls; otherwise the birthday rule applies.
- For active vs. retired/laid-off, the active-employee plan is generally primary.
Elimination Periods and Disability Claims
Disability income and LTC claims hinge on the elimination (waiting) period — the days at the start of a disability before benefits begin. It is a time deductible, not a dollar deductible, and there is no benefit paid during it.
Worked Elimination-Period Example
A DI policy pays $3,000/month with a 90-day elimination period and a 2-year benefit period. The insured is totally disabled for 8 months, then recovers.
- First 90 days (~3 months): no benefit (elimination period)
- Remaining benefit months = 8 - 3 = 5 months
- Benefit paid = 5 x $3,000 = $15,000
Benefits are typically paid in arrears (after each month of disability).
Fraud Prevention and Unfair Claims Practices
Insurance fraud raises everyone's premiums, so federal and state law attack it from both sides.
- Insured-side fraud: false claims, staged losses, inflated bills, misstatements on application.
- Insurer-side abuse: the Unfair Claims Settlement Practices Act prohibits unreasonable delay, failing to acknowledge claims promptly, not attempting good-faith settlement of clear claims, and forcing insureds to sue by offering far less than owed.
- The federal Fraud and False Statements law (18 U.S.C. 1033/1034) bars anyone convicted of a felony involving dishonesty from working in insurance without written consent, and makes interstate insurance fraud a federal crime.
Exam trap: A single delayed claim is not necessarily an unfair practice; the law targets acts committed with such frequency as to indicate a general business practice.
Common Unfair Claims Acts to Recognize
The exam lists specific prohibited acts. Be able to identify them in a scenario:
- Misrepresenting pertinent facts or policy provisions relating to a claim.
- Failing to acknowledge and act promptly on communications about claims.
- Failing to adopt reasonable standards for prompt investigation.
- Refusing to pay claims without a reasonable investigation.
- Not attempting in good faith to settle a claim where liability is reasonably clear.
- Compelling insureds to litigate by offering substantially less than amounts ultimately recovered.
Claim Payment and the Facility-of-Payment Clause
On a life claim, the insurer pays the named beneficiary. If no beneficiary survives, proceeds go to the estate. Some group and industrial policies include a facility-of-payment clause allowing the insurer to pay a relative or whoever incurred funeral or last-illness expenses when no beneficiary is named — a useful efficiency that the exam may test.
Spendthrift and Interpleader
A spendthrift clause protects settlement proceeds left with the insurer (under a settlement option) from the beneficiary's creditors before payout. When two parties both claim the death benefit (for example, an ex-spouse and a current spouse), the insurer may file an interpleader, deposit the proceeds with a court, and let the court decide — protecting the insurer from paying twice. These tools show that claims handling is as much about paying the right party as paying promptly.
A health insured suffers a covered loss. Under the standard uniform provisions, Notice of Claim must generally be given within ____ days and written Proof of Loss within ____ days of the loss.
A child is covered under both parents' health plans. The father's birthday is March 3 and the mother's is July 12. Under the birthday rule, the primary plan is: