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Permanent Health Insurance (PHI) schemes Legal and practical implications

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Permanent Health Insurance (PHI) schemes Legal and practical implications

1. Introduction

(a) The issues raised by PHI schemes are important for employers (and possibly their insurance brokers) and for employees.

(b) They are designed to provide an income for people unable to work as a result of health problems: see paragraph 2 below.

(c) Government statistics show that every year more than 670,000 men aged between 40 and 64 are absent from work for more than six months because of long-term illness. In 1997 over 1.7 million men and women between 20-64 had been unable to work for longer than 6 months and were claiming Incapacity Benefit.

(d) State benefits in the form of Incapacity Benefit are not generous, are taxable and the conditions for payment strictly adhered to and statutory sick pay is also largely regarded as an inadequate way of providing for long-term illness.

(e) The “age discrimination” issues raised by PHI schemes are tangential, but the premiums paid seem to increase the older a member of the scheme gets (and, incidentally, some schemes load their premiums more heavily against women because statistics suggest that they are more likely to claim.)

2. The nature of PHI schemes

(a) Almost invariably, a PHI scheme (and the expression “scheme” will be used throughout for the reasons given below at 3(d)) is underwritten by an insurance company. Many of the well-known insurers like Norwich Union provide this kind of scheme, though UNUM is a well-known name in the field.

(b) Most schemes now pay out up to between 50% and 60% of a claimant's gross salary, plus state benefits. The payments are paid tax-free. The rationale for limiting the payments to something under 100%

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appears to be to build in an incentive to return to work. Usually the payments are inflation-proofed.

(c) There is usually a “deferral period” before payments are made. This can be anything from 4 weeks to a year depending on the scheme. (d) Most employers of reasonable size and standing will enter into an

arrangement with a PHI provider to cover in the event of an employee becoming seriously ill or incapacitated. It is obviously a cheaper way of providing this kind of protection than doing it on an individual basis, but it is often this set-up that gives rise to the legal problems (see paragraph 4 below).

3. The terms of a PHI scheme

(a) As with any scheme which is akin to a contract of insurance (but see below), reading the small print is vital.

(b) Many schemes provide that benefits are payable in the event that the employee is “totally unable by reason of sickness or accident to follow his Occupation”. Furthermore, after the termination of an employee’s employment with an employee who has entered into an arrangement with a PHI provider, benefits are usually payable thereafter only at the discretion of the provider. Payment is only an obligation whilst the contract of employment exists.

(c) Subject to any other terms of the scheme, a scheme providing for payment on the foregoing basis will mean that an employee who cannot follow his or her own occupation will receive benefits1. If the scheme said that benefits are payable in the event of not being able to follow “his own or any occupation” would entitle the provider to decline, for example, to provide payment to a seriously injured senior partner of a firm of solicitors because he or she was in fact capable of stuffing envelopes at home.

1

“I think that the expression “totally unable . . . to follow his Occupation”, taken by itself, naturally means that the employee is no longer capable of carrying out the duties which would enable him to be employed in his current position, whether full-time or part-time.” – Moore-Bick J in Earl v

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(d) Although PHI schemes are often thought of as insurance policies (and in addition to “permanent health insurance” they are sometimes called income replacement insurance, income protection insurance, long-term disability insurance, disability income insurance or personal disability insurance), certainly where an employer arranges such a scheme and takes primary contractual responsibility to make payments under it, it is in law merely a contract with no particular “insurance elements”.2 This is why the expression “scheme” is used: there is usually a provision within the employment contract that the employer will put in place an arrangement whereby payments will be made by the employer to the employee in the event of serious disability3, but the source of those payments will be the PHI provider.

(e) Generally, the exclusions in respect of past illnesses or specific matters (such as Aids, self-inflicted injury, illness caused by drug or alcohol abuse, an act of war or criminal activity, pregnancy, childbirth or associated complications) will be provided within the terms of the PHI scheme. The need for disclosure is probably contractual rather than necessarily arising from the obligation of uberrimae fides required for a contract of insurance.

(f) Where a PHI provider agrees to pay out, continuing evidence of the incapacitating illness is often required, particularly where the illness is psychiatric or has otherwise arisen for psychological reasons. Illnesses such as ME and Chronic Fatigue Syndrome represent difficult areas in this regard.

