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


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

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 must:

have been off work for six months

be ‘totally incapable of following any occupation’

be employed by SW.

board now wants to sack Slowe. 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.

the company dismiss Slowe?

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. 

issue was tackled in Aspden v Webbs Poultry and Meat Group (Holdings) Limited,
1996, IRLR 521.

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.

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. 

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.

the company were to dismiss Slowe 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.

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.

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.

the company replace Slowe?

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.

SW obliged to help Slowe return to work?

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

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.

Slowe’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

Slowe 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.

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. 

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

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).


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

certainly. In Briscoe v Lubrizol Limited, 2002, EWCA Civ 508, the employment
appeal tribunal 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.

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.

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

SW declare Slowe’s position redundant?

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

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.

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

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”.

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. 


can SW protect itself against liabilities connected to PHI schemes?

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, who must
acknowledge receipt.

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.

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

contract should state the employer has no liability to meet lost 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.

Baker is a solicitor with City law firm Macfarlanes

article first appeared in Employers’ Law. To subscribe, call 01444 445566

PHI cover worth having?

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.

view of the obligations courts are now imposing, however, it may be more
economical for employers to pay staff to find their own cover.

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.

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