11.4 Claims, Coordination of Benefits, and Subrogation

When multiple sources may pay for the same loss, insurers use coordination of benefits (COB) and subrogation to prevent the insured from profiting from a loss — the bedrock principle of indemnity in health insurance. These clauses determine who pays first, how much, and who can recover from a third party. Exam questions almost always involve dual coverage or a liable third party, so you must know the ordering rules cold.

Coordination of Benefits (COB)

COB applies when a person is covered by two or more group health plans. It establishes a primary plan (pays first, as if no other coverage existed) and a secondary plan (pays the balance up to its own limits, but never so that total payment exceeds 100% of the allowable expense).

Order-of-benefits rules

• Your own plan is primary over a plan where you are a dependent.
• For a dependent child covered under both parents, the birthday rule applies: the plan of the parent whose birthday falls earlier in the calendar year is primary (year of birth is irrelevant).
• For divorced parents, a court decree controls; otherwise the custodial parent's plan is primary.
• An active employee plan is primary over a retiree or COBRA plan.

COB worked example

Suppose a $1,000 allowable hospital bill is covered by two group plans:

Plan A pays its normal $800. Plan B, as secondary, pays the remaining $200 so total reimbursement equals the $1,000 allowable expense — not $1,600. The insured cannot collect twice; COB caps total recovery at 100% of the allowable charge.

Birthday rule trap: A father born March 3, 1980 and a mother born June 10, 1975 both cover their child. The father's plan is primary because March comes before June — the parent's year of birth (and who is older) does not matter.

Subrogation

Subrogation is the insurer's right, after paying a claim, to step into the insured's shoes and recover from a negligent third party who caused the loss. It prevents the insured from collecting twice (once from the insurer, once from the wrongdoer) and shifts the ultimate cost to the responsible party.

• Subrogation arises mainly in medical expense coverage, where benefits are paid on a reimbursement (indemnity) basis.
• The insured must not impair the insurer's subrogation rights — e.g., signing a release with the at-fault party can forfeit benefits.
• Subrogation generally does not apply to pure life insurance or fixed/valued benefits (e.g., a flat AD&D or hospital-indemnity payment), because those are not indemnity contracts and are not measured by actual expense.

Worked example: A driver's negligence injures the insured, generating a $30,000 medical bill that the health insurer pays. The insured then sues the driver and recovers $50,000, of which $30,000 was for medical costs. Through subrogation, the insurer is reimbursed its $30,000, and the insured keeps the remaining $20,000 (pain, suffering, lost wages) — the insured is made whole but does not profit on the medical portion.

Cooperation and the order of recovery

Most policies include a cooperation clause requiring the insured to help the insurer protect its subrogation rights — turning over information, refraining from settling without consent, and reimbursing the insurer from any recovery. If the insured signs a release that wipes out the insurer's claim against the third party, the insurer may reduce or deny benefits to the extent its recovery was impaired. Some states apply a made-whole doctrine, under which the insurer cannot recover until the insured has been fully compensated for all losses, which can limit how much of a partial settlement the insurer may take back.

Claim Settlement Provisions and Indemnity

The COB and subrogation clauses both flow from one idea: health insurance is a contract of indemnity for expense-based coverage, so the insured should be restored to the position before the loss — no better. Several claim provisions reinforce this:

• Payment of Claims — benefits go to the insured (or the named beneficiary for death benefits). A facility-of-payment clause lets the insurer pay up to a small sum to a relative who incurred expenses if no beneficiary survives.
• Assignment of benefits — the insured may direct payment straight to the provider; this assigns the benefit, not ownership of the policy.
• Time of Payment of Claims — once acceptable proof of loss is received, the insurer must pay promptly; periodic disability income benefits are paid at least monthly.

Fixed/valued products behave differently from expense-based ones. A hospital indemnity or fixed-benefit policy pays a flat amount per day or per event regardless of actual cost, so it is not subject to COB or subrogation — the insured may collect it on top of a major-medical reimbursement. This is why a question naming a "$300/day hospital indemnity" benefit usually has a different answer than one naming "major medical reimbursement."

Trap: COB and subrogation reduce duplicate recovery only on reimbursement/indemnity coverage. Fixed-indemnity and lump-sum AD&D benefits are paid in full and are not coordinated or subrogated.