Minimising the risks involved in providing PHI

What is the main risk for an employer in providing PHI?

An employer’s main risk is that the insurance company could refuse to make a payment under the policy. This may occur where the employee has ceased to be employed by the employer; or where there is disagreement regarding the medical prognosis, and the insurance company declares that the employee is fit to return to work, but this is disputed by the employee, the employer, or both.

What are the possible consequences of such a refusal?

The policy setting out the terms of the insurance contains the agreement between the employer and the insurance company; and the contract of employment setting out the provision of the benefit contains the terms between the employer and the employee. Thus, the employee is not a party to the insurance policy and, unless they can rely on the Contracts (Rights of Third Parties) Act 1999, which is often excluded either in the policy itself or in the contract of employment, they will not generally be entitled to enforce their rights to receive the benefit directly against the insurer.

In such circumstances, many employees look to their employer to provide the benefit out of its own funds. As the amounts involved can be huge – often extending to six-figure sums – this ultimately results in proceedings being commenced against the employer. It is then up to the employer to join the insurance company to the proceedings as a third party.

There is an argument that, where the insurance company refuses to make a payment, the employer has a duty to take all reasonable steps to ensure the employee benefits from the PHI, as part of its implied duty of trust and confidence. It has been suggested that this duty may extend to the employer commencing proceedings against the insurer on the employee’s behalf. Clearly, careful consideration needs to be given to the cost ramifications of taking such action.

In what situations is the employer most likely to be liable to the employee?

The employer is often found to be liable to the employee where the terms of the insurance policy are not reflected in its contracts of employment or staff handbook. This can arise in a number of situations, for example, where the employer amends or redrafts its contracts of employment and/or staff handbook without considering the insurance policy or, following an acquisition or merger, where the purchasing company maintains the employees’ existing contracts of employment, but harmonises the insurance arrangements of the two companies.

How can careful drafting of the contractual documentation help avoid liability?

Employers should ensure their contracts of employment and other contractual documents make no reference to a specific insurance policy. Ideally, a PHI clause should be relatively short and concise. It should inform employees of the PHI provision and expressly state that the benefit, payable to the employee in the event of long-term sickness, is ‘subject to’ the terms of the insurance policy in place from time to time. The clause should also permit the employer to amend or withdraw the PHI benefit.

Is there any other way of minimising the risk?

Yes. Effective communication between HR, the employee, the insurance company and sometimes the employer’s medical advisers is essential to ensure disputes do not arise regarding the employee’s medical prognosis or ability to return to work. Such communication should aim to address any issues prior to a possible decline of cover. However, even if the PHI cover is declined, continuing dialogue with the insurance company during any appeal under the policy or to the ombudsman is still important.

Can the provision of PHI cover restrict the employer’s ability to terminate a contract?

The majority of insurance policies state that the PHI benefit is payable only if the employee continues in employment. Where such a policy is in place and the employment is terminated, the courts are likely to find that there is an implied term in the employment contract to the effect that the employer cannot terminate it if the purpose is to deprive the employee of the benefit of PHI while on long-term sick leave.

Extreme care is needed if the employer wishes to terminate the employment in such circumstances and wants to avoid liability for future PHI payments. Employers are advised to ensure they can justify that any such termination was for ‘good cause’ – for example, gross misconduct, or a repudiatory breach of contract.

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