Can contractual liability be limited by insurance?

Jonathan Insley reviews a Court of Appeal decision on an employer’s liability to pay income protection payments.

The facts

The Claimant, Mr Langton, was originally employed by Cramer Systems Limited which was subsequently acquired by Amdocs in 2006. 

Mr Langton had been employed since 2003 and received an offer letter, contract of employment and a summary of benefits document.  Both the offer letter and summary of benefits documents set out entitlement to income protection payments in the event that he was unable to work due to long term sickness absence.  As part of those entitlements, an escalator was included such that after the first year of absence, payments to him would increase every year by 5% (on account of inflation).

Mr Langton commenced a period of long-term sickness absence in 2009 and from November 2019 he began to receive income protection payments. His income protection payments (amounting to 75% of salary) did not include the escalator after the first year, which was raised by Mr Langton in 2016 when he realised that it was not being applied.  Amdocs stated to him that the escalator had been removed from the policy in 2008 when they changed insurance provider and so prior to commencement of payments under the scheme. 

Mr Langton was unsatisfied with the reply and brought a claim in the Employment Tribunal for unlawful deduction from wages on account of Amdocs’ failure to pay the escalator. The Employment Tribunal and Employment Appeal Tribunal found in his favour and held that Mr Langton had been contractually entitled to have the escalator applied to his payments.  Amdocs appealed to the Court of Appeal.       

Court of Appeal Decision

The decision of the Court of Appeal held that Amdocs was directly liable to pay the level of income protection payments, including the escalator, set out in the offer letter and attached summary of benefits as these were incorporated into the contract.

The Court of Appeal considered that:

1. The escalator provisions were sufficiently clear to have contractual force.
2. The statement in the summary of benefits which stated that the benefit was governed by the terms of the insurance policy would not act as to override contractual terms. 
3. Any ambiguity would be construed against the employer.

Amdocs’ liability was not therefore limited by the terms of the insurance policy in place from time to time, as the contractual entitlement to the escalator applied to override the policy terms.    

The Birketts view

The Court of Appeal’s decision serves as a reminder to employers that any ambiguity in drafting will usually be resolved in favour of the employee rather than employer, as confirmed by earlier case law. 

The judgment also reiterates the importance of clearly drafted contracts, especially in relation to provisions concerning insurance benefits.  Such clauses need to be precisely drafted, in order to limit liability to the amounts covered by the insurance policy applicable at the time the benefit is claimed.  The consequences of failing to put in place clear and unambiguous documentation is that employers could find themselves liable to employees for income protection benefits that are not covered fully by the employer’s policy of insurance. 

Finally, where an employer wishes to change to a policy with new and less favourable benefits, it should ensure that the contractual wording allows this and ensure that these new terms are clearly communicated to employees.

For more information on the contents of this article please contact Jonathan Insley or a member of the Employment Team.