16.3 Claims Handling and Fraud Prevention

Claims Handling and Fraud Prevention

The claims function is the insurer's promise in action. Health and life policies contain mandatory provisions controlling how and when claims are filed, proven, and paid. Most are drawn from the Uniform Individual Accident and Sickness Policy Provision Law (UPPL), which states adopted to standardize health policy language.

Claims handling is also where unfair practices laws bite hardest. The Unfair Claims Settlement Practices Act prohibits insurers from misrepresenting policy provisions, failing to act promptly on communications, failing to adopt reasonable claim standards, and forcing insureds to litigate by offering far less than the amount due.

Mandatory Health Claim Provisions and Timelines

The UPPL sets the claim clock on individual health policies:

Trap: notice = 20 days, forms furnished = 15 days, proof of loss = 90 days. These three numbers are heavily tested and easily confused.

Worked Example: Coordination of Benefits (COB)

When a person is covered by two group health plans, the coordination of benefits 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.

Suppose a $2,000 covered hospital bill. The primary plan pays $1,500 (after its deductible/coinsurance). The secondary plan would normally pay $1,400 on its own, but COB limits total reimbursement to the $2,000 actual cost. The secondary therefore pays only $2,000 - $1,500 = $500. The insured is made whole but does not profit — consistent with the principle of indemnity.

Disability Claims and Elimination Periods

Disability income claims hinge on the elimination (waiting) period — the time after disability begins before benefits accrue. It functions like a time deductible and is not retroactively paid.

Example: a policy pays $3,000/month with a 90-day elimination period and benefits payable monthly in arrears. The insured is disabled for 7 months. No benefit accrues during the first 90 days (3 months). Benefits accrue for months 4-7 = 4 months x $3,000 = $12,000. Because benefits pay in arrears, the first check arrives roughly 30 days after the elimination period ends. A longer elimination period lowers the premium.

Proof, Subrogation, and Assignment of Benefits

A claimant must submit proof of loss on the insurer's forms (or in their own words if forms are not furnished in time). For health claims, the insured may use an assignment of benefits so the insurer pays the provider directly; for life claims, the named beneficiary files a claim with a certified death certificate.

In medical-expense coverage, subrogation lets the insurer recover what it paid from a negligent third party (for example, an at-fault driver), preventing the insured from collecting twice for the same injury. Life insurance has no subrogation because it is a valued contract, not a contract of indemnity — the face amount is paid regardless of fault or actual loss.

Unfair Claims Settlement Practices

The NAIC Unfair Claims Settlement Practices Act lists conduct that becomes a violation when committed flagrantly or as a general business practice. Tested examples include:

• Misrepresenting pertinent facts or policy provisions.
• Failing to acknowledge and act promptly on claim communications.
• Refusing to pay without conducting a reasonable investigation.
• Not attempting a prompt, fair, equitable settlement once liability is clear.
• Compelling insureds to sue by offering substantially less than amounts ultimately recovered.

These duties run to the insurer, but producers who handle claims paperwork must avoid aiding any of them. Prompt, documented, good-faith handling is both the legal standard and the practical way to retain policyholders.

Fraud, Rescission, and the Contestable Period

During the 2-year contestable period, an insurer may rescind a life policy for a material misrepresentation on the application — one that, if known, would have changed the underwriting decision. After 2 years, the incontestability clause bars contesting the policy except for nonpayment of premium and, in most states, fraud or misstatement of age.

Insurance fraud (intentional deception for gain — staged losses, faked disabilities, inflated claims) is a crime. Producers must report suspected fraud; the federal Fraud and False Statements statute (18 U.S.C. 1033/1034) bars persons convicted of a felony involving dishonesty from working in insurance without written consent. Trap: an innocent misstatement is not fraud, but a material one can still void the contract within the contestable period.