11.4 Claims, Coordination of Benefits, and Subrogation

When a person is covered by more than one plan, or is injured by a third party, the principle of indemnity governs: health insurance reimburses actual loss but must not let the insured profit. Coordination of benefits (COB) and subrogation are the two mechanisms that enforce this, and both appear frequently on the exam.

Coordination of Benefits (COB)

COB decides which plan pays first (primary) and which pays the balance (secondary) so total payments never exceed the actual expense.

Note: The Birthday Rule compares month and day only - never the year of birth, and gender is no longer used.

COB worked example

A child is on both parents' plans. Mom's birthday is March 15; Dad's is September 22. Mom's plan is primary (earlier in the year). A $1,000 bill is paid 80% ($800) by the primary plan; the secondary plan covers up to the remaining $200, leaving the family at $0.

Subrogation

Subrogation lets the insurer "step into the shoes" of the insured and recover what it paid from the negligent third party who caused the loss. This stops the insured from collecting twice - once from the insurer and again from the at-fault party.

How subrogation flows

1. A third party negligently injures the insured.
2. The health insurer pays the medical claims.
3. The insurer acquires the insured's right of recovery against the wrongdoer.
4. The insurer recovers its outlay from the third party's settlement.
5. The insured cooperates and cannot settle without the insurer's consent.

Subrogation worked example

Paying and Assigning Claims

• Payment of Claims provision names the payee: the insured for indemnity benefits, the provider when benefits are assigned, the beneficiary for a death benefit, and a relative under a facility-of-payment clause if no beneficiary survives.
• Assignment lets the insured direct payment to a hospital or physician; expense-incurred medical benefits are commonly assignable, while disability income benefits generally are not.
• Non-duplication vs. maintenance of benefits: under non-duplication, the secondary plan pays nothing if the primary already paid what the secondary would have; under maintenance of benefits, the secondary pays what it would have paid as primary minus what the primary paid.

Trap: COB coordinates two health plans; subrogation recovers from a liable third party. Questions deliberately blur these - read for whether a second insurer or a wrongdoer is involved.

Claim Settlement Duties and Timing

The required Time of Payment of Claims provision controls speed: lump-sum benefits are paid immediately upon receipt of acceptable proof, and periodic disability benefits are paid at least monthly. Most states layer a prompt-pay standard on top, requiring clean claims to be paid within a set number of days (often 15-45) or the insurer owes interest. Slow or improper handling can violate the Unfair Claims Settlement Practices Act, which prohibits acts such as failing to acknowledge claims promptly, not adopting reasonable investigation standards, or compelling litigation by offering far less than amounts ultimately recovered.

Indemnity vs. Valued Contracts

Why do COB and subrogation exist at all? Because most health coverage is a reimbursement (indemnity) contract — it pays actual expense and the insured must not gain. By contrast, a valued contract such as an AD&D rider or a fixed hospital-indemnity plan pays a stated amount regardless of cost, so those benefits are generally not coordinated or subrogated. This is why a hospital-indemnity policy can pay $300/day on top of a major medical plan without violating indemnity.

Key Point: Coordination and subrogation apply to expense-incurred (indemnity) coverage; fixed/valued benefits like hospital indemnity and AD&D pay in addition and are not coordinated.

Order of Benefit Determination in Practice

When two plans both cover the same person, run the COB rules in order until one breaks the tie:

1. A plan with no COB clause is primary over a plan that has one.
2. The plan covering the person as an employee/member is primary over one covering them as a dependent.
3. For a dependent child of married parents, apply the Birthday Rule.
4. For a child of separated/divorced parents, a court decree controls; absent one, the custodial parent's plan is primary.
5. If still tied, the plan that has covered the person longer is primary.

Secondary-payer math

Suppose a $2,000 covered bill and the primary plan pays 80% ($1,600). A maintenance-of-benefits secondary plan pays the lesser of its normal benefit and the unpaid balance — the $400 balance — so the insured owes $0. A strict non-duplication plan pays nothing if the primary already paid what the secondary would have.

Exam Tip: Total payments from all plans can never exceed 100% of the allowable expense — any answer implying the insured profits is wrong.