2

“ … it is not in any sense a contract of insurance. It is nothing more or less than an undertaking on the part of the employer to make certain payments to the employee in certain defined circumstances and subject to certain defined conditions.” – ibid.

3

“I am unable to accept that the word “sickness” should be construed as referring to a supervening event, such as the onset of a disease. This is a reflection of the argument which I have already rejected that the scheme should be construed as if it were a contract of insurance. In my judgment the word “sickness” is intended simply to describe a condition; that is, it refers to the absence of good health, without regard to the underlying cause of that condition. If a want of good health is so serious as to render an employee totally unable to do his job he is in every sense incapacitated “by reason of” sickness. In my view that is the natural meaning of the words used …”. - Moore-Bick J in

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4. The legal and practical problems

(a) If an employer sets up such a scheme, backed by a PHI provider, but then in a particular case fails to pursue the claim against the PHI provider timeously, or fails to give sufficient information to the provider to satisfy it that the claim is justified, the employer can find itself having to fund the payments that it had anticipated that the provider would provide: see Earl v Cantor Fitzgerald, 3/5/2001. This is because of the employer’s primary contractual obligation to the employee.

(b) Equally, it can be disastrous for an employee to “retire” or “resign” on health grounds without having ensured that the benefits of any policy in place are properly secured in his or her favour: Crossley v Faithful

& Gould Holdings Ltd [2004] EWCA Civ 293; [2004] 4 All ER 447;

[2004] ICR 1615. Relying on the provider’s “discretion” after cessation of employment would be most precarious.

(c) In Earl v Cantor Fitzgerald, above, Moore-Bick J said this:

“There is a growing body of authority to the effect that when an employee’s contract of employment incorporates a permanent health scheme of the kind which existed in this case it is an implied term of the contract that once the employee has become entitled to the benefits due under the scheme the employer will not dismiss him simply on the grounds of his continuing incapacity to work: see Aspden v Webbs Poultry & Meat Group

(Holdings) Ltd [1996] IRLR 521, Adin v Sedco Forex International Resources Ltd [1997] IRLR 280, Brompton v AOC International Ltd [1997] IRLR 639, Hill v General Accident Fire & Life Assurance Corporation [1998] IRLR 641

and Villella v MFI Furniture Centres Ltd [1999] IRLR 468.”

(d) That implied term is of immense importance to both employer and employee. If the employer breaches it (as occurred in Earl’s case) the employee may have a claim against the employer for the benefits

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(possibly a working lifetime’s benefits) that would otherwise have been met by the PHI provider.

(e) Where an employee has been unwise enough to “retire” or “resign” on health grounds without having ensured that the benefits of any policy in place are properly secured in his or her favour, it would not avail him to argue that his employer owed him a duty to take reasonable care for his economic well-being: see Crossley v Faithful & Gould

Holdings Ltd, above.

(f) Things might be different if the employee solicits a letter of resignation knowing that this would or might prejudice the employee’s rights under the PHI scheme: this seems to have been recognised in Crossley

v Faithful & Gould Holdings Ltd (see para.s 48 and 49 of the

judgment), albeit not arising on the facts of that case.

(g) Equally, there may be some circumstances (perhaps depending on the status of the employee) where an employer would owe the employee an obligation to inform him of the terms of the scheme before accepting his resignation: see Crossley v Faithful & Gould Holdings

Ltd at para.s 50-53. However, the requirements set out in Scally v Southern Health and Social Services Board [1992] 1 AC 1 would need

to be fulfilled, namely, that –

“ …(1) the terms of the contract of employment have not been negotiated with the individual employee but result from negotiation with a representative body or are otherwise incorporated by reference; (2) a particular term of the contract makes available to the employee a valuable right contingent upon action being taken by him to avail himself of its benefit; (3) the employee cannot, in all the circumstances, reasonably be expected to be aware of the term unless it is brought to his attention.”

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(h) Given the normal terms of a PHI scheme (see paragraph 3(c) above), there is no general obligation on an employee to mitigate his or her loss by seeking other employment4.

DAVID FOSKETT QC MAY 2006

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References

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