Previous Article Next Article Till death do us part?On 1 Sep 2000 in Personnel Today Permanent health insurance can be an important tool for recruiting andretaining senior executives. But beware – the advantages could be faroutweighed by huge penalties if employers fail to heed its hidden dangers. ByJames WildersMoney is often not the only reason an employee (particularly a seniorexecutive) accepts one job and declines another. The provision of a companycar, for example, is frequently an important consideration in status terms.Less apparent benefits like life assurance and private medical insurance areoften also essential elements of the remuneration package. Another important attraction for many employees is permanent healthinsurance (PHI). Usually this is taken out by an employer on a group basis. Theemployer will enter into a contract of insurance with an insurance companyunder which it is insured against any of its employees, or specified groups ofstaff, being prevented from working by ill-health. Should any of the employees covered by the insurance become unable to workbecause of illness, then the insurer will make a financial payment to theemployer. The payment will be a proportion of the employee’s salary, forexample a half or two-thirds of basic salary. Monthly payments will be made bythe insurer while the employee remains incapacitated. It is then for theemployer to pass on these regular payments to the absent employee. As with all insurance contracts, the policy will be subject to limitations.There will be a minimum period for which employees must remain incapable ofworking (usually six months) before any benefits become payable. Also, theinsurer’s obligation to pay benefits will cease if the employer terminates theemployment of any member of staff who is the subject of the policy, if the employeedies, or upon the employee reaching normal retirement age. Quite separate from the insurance contract, the employer also enters into anobligation with its employees for each of them to be members of the PHI scheme.Membership of the scheme will form part of the terms of each employee’scontract of employment. It is under the terms of the PHI scheme that theemployer will pass on to an incapacitated member of staff the insurancebenefits which the employer receives from the insurer. But in the absence of anexpress agreement to the contrary, the detailed terms of the insurance betweenthe employer and the insurance company are not incorporated into individualemployment contracts. This gives rise to significant potential dangers in theoperation of PHI schemes. References to membership of a PHI scheme in, for example, a writtenemployment contract or staff handbook are frequently vague and incomplete.Often these documents make no reference to the limitations on the insurancecover imposed by the insurer. So while providing this kind of benefit canassist the employer in attracting the best quality staff, and retainingexisting staff with a valuable and often reassuring perk, those advantages canbe outweighed by the huge penalties for getting it wrong. Employees can end upwith far greater rights against the employer than the employer has insuredagainst. Rights survive termination The starting point for understanding the pitfalls facing employers is thefact that only existing employees are likely to be covered by the policy ofinsurance. The detailed terms of such policies include a definition of thoseemployees in respect to whom the insurer will pay out benefits if one of thembecomes incapacitated. The definition will limit those who are covered toindividuals who are existing employees. This interpretation of such a policywas confirmed by the Court of Appeal in an unreported decision called Bastick vYamaichi (15 January 1993). Often an executive’s service agreement will include detailed provisionsallowing the employer to dismiss in the event of prolonged incapacity. However,this does not supersede the employee’s rights arising under any PHI scheme. Inthe case of Aspden v Webbs Poultry & Meat Group, 1996, IRLR 521, thecontract of employment contained both a general power to terminate thecontract, and a specific power to dismiss Aspden in the event of him beingunable to discharge his duties, for a total of 183 days in any 12 consecutivecalendar months. Aspden had been employed in a managerial position since December 1978.Following a management buy-out, a generous PHI scheme for directors and seniormanagers was introduced in the early part of 1985. Aspden was included in thescheme. The cover was three-quarters of annual salary payable after 26 weeks’incapacity and ending on the employee’s death, or retirement date, or the dateon which the employee ceased to be an eligible employee (which includeddismissal). Aspden fell ill with angina. The managing director thought he wasmalingering. Aspden was dismissed. In consequence he ceased to be an eligibleemployee under the PHI scheme and lost his entitlement to PHI benefits. Heclaimed damages for wrongful dismissal. The High Court held thatnotwithstanding the express provision allowing the employer to dismiss Aspdenfor prolonged incapacity, a term would be implied into his employment contract,that the provisions for dismissal would not be operated so as to removeAspden’s entitlement to benefit under his employer’s PHI scheme, of which hewas a member. The significance of the decision in Aspden is this. Even if an employeebecomes so ill that it is apparent he or she will never be able to return towork, the employer must not dismiss, but must keep the employee “on thebooks” if he or she is to remain covered by the employer’s PHI insurance. Moreover, should the employer dismiss, then it may be faced with asubstantial claim for damages. Those damages will be assessed to represent thePHI