A permanent headache

health insurance has become a useful way to attract and retain talented senior
staff. However, a flurry of recent cases has revealed numerous complications.
James Baker looks at their likely impact

Damages claim

Arthur Slowe is the 56-year-old managing director of Slowe’s Widgets Limited
(SW). Unfortunately, during the course of building up the business, he suffered
a nervous breakdown and was diagnosed with chronic fatigue syndrome. He stopped
work on 1 January 2003, and by 1 May he would have been off work for four months.

SW has a permanent health insurance (PHI) policy for senior staff. It
insures Slowe for a salary of £70,000 until death, retirement, the termination
of his employment, or his return to work. To qualify for insured benefits he

– have been off work for six months

– be "totally incapable of following any occupation"

– be employed by SW.

The board now wants to sack Arthur. Under his service agreement, the company
is entitled to dismiss him summarily if he is absent due to ill health for
three months or more.

Can the company dismiss Slowe?

The company will risk a claim for substantial damages if it terminates his
employment now. It appears to be entitled to dismiss him due to its right to terminate
following three months’ absence. However, if Slowe is dismissed, he will be
deprived of the benefit of his PHI policy.

This issue was tackled in Aspden v Webbs Poultry and Meat Group (Holdings)
Limited, 1996, IRLR 521. The employer tried to terminate Aspden’s employment in
similar circumstances. The High Court said that where a worker’s entitlement to
PHI depended upon them continuing in employment, it was an implied term of the
employment contract that the employer would not terminate it without good
reason (such as gross misconduct) while the employee was incapacitated. This
overrode the express provision allowing termination after prolonged incapacity.
It was clearly the intention of the parties that the contract would not remove
the worker’s PHI entitlement.

Had the court not been prepared to imply such a term, an employee’s
contractual entitlement to receive PHI benefits would be worthless – employers
would be free to dismiss staff whenever they pleased just to maintain good
claims records with their insurers.

If the company were to dismiss Arthur summarily, he would be entitled to
claim damages for breach of this implied term, to compensate for loss of PHI
benefits. The court would not simply assume that Slowe would remain
incapacitated until retirement, but would hear evidence on the likelihood of
him returning to work, being dismissed in the meantime (for example for
redundancy) or anything else that might mitigate his loss.

SW would be responsible for compensating Slowe for the loss of his PHI
benefits. Whether the company could recover that sum from its insurer is
another matter, and would depend on the terms of the insurance policy.

In Walton v Airtours Plc and Sun Life Assurance Company of Canada, 2003,
IRLR 162, Walton was dismissed by Airtours following a decision by Sun Life –
which provided the PHI policy – that he was no longer entitled to benefit from
it. The court found he was too unwell to follow any occupation, and should have
continued to receive the benefits. It said that while Airtours was primarily
responsible for compensating Walton for loss of benefits under his employment
contract, Airtours was entitled to recover that sum from Sun Life.

Can the company replace Arthur?

Only for the period of his absence. A problem may arise if he wants to
return to work. Unless SW can demonstrate a material change in circumstances
necessitating a genuine reorganisation of staff (possibly giving rise to
redundancy), he will be entitled to return to work in his old position and on
the same terms.

Is SW obliged to help Slowe return to work?

Yes. Employers are under two separate but related duties to assist employees
who are absent due to ill health.

Under the Disability Discrimination Act 1995 (DDA), if an employee suffers
from a disability, their employer is obliged not to treat them less favourably
than it would treat others who are not disabled, and to make reasonable
adjustments to prevent any arrangements or circumstances placing them at a
substantial disadvantage.

In Arthur’s instance, the first question will be whether he suffers from a
disability. The definition of disability under the DDA is that the employee
must have "a physical or mental impairment which has a substantial and
long-term adverse impact on their ability to carry out normal day-to-day

Because Arthur is absent due to chronic fatigue syndrome (likely to have
been brought on by work-related stress), the company should try to make
reasonable adjustments to his working practices or environment. The DDA provides
a non-exhaustive list of 12 steps an employer may have to take to comply with
its duty to make reasonable adjustments. In this case, the most relevant are
likely to be allocating some of his duties to another person, altering his
working hours and/or allowing him to be absent during his working hours for
rehabilitation, assessment or treatment.

