Life and Health Insurance · Accident and Health Insurance · 7 min read
Optional Contract Adjustments
- Distinguish how optional policy provisions protect insurers from adverse selection, duplicate coverage, and shifting risk exposures while safeguarding insured rights.
- Explain how insurers recalculate benefits or return excess premiums under the change of occupation, misstatement of age, and duplicate coverage provisions.
- Identify the operational mechanics of financial adjustments, cancellation rules, and statutory exclusions under the NAIC Uniform Individual Accident and Sickness Policy Provisions Law.
The Purpose and Rules of Optional Policy Provisions
The standard NAIC provisions separate contract requirements into twelve mandatory provisions and eleven optional provisions. The NAIC model identifies eleven optional provisions for individual accident and sickness policies subject to the model; it does not govern every type of health insurance contract. Policies subject to the applicable uniform policy provisions law must include its required provisions; permitted optional provisions address risks such as changes in occupation and overlapping coverage.
The NAIC model permits an insurer to omit its optional provisions, but applicable state law may impose different requirements, and the model does not apply to every health contract. However, if an insurer chooses to include an optional provision, it must use the standard statutory wording or substitute wording approved by the state insurance department that is at least as favorable to the insured. Optional provisions cannot be modified to make them less favorable to the insured than the standard statutory language established by law.
These optional terms establish standard procedures for handling underwriting facts that change after issue or that were reported incorrectly on the application. They also give companies a clear, consistent method for reconciling claims when an individual owns multiple insurance plans covering the identical financial loss.
Common mistakes
- Believing that an incorrect age on an application completely voids the health insurance policy. Under the NAIC model provision, the insurer adjusts the benefit to match what the paid premiums would have purchased at the correct age, rather than voiding the contract.
- Assuming an unearned premium refund is always calculated the same way. If the insurer cancels mid-term, the refund is pro rata with no penalty; if the insured cancels, the refund is typically short-rate, permitting an administrative fee retention.
- Thinking that any injury occurring while an insured is committing a crime or using non-prescribed narcotics is immediately excluded. Under the model language, the criminal conduct or substance influence must be a contributing cause of the loss.
- Confusing mandatory provisions with optional provisions. The NAIC model identifies twelve required provisions for individual accident and sickness policies subject to the model and eleven provisions an insurer may elect to include, subject to applicable state law.
Key points
- The NAIC Uniform Individual Accident and Sickness Policy Provisions Law establishes eleven optional provisions that insurers may include to address adverse selection, duplicate coverage, and altered risk exposures.
- Optional provisions used by insurers must match standard statutory wording or state-approved text that is at least as favorable to the insured.
- A change to a more hazardous job reduces benefits to what the premium would purchase, while a change to a less hazardous occupation lowers premium rates and refunds excess payments.
- Under the NAIC model misstatement of age provision, benefits are adjusted to what the premium paid would have purchased at the correct age rather than voiding the policy solely for that error; treatment of a misstatement of sex depends on applicable law and policy wording.
- Applicable other-insurance provisions can limit overlapping coverage and require a corresponding premium return; a relation of earnings provision can limit disability income benefits, while fixed-benefit coverage is not generally limited to the amount of a financial loss.
- Under the NAIC model cancellation provision, an insurer-initiated cancellation calls for a pro rata unearned premium refund, while an insured-initiated cancellation uses a short-rate calculation; applicable law and policy terms govern a particular health plan.
- Exclusions for illegal acts or intoxicant usage under NAIC model provisions require the prohibited activity or substance to be an actual contributing cause of the loss.
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