benefits the employee would have received had the employer not dismissedhim in breach of the implied term which was established in Aspden. There is nolimit on such damages so that in the case of a young employee on a high salarywho has no prospect of returning to work but who will survive until his or herretirement date, the damages could be very substantial. It should be noted that insurers may consent to the termination of anemployee’s employment and agree to pay insurance benefits direct to theemployee rather than through the employer. In those circumstances, theemployee’s dismissal may not be in breach of the implied term under Aspden.However, the employer would still have to consider whether the dismissal couldbe unfair and/or discriminatory on grounds of disability. No restrictions for employee The rights of employees under PHI schemes were further defined in thesubsequent case of Villella v MFI Furniture Centres, 1999, IRLR 468. Villellaceased working due to ill-health. After six months of absence, he receivedbenefits in accordance with the PHI scheme. Subsequently the insurers told theemployer that the medical evidence no longer supported the continuation ofbenefits. They then ceased paying benefits. Later the employers dismissedVillella. Villella sued his employers for benefits under their PHI scheme. Theemployer argued that Villella ceased to be entitled to benefits when hisemployment was terminated. It submitted that his contractual entitlement couldbe no greater than the employer’s own entitlement against the insurers under theinsurance policy (with Villella ceasing to be covered by the policy when he wasdismissed), and that he was bound by the restrictions in the policy which wereincorporated into his employment contract by implication. The High Court heldthat the restriction in the insurance policy which stipulated that entitlementto benefit would cease on the employee leaving service, did not form part ofVillella’s contract of employment. He was therefore entitled to continue toreceive benefits from his employers. The employer’s argument that Villella’srights under his employment contract could be no greater than the its ownrights under the insurance policy was wrong. In this case MFI’s arrangementswith its insurers were irrelevant. How, therefore, can the employer avoid having to pay out PHI benefits to anincapacitated employee after the insurer has declined to pay? – Identify the detailed terms under which employees enjoy membership of thePHI scheme. Those terms may be recorded in the employment contract. There mayalso be references to the scheme in employee handbooks. Alternatively theycould be included in an explanatory booklet or guidance note, memo or otherdocument. – Bear in mind that in the event of a dispute, the Court would have todecide how any vague references in such documents to the PHI scheme should beconstrued and would imply any other terms necessary in order to make the schemeworkable. The cases described above show that the Court will be inclined tointerpret the PHI scheme in the employee’s favour. – Ensure that your obligations to staff under the PHI scheme are no greaterthan the cover you have taken out with insurers. If necessary, steps should be takento amend the PHI scheme so that it more closely reflects the insurance coveravailable. – Consider seeking the express agreement of all employees to any changes tothe scheme. Earlier cases in the context of mobility clauses are quite clearthat where a variation to an employment contract has no immediate practicaleffect, the employee cannot be taken to implicitly accept the variation bysimply staying silent and not raising any objection. It may therefore not besimply enough to notify staff of changes to the PHI scheme. Instead thosechanges should be properly documented, preferably with each employee signing aconsent. James Wilders is head of the employment department at Dickinson Dees inNewcastle Warning: choose your insurer with careAny discussion about PHI schemes is not complete without a note of caution.Like all diligent and prudent insurers, the insurance companies who specialisein providing this kind of cover to employers will only admit claims after theyhave fully investigated the condition of the affected employee.I acted in one such case for a quantity surveyor. In March 1993 my clientdeveloped the symptoms of a severe heart condition. He was a member of hisemployer’s PHI scheme which was underwritten by one of the market leaders inthe field, Unum. These insurers accepted the severity of my client’s condition.However they declined his claim on grounds that he could perform sedentarywork, and that the physical demands of his job were minimal.Despite the medical evidence, Unum continued to resist the claim, even inthe face of requests and representations from my client’s MP. There wastherefore no alternative but to sue. Two weeks before the trial my client died.Despite this Unum continued to resist the claim until a few days before there-arranged trial when they accepted that my client was indeed incapable ofworking. Such was Unum’s conduct that on behalf of my client’s widow I pursuedan application at trial for them to pay my client’s costs on an indemnity basis.The application was successful.Employers should therefore be warned. One of your staff may have apersuasive claim for PHI benefits. However, if insurers decline the claim thenthe employee will be entitled to sue you for those benefits. In order to recoveragainst the insurers you will have to join them as a third party to theemployee’s claim. In my late client’s case, the insurers did not capitulateeven after my client had died and only accepted that he was incapacitatedvirtually on the doorstep of the court. Related posts:No related photos. Comments are closed.