PHI – some things we know, and some things we aren't so sure about

A bit like buses, PHI cases seem to come along for me in threes. After a trio of quirky PHI issues made their way across my desk recently, and having had my thoughts provoked by a recent discussion breakfast on the subject, I thought I'd try this week to draw together a few strands of things I'm (pretty) certain about in relation to PHI, and also look at areas where I think there's still scope for development and debate. This is by no means a comprehensive analysis or a full statement of the legal position: more some thoughts and pointers from my experience over the years and also in part an assessment of the approach the courts may currently be taking (and approach one might well argue is changing fairly rapidly).

What I know

The principle of PHI (also known as GIP, or group income protection) is straightforward enough: to provide an employee unable to work due to long term sickness with the benefit of an income. Employers (and sometimes employees) take out policies which provide a proportion of salary in the event that the employee meets the relevant criteria. So far so simple, but...

• Definitions of 'incapacity' vary pretty widely from policy to policy. Check whether the policy kicks in if the employee is unable to follow 'any' occupation, or is it confined to their 'normal' occupation? Self-evidently, this can make a huge difference;
• What is the 'deferment' period (and is it tied in to your own contractual sick pay period)? This is the period of absence due to incapacity for which PHI payment is deferred;
• What is the period of cover: a fixed term (two years, five years?) or until 65 (and how does the absence of a retirement age fit with that?). How frequently is medical assessment required during that period – what happens if there are gaps in cover, or a delay before an assessment can take place;
• What steps need to be taken before cover is accepted (and by whom)? Does the employee have to declare pre-existing conditions; are any types of illness excluded; what's the position on medical examinations and reports (insurer/employer/employee?)? The question of medical evidence is unsurprisingly frequently a huge battle ground: if the insurer gets their own evidence it can take months; they are likely to pick and choose which bits they do and don't rely on, and disregard competing evidence from the employee. There is a whole separate question as to the 'reasonableness' of insurers' (and indeed, employers') procedures and exercise of their discretion on outcome, which may well be an area ripe for further exploration by employees post-Braganza;
• Does the individual have to remain an employee while receiving benefits under the policy? Some policies provide benefits to the individual even after employment ends – but that can have a knock on impact on cost, which for a relatively under the radar benefit may not be attractive to many employers. Which leads on to the crunch question – can you dismiss in circumstances where doing so would deprive the employee of the benefit of PHI? More on that below;
• Be careful in your employment documents (contract, handbook) that you go no further than the terms of the policy when/if describing that policy (and it may well be better just not to describe the policy at all). If there is a disjoint between the two, you may end up being exposed to liabilities for which you are not insured, and there have been several cases on this point. Make sure that if you do reference the PHI/GIP scheme in your contract, you (a) reserve the right to amend/withdraw it and (b) include an express limitation that any benefit is subject to the terms of the relevant policy in place from time to time;
• Employers are sometimes surprised to realise that if an employee has a contractual entitlement to a PHI benefit, they as the employer may be under an implied duty to seek to procure the benefits of the policy for the employee (and to take 'all reasonable steps – whatever that might mean – in doing so, following the case of Marlow v East Thames Housing Group in 2002). The employee is after all not a party to the contract with the insurer. Even before that stage, employers may well be under a duty to bring the PHI benefits to the attention of the employee. This principle derives from the overarching implied duty of trust and confidence – the Marlow case acts as a salutary reminder of the lengths to which that duty may extend. In some circumstances, it is clear that litigation by the employer (on behalf of the employee) against the insurer may be held to be a reasonable step – depending in part on the strength of the employee's case. That said, some judicial commentary about the extent to which employees might be asked to provide indemnities as to the employer's costs in relation to such litigation, could well make this kind of approach unsustainable for employees;
• If an employee can't obtain PHI cover due to the employer's failure to comply with the policy, the employer will be liable to the employee in damages for breach of contract. However, this doesn't extend as far as imposing a general duty on employers to care for their employee's overall economic well-being (though the circumstances will vary, depending on the employee's overall experience and the extent to which they have ready access to independent advice of their own).

