Employers can fall foul of health insurance perk

Staff are seeking redress from firms in growing numbers when Permanent
Health Insurance benefit schemes fail to pay out

Many employers offer insurance benefits to employees to attract and retain
them, and permanent health insurance (PHI) is a popular choice.

However, there have been an increasing number of reported cases where
damages have been awarded in respect of PHI, giving employers cause to think
carefully before offering this as a benefit.

What is Permanent Health Insurance?

PHI schemes provide long-term sickness benefits to employees in the form of
monthly payments, which represent a proportion of the employee’s salary.

These payments are normally triggered after the employee has been sick for a
period of time (usually 13 or 26 weeks) and continue until the employee either
recovers from the illness and returns to work or alternatively, when the
employee reaches retirement age.

What problems can arise?

Employers usually offer PHI as a contractual benefit to employees and are
insured through a third party. However, problems can arise if there is a
failure to make payments under the scheme.

The employee normally has a direct contractual relationship only with the
employer, (who has agreed to provide the scheme) while the employer has a
separate contractual relationship with the insurer (who has agreed to
underwrite the scheme).

Therefore, in the event that an insurer does not pay out under the scheme,
the employee has no direct recourse against the insurer, but is likely to have
a claim against the employer.

In addition, it is usual to see a condition in PHI schemes where the staff
member must remain employed by the employer in order to be eligible to receive
payments under the scheme.

If the employer dismisses an employee who is eligible to receive payments
under the PHI scheme – when they are on long-term sickness absence, for example
– the employer may be depriving the employee of a right to payments under the
PHI scheme.

What is the solution?

So what can an employer do to avoid a large claim for damages for the sum
the employee would have received under the scheme had he not been dismissed
(potentially up to the date of retirement).

There are steps employers can take to minimise liability arising from the
provision of PHI. These include:

– An employer should consider whether it is really necessary to provide this
benefit to its employees

– The employer may prefer to limit the benefit to senior employees only
(although it should ensure this is not indirectly discriminatory – where the
vast majority of its senior employees are of one sex, for instance)

– Alternatively, an employer could agree to pay the employee a sum of money
to purchase his own PHI cover (although the employee should be aware that this
is a taxable benefit, which will need to be accounted for in their annual tax
return)

– An employer should also ensure that where it provides for the benefit in
an employment contract, the relevant clause is carefully drafted and includes
an express right for the employer to change insurers, vary entitlement or
discontinue the scheme if the costs become too great

– In addition, the clause should always state that the provision of the
benefit is subject to the rules of the PHI policy from time to time in force
(which may be changed by the insurer without notice to the employee)

In the light of the above, employers should bear in mind that PHI scheme
membership is not without its problems.

What is offered as a sugared treat to employees can become a bitter pill for
employers.

By Sarah Keeble a partner at Olswang solicitors

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