Recent decisions show that while Permanent Health Insurance is valuable for
staff, it can damage your organisation
Permanent health insurance (PHI) is a valuable benefit for sick employees,
but two recent decisions show that it can cause headaches for employers.
In Jowitt v Pioneer Technology (UK) Ltd, 2002, IRLR 790, Jowitt was employed
by Pioneer Technology as a senior technician initially on a probationary basis.
When his position became permanent, he was advised that his terms and
conditions of employment were detailed in the company handbook.
The company’s long term disability scheme was set out in clause 5.3 of the
handbook. This stated that the company ran a scheme designed to provide an
income during lengthy periods of absence due to prolonged illness or injury and
that "members of staff are entitled to two-thirds of normal pay… after 26
weeks continuous absence through illness or disability for as long as they are
unable to work up to the date of retirement".
The insurance cover the company had taken out with Swiss Life defined
‘disablement’ as a "state of infirmity of mind or body as a result of
which a member shall be totally incapacitated from following the occupation in
which he was engaged by the employer… and is not following any other
occupation". Jowitt was unaware of the existence of the insurance policy
or its terms.
In October 1996, Jowitt was involved in an accident at work as a result of
which he sustained serious injury to his neck and was unable to work as a
technician. Initially, he received payments under the PHI scheme, but some two
years later, a consultant orthopaedic surgeon advised the insurers that Jowitt
was "not disabled from any kind of employment activity" and
accordingly the insurers refused to make any further payments to the employer
under the policy.
The company unsuccessfully attempted to persuade the insurers to change its
mind and then stopped paying Jowitt any long-term disability benefit.
Jowitt complained, under Section 13 of the Employment Rights Act, that the
non-payment amounted to an unlawful deduction of wages. The Employment
Tribunal, however, rejected his complaint accepting the employer’s argument
that Jowitt was only entitled to long term disability benefit if he satisfied
the provisions of the insurance policy and found that the insurer’s were
entitled to conclude, on the medical evidence, that Jowitt was not eligible for
payment under the policy as he was fit to work, albeit not in his previous
Allowing the appeal, the Employment Appeals Tribunal (EAT) ruled that
Jowitt’s entitlement to payment rested not on the terms of the insurance policy
(as this had not been referred to in the company handbook), but on the terms
set out in the company handbook. Having regard to the relevant background, the
words ‘unable to work’ meant unable to work as a senior technician rather than
unable to work at all. It was, said the EAT, inconceivable that the parties
would not have understood that an employee who had a long-term disability resulting
from an industrial injury would not have been covered by the scheme as
described in the company handbook.
In Jowitt, the employers attempted, albeit unsuccessfully, to persuade the
insurers to continue to make the payments to Jowitt. However, the recent High
Court decision in Marlow v East Thames Housing Group Ltd, 2002 IRLR 798,
suggests that, as part of the duty of trust and confidence and good faith,
employers may be under a duty to take legal proceedings against insurers who
refuse to pay such benefits. In this case, the insurers again refused to
continue making payments under a PHI scheme, because they considered that the
claimant was no longer disabled. Both the claimant and her employers disagreed.
In such circumstances, said the judge, the employer was under a duty to bring
legal proceedings against the insurers if it considered that such proceedings
stood a reasonable chance of success. This was particularly so if the employee
(or his union) was prepared to cover the legal costs of such action.
Anthony Korn is a barrister at 199 Strand Chambers