What may be less certain

• Can you lawfully terminate employment when someone is eligible to make a PHI claim, or is already in receipt of PHI? Maybe, is the helpful answer;
• Unpicking that a bit: back in the day, when I first started working on these kinds of cases, it was pretty much axiomatic that there was an implied term (again, derived from the duty of trust and confidence) not to terminate when the employee was incapacitated and could qualify for PHI benefits. That was the mantra from the Aspden v Webbs Poultry case, and resulted in sometimes complex settlement agreement drafting, whereby employment would be continued solely for the purposes of preserving PHI entitlement. That's still an option now, and with a bit of intelligent drafting one can come up with a two stage agreement providing for a variety of scenarios, including what happens on expiry of the benefit if the individual does not recover in the interim and what happens if they are well enough to return to work during the continuation of the benefit;
• However, the courts have done a fair bit of rowing back from that overarching principle over the intervening years. It was clear even from Aspden that you could terminate for gross misconduct, even if that would deprive the employee of PHI benefits. Following the Hill v General Accident Fire and Life Assurance Corporation case, it is also (pretty) clear that you can terminate for redundancy, provided that the reason isn't connected with the illness and isn't a repudiatory breach. I still find redundancy dismissals tricky here – it is one thing in a situation where the whole business is closing down and everyone is affected: in that kind of situation and all else being equal, there may well be no damages claim if you terminate and the PHI benefits therefore cease. However, in more iffy circumstances, where the employee in receipt of PHI is one of only a few individuals to be selected, there must still be question marks – leaving aside the question of the general fairness of the dismissal (how do you deal with selection criteria, for example, if they have been out of the business for years?) and disability discrimination risks. Similarly, the Court of Appeal has held that it is possible for an employer to dismiss for 'good cause' as long as the reason for dismissal isn't to prevent the employee from receiving benefits under the PHI scheme;
• The retreat from the Aspden principle continued in the more recent case of Lloyd v BCQ. Here, the employer had an express contractual right to terminate in the event of long term incapacity. The employment contract didn't reference the PHI policy. The contract did contain an entire agreement clause. The employee became eligible for PHI benefits, and was dismissed in accordance with the employment contract. The employee said he shouldn't be dismissed (following Aspden) whilst in receipt of benefits. The court said that the Aspden implied term couldn't apply here since it contradicted the express term of the contract – confirming that this situation could be distinguished from Aspden as in that case the implied term had been necessary in order to try to reconcile two express terms which contradicted one another. So, the current position appears to be that you cannot terminate solely to remove entitlement to PHI benefits, but that it may be possible to terminate for other reasons even when an employee is in receipt of such benefits (again, I'm talking here about avoiding breach of contract risks rather than looking at questions of fairness or equality from a statutory perspective). The next step may well be for an employee to argue that if the employer or insurer is in breach of an express (or indeed, implied) term, then the court should grant a declaration that the employment continues (thus preserving the benefit) rather than the individual bringing a riskier breach of contract claim where damages are based on the loss of a chance;
• I can't resist a reference to holiday pay – no self-respecting article is complete without it at the moment. Holiday plainly accrues (and can be taken) during periods of absence covered by PHI. Statutory holiday entitlement (under Regulation 13 of the Working Time Regulations) rolls over, albeit for only 18 months after the end of the year in question. Since most PHI policies provide for a percentage payment of normal salary, how does that interact with the WTR requirement for annual leave to be paid at a rate of a week's full pay? Is there an expectation of 'full pay' (at the higher, non-PHI rate) rather than 'PHI pay' during a period of holiday? The Scottish case of Souter v RCN Scotland found, amongst other things, that the contract had been varied when the claimant began receiving PHI benefits, so that her normal salary for holiday pay purposes was at the lower, PHI level. However, this was a first instance decision, and applied to payment in lieu of holiday on termination – so there is real ambiguity about how the question may be decided in future. What is clear is that you need to ensure that the terms of your policy allow an employee on PHI to take holiday when in receipt of benefits. Before the Stringer case it wasn't possible to classify an employee as being off sick and on holiday at the same time – so do make sure that if you allow an individual to take holiday whilst on PHI (and particularly if you top up to 'normal' pre-PHI salary during that period, as some employers do), that doesn't affect their classification as 'incapacitated' under the PHI policy.

So, if all that leaves you reeling, I've pulled together below some of the practical themes from my ponderings:-

• Check the consistency between your employment contracts and your PHI policy. As I say, make sure that you have the contractual right to change provider and that your contract doesn't go further than your policy;
• Think about including an express term to say that if the employee is refused cover (both initially and on appeal), the employer doesn't have to litigate, or indeed, to continue to employ the individual. That last suggestion remains a moot point, but simply including it in the contract ought not of itself to be problematic;
• Similarly, consider an express clause reserving the right to terminate employment in any circumstances, even where an employee is receiving PHI (checking the consistency of the remainder of the contract). It may not get you all the way, depending on the circumstances, but given the apparent retreat from the Aspden principle it is better to have it in place than not. It will need to be explicit, and whilst it won't save you from an unfair dismissal or discrimination claim, it does at least potentially take you out of breach of contract territory;
• If you don't want to go that far but do want to have certainty that an employee won't turn up years down the line saying they are better and are coming back to work, consider a settlement agreement arrangement whereby it is agreed that employment will continue for PHI purposes, but will terminate at the point that the individual is fit to return/on expiry of the benefit. The drafting can be tricky, but it can be done, particularly where there is a will on both sides (care does need to be taken if you make any payments direct during this period, to ensure they are not simply deducted by the insurer from payments made to the individual under PHI);
• If battling with an insurer which is refusing to pay, remember the Financial Ombudsman. This won't work in all cases, and it is the employee who has to raise the question (albeit you can offer to support their legal fees). The process is free, but importantly not binding (that said, insurers are pretty unlikely to ignore the Ombudsman's recommendations in practice). The fact that there is a £100,000 ceiling may make it unattractive to some employees (particularly if there is a risk they won't be able to bring a breach of contract claim later, ie, if the matter is deemed already to have been adjudicated – which I think is unlikely) – but it can be a useful alternative to litigation;
• Seek to agree with the insurer that once the employee is entitled to benefits, they don't need to remain on your books to continue to receive those benefits.