Winners and Losers in the Permanent Health Insurance Game

Permanent health insurance (PHI) can solve the problem of income protection when an employee is ill for a period beyond that where income is directly maintained by the employer. The employee has time to recover and the employer is relieved of the expense of paying for the non productive employee. But it is not always a Win-Win situation, particularly where there comes a parting of the ways between employer and employee.
 
Where an individual is employed in a particular job, and he/she becomes incapacitated through illness or injury, the employer might contractually provide for sick pay at or about the salary rate, or it might exercise discretion to pay whilst the employee is off work. Typically the employee will recover or inevitably termination of employment will be in the air. It might be that the employee can return to the original role, perhaps with reasonable adjustment (see Equality Act 2010) or he/she might be suitable for other, perhaps less congenial or less skilled, employment if they become permanently disabled. In general the aim of PHI is that, where periods of extended absence through ill health or disability arise, the employee’s income is substantially protected.  
 
The terms under which PHI is paid will be contained in the contract of employment or the employee handbook. This will set out the level of income, usually 50-75% of wages, to be paid after exhaustion of a specified period or any contractual sick pay. PHI income will cease or vary on recovery but is otherwise designed to end with death in service or retirement. It is tax efficient for the employer to provide PHI rather than employees who otherwise pay premiums out of taxed income. However, an employee who provides his/her own cover has the certainty of continued income protection regardless of continuation of an employment contract or solvency of the employer. Case law has been much concerned with the cessation of PHI benefit to the incapacitated employee on termination of employment.
 
Swings and Roundabouts
 
The insurer dictates eligibility and how much benefit will be paid, with periodical review of the receiving employee on their fitness to work. Partial recovery invokes proportionately reduced payments since, sometimes with reasonable adjustments, the employee may be able to return to the original role or otherwise achieve a degree of independent income. Where capability changes occur in the course of a deteriorating condition, terms and conditions may expressly provide for fewer hours, or lower pay grade, superseding those envisaged by the original policy, and the amount of benefit can be commensurately reduced. Thus the swings and roundabouts can over time slowly grind to a halt even with PHI. Much depends on the PHI terms and conditions.
 
Parting of the ways – not always such sweet sorrow
 
PHI envisages eventual full or partial recovery and there might come time when there is no prospect of the employee returning, to the original role, or at all. But what if the company falls on hard times, even going into liquidation? The employee’s income could cease. The employee needs to know whom the insurer pays. If the employer is the initial recipient on condition that it pays the absent employee then, if no company no benefit. Even if the employee’s job goes on the grounds of redundancy, through no fault of the employee, he/she will no longer be employed and PHI benefits can cease unless there is a specific provision for continuing cover in such eventualities. Although a permanently incapacitated employee may be dismissed on potentially fair grounds, before embarking on dismissal the employer should consider the effect on PHI. Whilst it might be lawful to dismiss the employee on (or about to receive) PHI benefit might still have a claim against the employer re PHI.
 
In relatively rare circumstances incapacity can cause frustration of a contract of employment if the employee’s inability to work is by reason of an unforeseen event. Where frustration applies then no action (by dismissal or resignation) need be taken when performance of the contract becomes impossible. In Egg Stores v Leibowici frustration occurs where an employee suffers “a catastrophic accident with effects that are so dramatic and shattering that it is obvious to all concerned that for all intents and purposes, the contract must be regarded as at an end … [but] where an employee suffers a prolonged illness with an uncertain outcome, one of the factors [in determining whether the contract has been frustrated] is whether the employee continues to be paid.” In practice the doctrine of frustration is unlikely to be found if benefit has already been paid to the employee.
 
Villella v MFI held that income protection for long-term incapacity means that protection is for a foreseeable event. Given that the point in the doctrine of frustration is that the event must be unforeseeable, where a contract incorporates PHI it is arguable that the contract of employment cannot be frustrated precisely because it was, however remotely, contractually foreseen.
 
In Aspden v Webbs A was dismissed while on long-term sick-leave. The employerwas found to have breached the implied term in the employment contract that dismissal would not be effected so as to remove contractual entitlement to PHI benefit.  Since then the cautious employer, where there is no agreement with the insurer and employee, tends to keep the absent employee “on the books” if dismissing him/her means cessation of PHI. The dismissal effectis not written in tablets of stone. In Lloyd v BCQ Ltd, the EAT held that there was no implied term (as found in Aspden) on loss of PHI in the event of dismissal. Most cases are terms and condition sensitive and, in Lloyd, the benefit of PHI was held not to be part of his employment contract. Procedural aspects play their part.  In redundancy the employee should not be put to any disadvantage because of a current inability to perform particular work.  Archibald v Fife Council  held it will be a reasonable adjustment to transfer a disabled employee to another job, if one is available, where an employee is already receiving the income benefit of PHI.
 
 The Benefit of Clarity
 
Clarify from the outset the terms on which PHI benefits are to be paid/ cease within the employment contract.  For example by referring to cessation of payments in the event of the insurer refusing to pay and to variation in benefits being the sole province of the insurer. The employer can take some comfort from the procedure where, if the insurer refuses to pay and the employee sues the employer, the employer can join the insurer as a third party to the proceedings, asserting that the liability accrues to them. All could take more comfort in being contractually clear from the outset.
 
An extended version of this article can be found on the Henderson Chambers Website under Linda Goldman

Linda Goldman has degrees in dentistry and law. Her Honorary Doctorate is from West London University. She practises in employment law, acting for claimants and respondents. She is standing counsel to a premier league football club. She writes articles and contributes chapters to occupational health text-books. She is the author of “Wigs and Wherefores,” the biography of Michael Sherrard CBE QC.

Linda can be contacted on +44 (0)20 7583 9020 or by email at clerks@hendersonchambers.co.uk

David Brook has a practical background in commerce and industry. He acts in employment, commercial, contract and business related matters. Principally instructed by companies, employers, senior employees and local authorities he undertakes advisory work, mediation, litigation in tribunals/courts, and takes matters on appeal. He accepts instructions from solicitors and on direct access, is an Employment Tribunal Judge and an accredited mediator.