Permanent health insurance – are you covered?

The case

The employee's offer letter and summary of benefits document set out the right to receive income protection payments (IPP) in the event he was off work due to a long-term sickness. This particular scheme offered an enhanced payment after the employee had completed 52 weeks service.

At the time his employment started, the employer had taken out an insurance policy that covered the IPP and the enhanced rate. The employee's contract was then transferred to a new employer under TUPE and the terms of the contract remained unchanged. Three years after the transfer, the employee was signed off for long-term sickness and started to receive the IPP.

After the transfer occurred, the new employer changed its IPP insurance policy to one which did not offer the enhanced payment. The new employer did not make the employee aware of or agree the change to the policy terms.

The EAT decided that the employee was still contractually entitled to the sums specified under the old policy. The insurer did not cover the enhanced payment and so the employer was liable to pay the difference between the new and the old policies.

Why was the employer liable?

The EAT decided that there was sufficient certainty in the employees original offer letter and summary of benefits document to make the IPP a contractual commitment. This included not just the IPP but also the enhanced payment.

The employer replaced the original insurance policy with one that provided less favourable terms but did not seek to reflect those changes in the employment contract.

It is an established principle that if a change is introduced that limits or reduces a person's rights, it needs to be brought to that person's attention and accepted by them. If there is any ambiguity about whether an employer has an obligation to provide a benefit, a tribunal will usually decide in favour of the employee rather than the employer.

What does this mean for employers?

This case highlights the risk to employers of changing insurance policies that affect employees' contractual benefits. In particular, it is a useful reminder for transferee employers to carefully check the level of permanent health insurance benefits for employees transferring to them in a TUPE situation.

Employers need to set out clearly in any contractual documentation that liability to make permanent health payments will be limited to the amount received from the scheme insurer for that purpose at the relevant time.