UK: Permanent Health Insurance "PHI" Schemes – The Problem Areas

Last Updated: 24 July 2006
Article by Linda Farrell


PHI cover is a type of insurance that provides a replacement income for employees during long-term sickness absence. Although it can be an invaluable benefit for an employee, problems can arise for the unwary employer. An important point to bear in mind is there are 2 different contracts involved: employer–employee and employer–insurer. Any limitations or exclusions in the PHI policy will not be binding on the employee unless they have been drawn to the employee’s attention and form part of the contract of employment. In addition, the employer’s ability to dismiss an employee who is in receipt of (or may be entitled to) PHI benefits is restricted. There have been a number of cases in this area and these are noted below. However, in summary, the main points that can be distilled from these authorities are as follows:


When it may be safe to dismiss an employee in receipt of PHI benefits

  • Where the employee is guilty of gross misconduct or repudiatory breach of contract;
  • Where the employee is genuinely redundant;
  • Where there is some other "good cause", e.g. the fact that the insurer has declined to meet the claim, or has discontinued benefits, unless due to the fault of the employer.

When it is unsafe to dismiss an employee in receipt of PHI benefits

  • Where the reason, or principal reason, for the dismissal is related to the employee’s ill health or absence from work due to ill health.

The contractual position

  • There should be no inconsistencies between the contract of employment and the policy cover.
  • Entitlement to benefits should be subject to the rules of the relevant scheme and conditional on the employee satisfying any applicable requirements of the insurers.
  • Any limitations or exclusions in cover should be brought to the attention of employees and form part of the contract of employment.
  • The employer’s obligation to provide PHI benefits should be excluded in circumstances where the insurer considers that the employee is not, or is no longer, eligible for benefits and/or discontinues payment and it should also be made clear that the employee shall not be entitled to any compensation by reference to the benefits he might have received but for the decision not to provide, or to discontinue, cover.

The decided cases

  • Where receipt of benefits under a PHI policy is dependent on the employee remaining in employment, a term will be implied into the contract of employment that the employer will not dismiss the employee, save for a cause unrelated to ill health, where the effect would be to deprive the employee of his right to benefits under the policy (Aspden -v- Webbs Poultry and Meat Group 1996).
  • In Briscoe –v- Lubrizol Ltd 2002 the employee’s claim was rejected by the PHI insurers but the employer continued to support his efforts to be accepted for benefit. The employer warned the employee that if his condition did not improve and his claim continued to be unacceptable to the insurers, then it would have to consider terminating his employment. Once it became clear that the insurers would not meet the claim, the employers tried to meet Mr Briscoe but their efforts were unsuccessful and his employment was terminated. The Court of Appeal held that, although an employer could not terminate employment as a means to remove the employee’s entitlement to disablement benefit, it was entitled to do so where there was "good cause" such as a repudiatory breach. Mr Briscoe’s actions in failing to attend the meeting or to respond in any way to his employer’s correspondence were "wilful" and "undermined the trust and confidence inherent in his contract of employment". The employers were entitled to treat such actions as a repudiatory breach.
  • A contract of employment will often state that the right to receive benefits under a PHI policy is "subject to the terms of the policy". However, where the policy incorporates limitations or exclusions on the right to receive benefits (e.g. disentitling the employee to continuing benefits on leaving service), the employer will not be able to rely on such limitations against the employee unless the employee was made aware of them and they formed part of his contract of employment (Villella -v- MFI Furniture Centres 1999).
  • In Jowitt -v- Pioneer Technology 2002, the staff handbook stated that PHI cover was available where the employee was "unable to work". On the other hand, the insurance policy provided cover only where an employee was disabled from "any" work. The EAT took the view that both parties must have understood that if an employee had a long-term disability, his benefit entitlement would arise not if he was unable to do any work but simply if he was unable to do the job he was employed to do. In contrast, in Briscoe, disablement was defined in the employee handbook as inability to follow "any occupation" whereas in the PHI policy it was inability to follow the employee’s "normal occupation". The Court of Appeal held that the intention of the parties was that the employee would receive the benefits of the PHI scheme as set out in the insurance policy.
  • In Marlow -v- East Thames Housing Group 2002, an employee brought a claim against her employers when they ceased paying benefits to her after the insurers ceased making payments to them (on the basis of their view that the employee was no longer disabled). The employee was successful in obtaining an order from the High Court that the employers were contractually bound, as part of their general duty of trust and confidence or good faith, to take all reasonable steps to procure the benefit from the insurers. The Court added that if the employee provided an indemnity against costs, the pursuit of litigation would be a reasonable step to take, unless the prospects of success were very poor.
  • In Napier -v- UNUM 1996, the insurers disputed the employee’s entitlement to continuing benefit on the grounds that he was not "totally unable to follow his occupation by reason of sickness". The insurers contended that, as the policy required them to pay only "on proof satisfactory to them", their view of the employee’s condition was conclusive provided it was made in good faith. The High Court disagreed and held that the obligation to provide proof satisfactory to the insurers was only a vouching provision and was not the same as a stipulation that the insurer’s decision to reject an adequately vouched claim could not be disputed in the Courts unless on grounds of bad faith. It was for the Court to decide whether the employee was "totally unable to follow his occupation by reason of sickness".
  • In Walton -v- Airtours and Sun Life 2002, the employee was an airline pilot who became ill with chronic fatigue syndrome. Under his contract of employment he was entitled to benefits under the PHI policy if he was "unable to follow any occupation". Although he was unable to continue flying planes, the evidence from medical advisers instructed by Mr Walton and Sun Life was that he was medically fit to undertake light sedentary work on a part-time basis provided such work was introduced in a structured way, preceded by a programme of rehabilitation involving psychiatric support and accompanied by a continuing programme of support. Sun Life argued that, in these circumstances, the employee was not "unable to follow any occupation". The Court of Appeal upheld the High Court’s decision that the fact that the employee could not undertake work without structured support meant that he was unable to follow any occupation.
  • In Crossley v Faithful & Gould Holdings Ltd 2004 the claimant, a long-standing senior employee and director, had a nervous breakdown and went on sick leave. He told the company that he wished to take early retirement on health grounds but also made a claim under the PHI scheme. During discussions about his retirement, he was asked to sign a resignation letter, the effect of which was that he ceased to be entitled to benefit under the PHI scheme. The employee claimed that his employer was in breach of an implied contractual term obliging it to take reasonable care for his economic well-being by (a) asking him to submit a resignation letter knowing that he had applied for PHI benefit; and (b) failing to warn him that his resignation would prejudice his entitlement to that benefit. The Court of Appeal declined to imply such a term into the employment contract. In addition, it held that there was no duty to warn Mr Crossley because he was a senior employee and director and could reasonably have been expected to be aware of the provisions of the scheme (although it should be noted that the position might well be different with a junior and lower paid employee).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.