Many employers provide their employees with permanent health insurance as a standard benefit without realising the potential consequences for them. For example, it is common for employers to assume that their obligations extend no further than ensuring that the premiums are paid, however this is not the case. So what are the pitfalls of which you should be aware and what practical drafting tips can you utilise to minimise your potential liability?
The leading case relating to PHI benefits is the High Court decision in Aspden v Webbs Poultry & Meat Group (Holdings) Limited. In that case, the judge held that even though the employee’s contract expressly provided for dismissal for prolonged incapacity, there was an implied contractual term (in circumstances where the claimant’s entitlement to benefit under the employer’s PHI scheme was dependent on continuous employment) to the effect that, save where there was gross misconduct justifying summary dismissal, the employer would not terminate the contract while the employee was incapacitated for work and was receiving PHI benefits.
Even if an employment contract provides for dismissal on notice, an employer may still be in breach of contract, if it dismisses an employee on long-term sickness absence who is receiving or is being assessed for PHI benefits.
Damages for breach of contract will be assessed by reference to the total benefits lost under the PHI policy. This could be a substantial sum, particularly where an employee will not be fit to work again and the policy provides for benefits to continue until the employee’s normal retirement age.
Subsequent cases in which employers have been able to dismiss employees claiming PHI benefits fairly, have involved either gross misconduct or redundancy. However, employers still need to exercise caution as each case will be decided on its own specific facts.
What happens if an insurer refuses to pay out under a claim?
As the parties to the PHI contract are the employer and the insurance company, an employee cannot sue the PHI provider, as he is not a party to the contract.
Case law has established that employers are bound under the implied duty of mutual trust and confidence to take all reasonable steps to procure that the PHI insurer pays out.
This duty could extend to an employer suing the insurance provider for refusal or withdrawal of insurance benefits where an employee’s claim for benefits is strong and the employee is prepared to indemnify the employer against the costs of bringing a claim. As a practical point, employers may wish to consider taking out insurance for litigation costs, as opposed to requiring the employee to indemnify them against the costs of bringing a claim, as employees may not have sufficient funds should the employer need to call on the indemnity. Instead, the employee could be asked to indemnify the employer in respect of the premiums for insurance cover, which will be a lower amount.
Practical drafting tips
1. Do not use unqualified wording such as “during periods of sickness absence longer than 6 months, you will receive PHI benefits equal to 75% salary”. Such wording could create a free-standing contractual obligation independent of the terms of an insurance policy. The employer could, in such circumstances, be obliged to pay PHI benefits to employees, regardless of whether or not the policy covers such benefits.
2. The relevant clause should provide that an employer only has to pay PHI benefits to an employee if it has received correlating sums from the policy provider.
3. Employers should consider whether they wish to give the employee assistance in any appeal he or she may wish to bring against the policy provider’s decision to refuse or withdraw benefits. Such obligations should be drafted carefully to prevent a duty to litigate arising.
4. Participation in the PHI scheme should be expressed to be subject to the rules of the PHI scheme.
5. Consider whether to expressly exclude liability to any employee for any failure or refusal of the policy provider to provide benefits under the scheme, or if the PHI provider sets conditions or limitations on the benefits.
6. Participation in the PHI scheme should also be expressed to be subject to the employee’s health, not being such, as to prevent inclusion in a policy on terms and at a premium which the employer considers reasonable.
7. Reserve the express right to change the PHI provider, the level of cover provided and/or to terminate the scheme on reasonable notice to the employee – although employers should be aware that in such circumstances, it is likely that employees will try to seek comfort that an equivalent benefit will be provided.