Permanent Health Insurance "PHI" Schemes – The Problem Areas

Background

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:

• 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.

• 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.