PHI benefits case study

Employee could not argue that he was entitled to continued PHI benefits under a replacement policy

When an employee is sick for an extended period of time, they often think that at least any financial impact by not receiving full pay when sick pay is exhausted might be minimised because they will receive Group Income Protection or PHI benefits (Permanent Health Insurance benefits). These are benefits provided by an insurer via an employer that provides a percentage of the employee’s basic salary when an employee is incapacitated from carrying out their role through ill-health.  

The Employment Appeal Tribunal (EAT) recently considered a claim for Permanent Health Insurance benefits when an employee argued that the termination of PHI benefits was premature in Mr D Pelter v Buro Four Project Services Ltd. 

Here Mr Pelter was a Director of the Respondent company, Buro Four Project Services Ltd. His Director’s Service Agreement provided that the employer would “effect permanent health insurance (“PHI”)” for Mr Pelter. The agreement provided that the PHI benefit would be subject to “the rules of such PHI scheme”. The PHI insurance policy stated that the benefits payable to Mr Pelter on his incapacity would be determined by “the terms and conditions of the policy immediately prior to his incapacity” and that payments under the policy would cease at the ‘terminal age’, which was defined as 65 years old.

The state pension age at the time the PHI was entered into in 2011 was also 65 years old. In 2011 Mr Pelter became permanently ill and he received Permanent Health Insurance benefits. In 2012, Mr Pelter’s state pension age increased to 66. In 2016, the employer took out a PHI scheme that extended cover until 70 years old. However, Mr Pelter remained under the original policy. On reaching 65, the employer stopped making payments to Mr Pelter.

Mr Pelter claimed in the Employment Tribunal (ET) for direct and indirect age discrimination on the basis that he had been treated less favourably than an “employee aged under the age of 65 years who would be in need of PHI benefits” – i.e. someone under the extended policy. The claims are complicated because they required a detailed analysis of the terms of the different policies.

The ET rejected the claim, holding that the employer had an obligation to provide ‘access’ to the benefit in a non-discriminatory way and that all employees had been entitled to join the PHI scheme. Entitlement to access the scheme ceased when the benefit was ‘triggered’, the ET said, and once the benefit had crystallised “it is no longer a matter of access”, which was the employer’s responsibility. However, while it considered that payments under the policy stopping at age 65 was potentially discriminatory on the basis of age, it fell into the exclusion in the Equality Act 2010 (at Schedule 9 Part 2 Paragraph 14), which states that insurance benefits can end at age 65 or at state pensionable age, whichever is the latter.  The indirect discrimination claim was dismissed because the ET found that the employer not paying the difference between the old and new policy was a proportionate means of achieving a legitimate aim.

Mr Pelter appealed but the EAT agreed with the ET and dismissed his appeal endorsing the ET’s rationale. It said that the payment of the PHI benefit was a matter for the insurer and consistent with previous cases they were responsible not the employer. The EAT said that there was a stronger argument to show that Permanent Health Insurance benefits should have been provided to state pension age 66 but the old policy in theory could still be a proportionate means of achieving a legitimate aim which defeats this claim. The judgment is here. 

Navigating what your entitlements for Permanent Health Insurance benefits are can be complicated and therefore we recommend you get legal advice. No matter what, the employer has a duty of implied trust and confidence to act in an employee’s best interests and take all reasonable steps to obtain PHI benefits for unwell eligible employees.

This blog is written by Anita Vadgama, Partner for didlaw and who specialises in providing advice on PHI benefits.