How to manage policy changes to income protection benefits

In light of a recent EAT ruling, Stephen Hills examines whether firms can rely on changes made by an insurer to limit an employee’s entitlement to payments

How to manage policy changes to income protection benefits

Issue

A number of employers provide income protection schemes for employees on long-term sick leave. These are commonly referred to as Permanent Health Insurance schemes or PHI as the payments are funded by the employer taking out an insurance policy with a third-party insurer. 

The terms that apply to PHI schemes will generally provide that subject to the employee being absent for a minimum period and satisfying certain medical criteria, they will be entitled to receive a fixed proportion of their usual salary while they remain unable to work due to ill health. 

A dispute arose in the case of Amdocs Systems Group Ltd v Mr J Langton when changes to the insurance policy led to differences between the income entitlements that had been communicated to the employee and those that were actually covered by the insurance policy. 

The issue was whether the employer could rely on changes to the insurance contract between it and the insurer to limit the employee’s entitlement to payments.

Facts

When Mr Langton commenced work in 2003, he received a summary of his benefits which included details of a Group Income Protection Scheme. 

This benefit would be triggered if he was absent due to sickness for more than 13 consecutive weeks and guaranteed him 75 per cent of his wages. In the event that an absence lasted over a year, the payment would benefit from an escalator provision under which he would receive an annual 5 per cent increment. 

Langton was signed off long-term sick from 2009. He was still on sick leave when the business transferred in 2015 to a new owner. Only at this time did he check the summary he had been given of his benefits and realised that the 5 per cent increments had not been applied to his sickness payments. 

He complained about the shortfall but the employer disputed that there was any liability on the grounds that the insurance policy had changed back in 2008 when references to an escalator benefit had been removed. 

Langton issued a claim for the shortfall in payments.

Decision 

The Employment Appeal Tribunal held that Langton was contractually entitled to the annual increases in payments. 

He had been entitled to rely upon the summary of benefits that had been given to him. 

The employer’s argument that the correct construction of the documentation was that its obligations were limited to the amount in respect of which was covered by the policy of insurance was rejected. 

Even if there were references in the summary given to the employee that the benefit was backed by insurance this did not mean that the employer’s obligations were limited to the extent of that cover. Much clearer wording would have been required to achieve such an outcome.

Key point

The decision is an important reminder that if the payment of income protection benefit is to be limited to that payable through an insurance policy, it is essential that it is expressly referred to as being subject to any changes to the insurance policy and conditional on the payments being received from the insurer.  

As this case shows, in the absence of any express provision, the courts are unlikely to imply a limitation and the cost will need to be met by the employer even if this was clearly not their intention.

It also serves as a warning for those employers taking on new employees following a TUPE transfer to carry out appropriate checks in relation to historical liabilities under PHI and similar income protection schemes. Given the potential for disputes, where possible, indemnities in relation to such liabilities should be obtained from the outgoing employer.

Stephen Hills is a partner at Gateley Plc