11.4 Claims, Coordination of Benefits, and Subrogation

Coordination of Benefits (COB)

Coordination of Benefits is an optional group-policy provision that prevents an insured covered under two or more group plans from profiting from a loss. The combined payment from all plans cannot exceed 100% of allowable (covered) expenses.

COB establishes one plan as primary (pays first, as if no other coverage existed) and another as secondary (pays the remaining allowable balance up to its limits).

Key Point: Your own employer plan is always primary for you; a plan covering you as a dependent is secondary.

Without COB, a person with two group plans could submit the same $1,000 bill to each and collect $2,000 — a $1,000 profit on a $1,000 loss. That violates the principle of indemnity and invites fraud, so COB orders the plans and caps total payment. Additional order-of-determination rules round out the common scenarios: an active-employee plan is primary over a retiree plan, and an active plan is primary over COBRA continuation. When two plans cannot be ranked by any rule, the plan that has covered the person longer is primary.

The Birthday Rule

When a dependent child is covered under both parents' plans, the Birthday Rule determines which is primary: the plan of the parent whose birthday falls earlier in the calendar year (month and day only — the birth year is irrelevant).

Worked example: The mother's birthday is March 12, 1985 and the father's is June 30, 1980. March precedes June, so the mother's plan is primary even though the father is older. If both parents share the same birthday, the plan in force longer is primary. For divorced or separated parents, a court decree controls; absent a decree, the custodial parent's plan is primary, then the custodial parent's spouse, then the non-custodial parent.

Worked COB calculation: An insured incurs a $1,000 covered expense. Plan A (primary) pays 80% = $800. Plan B (secondary) then pays the unpaid allowable balance, $1,000 - $800 = $200, so the insured pays $0. The combined payment never exceeds the actual bill — COB caps total payment at 100% of covered expense.

Trap: The earlier year of birth does not matter. Only the month and day of the birthday decide order.

Subrogation

Subrogation is the insurer's right, after paying a claim, to step into the insured's shoes and recover that payment from a negligent third party who caused the loss. It enforces the principle of indemnity by preventing double recovery — the insured cannot keep both the insurer's payment and a settlement from the wrongdoer for the same expense.

Example: An insured injured by a negligent driver receives $20,000 in medical benefits from her health insurer, then sues the driver and recovers $20,000. Through subrogation, the health insurer is reimbursed from that recovery. Subrogation applies to the insurer's claim payment, not to amounts exceeding what was paid.

Crucially, subrogation rests on the principle of indemnity and therefore applies only to expense-incurred (reimbursement) coverages such as medical expense insurance. It does not apply to valued contracts — life insurance or fixed-indemnity plans that pay a stated sum regardless of actual cost. A classic trap asks whether a life insurer can subrogate against the wrongdoer who caused the insured's death; it cannot, because life insurance is a valued contract, not a contract of indemnity.

Assignment and Fair Claims Handling

Assignment of benefits lets the insured direct claim payment to a third party — most often a hospital or physician. It transfers only the right to receive payment, not policy ownership or control. A separate assignment of the policy (transferring ownership) is a different act used mainly in life insurance.

Claims must be handled fairly. Unfair claims settlement practices prohibited by state law include: failing to acknowledge claims promptly, not adopting reasonable investigation standards, denying claims without a reasonable basis, and forcing insureds to sue by offering far less than amounts ultimately recovered. Patterns of such conduct expose the insurer to regulatory penalties.

Exam anchor: Assignment of benefits routes payment to a provider; it is not a change of ownership.

Tie the three mechanics together by what each prevents or enables. Coordination of benefits prevents collecting from two plans more than the loss is worth. Subrogation prevents collecting from both the insurer and the wrongdoer for the same loss. Assignment of benefits simply streamlines payment by sending the check straight to the provider so the insured need not pay out of pocket and seek reimbursement.

All three operate against the backdrop of unfair-claims-practices law, which obligates the insurer to investigate promptly, communicate decisions, and pay legitimate claims without forcing litigation — failures that, when habitual, draw regulatory fines.