For many years, permanent health insurance (PHI) has been a standard
component in the portfolio of benefits given to middle and senior executives.
The cover usually provides that once the employee has been off sick for six
months or more, the insurance will provide a percentage of salary as long as
the employee is unable to work. Understandably, there is usually be a medical
examination of the employee applying for benefits, which may be refused if the
insurer believes the employee is not sufficiently incapacitated. Difficulties
for employers arise, however, in several areas.
Employers should be careful about how they express PHI benefits in contracts
of employment. The provision of the benefit must be stated as subject to rules
of the scheme, to avoid inadvertently giving the employee a contractual
entitlement to a percentage of salary if the employee is off sick for the
Breach of contract
In a recent case it was held that there was an implied term in the contract
of employment that an employer will not terminate employment where an employee
is likely to be eligible for PHI, in circumstances where such a termination of
employment will dis-entitle them from that benefit. In most cases, PHI cover
stipulates that the employee must remain an employee for the duration of the
cover. Therefore, in the absence of an express term allowing the employer to
override the implied duty to keep the employee in employment, it could be
difficult to justify a dismissal for sickness. Not only could the dismissal be
unfair, but the employer may be liable in damages for lost PHI benefits.
Termination of benefit
A further problem arises when the employee recovers after having spent some
time in receipt of PHI benefits, while technically remaining an employee.
Imagine the situation: a middle ranking executive has been off sick for, say,
three years but suddenly notifies you that his PHI benefits are ceasing and
that he is ready to return to work. In that three-year period, almost everything
could have changed – and usually has. It may be difficult at that stage to fit
the employee back into the organisation and the employer then faces the task of
agreeing terms of settlement for the employee’s termination, or having
difficult discussions with managers about redeployment. This scenario could be
avoided if, in the contract, there is a clause allowing the employer to
terminate employment in circumstances where PHI benefits cease to be payable.
Unless this is carefully drafted, however, there is always the possibility that
although such a termination would not be a breach of contract, it could be
unfair dismissal within the terms of the Employment Rights Act 1996.
For these reasons, employers might well reconsider offering PHI as a benefit.
One way around this situation is to encourage employees to obtain their own
cover and reimburse them for the premiums. That way, continued employment is
not a prerequisite for receiving the benefits. If PHI benefits are provided,
employers should look very carefully at the contract of employment.