Compensation for disability discrimination is uncapped. If Arthur claims
unfair dismissal, compensation is capped at £53,500, but is likely to be set
off by any award he receives for loss of PHI benefits.

Under health and safety law, the company is under a duty to provide a safe
system and place of work for its staff. It also owes a duty not to cause
psychiatric harm to an employee by reason of the volume or character of the
work required of them (Walker v Northumberland County Council, 1995, IRLR 35).

Gross misconduct

During Slowe’s absence, it emerges that he has been caught stealing money
from the firm. Does this change the situation?

Almost certainly. In Briscoe v Lubrizol Limited, 2002, EWCA Civ 508, the EAT
considered an employee who was dismissed and lost PHI benefits. Briscoe refused
to co-operate with Lubrizol’s appeal against the insurer’s decision, and was
dismissed for gross misconduct.

The tribunal ruled that while on extended sick leave, an employee has a duty
to co-operate with his employer’s reasonable requests for the purpose of
progressing their PHI claim, and should keep the employer informed of the
prospects for their return. Failure to do so may count as gross misconduct.

In fact, Briscoe’s claim succeeded because Lubrizol did not follow a fair
disciplinary procedure before dismissing him. In this case, Slowe’s behaviour
would almost certainly count as gross misconduct, entitling SW to dismiss him.

Can SW declare Arthur’s position redundant?

Yes. In Hill v General Accident Fire and Life Assurance Corporation Plc,
1998, IRLR 641, Hill was absent from work on medical grounds until his
employment was terminated due to redundancy. At this time he was being paid his
contractual sick pay, but had not been absent for long enough to start
receiving PHI benefits.

The court decided the Aspden principles relating to dismissal did not extend
to dismissal due to redundancy, arguing this would be just as "grossly
disadvantageous" to staff who happened to be well, as to staff who are ill
at the time.

Does SW have to appeal against the insurer if it denies Slowe’s benefits?

In Marlow v East Thames Housing Group Limited, 2002, IRLR 798, the court
decided that an employer was contractually bound to its employee, as part of
its general duty of trust and confidence and good faith, to take "all
reasonable steps to procure benefits in respect of [its employee] from the
insurers after they ceased making payments on the grounds that [the employee]
was no longer disabled in terms of the policy". This was because the
employee did not have a direct contractual relationship with the insurer on
which she could sue – the contractual entitlement to receive benefits was that
of her employer.

Protection against liability

How can SW protect itself against liabilities connected to PHI schemes?

The duty to provide PHI cover should be strictly in accordance with and
subject to the terms of the insurance policy taken out by the employer, and a
booklet summarising the benefits (including the fact that the right to receive
benefits ceases on termination of employment) should be provided for staff.
They should then be required to acknowledge that they have received it. An
employer may end up having to compensate an employee for their lost PHI
benefits if it does not effectively incorporate the PHI insurer’s terms into
terms and conditions of employment.

The employer should reserve the right to change insurance providers and to
remove cover if not available at a reasonable cost.

The contract should state that the employer has no liability to meet lost
PHI benefits on termination of the contract, and is expressly entitled to
terminate, notwithstanding the effect this will have on the employee’s
entitlement to PHI.

The scheme should be "non-contractual" as an employee without a
contractual right to participate in the scheme may not have a claim against the
employer if they do not receive a benefit.

Is PHI cover worth having?

PHI cover is a valuable benefit for
staff, and can help maintain a trained and skilled workforce. Without extended
sick pay, employees are unlikely to be able to stay at home recovering.

In view of the obligations courts are now imposing, however, it
may be more economical for employers to pay staff to find their own cover. This
is likely to be more expensive for employers in the short-term (as group
discounted rates may not be available) and may also lead to problems with
workers buying themselves inadequate cover. In the longer term, it should
remove employers from the contractual relationship with both the employee and
the insurer, helping avoid the expense of Aspden-type claims.

James Baker is a solicitor with City law firm Macfarlanes

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