Reflections on group life policies
Group insurance policies arranged by a firm on behalf of a number of individuals are commonplace, particularly in life and disability insurance. They are most prevalent in the employment context where offered as part of an employment benefits package. However, their structure, where the policyholder is not the ultimate beneficiary and there is no direct relationship between insurer and beneficiary, can give rise to issues when a coverage dispute arises.
Structure of group life policies
Although details can differ, the basic structure of group policies is that the insurer and employer enter into a life or life and disability insurance policy covering employees. An important characteristic of this arrangement is that the employer is the policyholder with the rights and obligations under the policy, including the sole right to receive payment of any benefits due in respect of any employee. The policy typically provides that the employees do not have any rights against the insurer.
An employer may (but does not have to) enter into a separate agreement with the employees as to how they will deal with any claims under the policy. This may form part of the employment contract and it may be on different terms to the group policy.
In some circumstances, however, employers do not assume any obligations to their employees with respect to the policy. They may not even inform the employees of its existence, using it instead to provide assistance payments to employees and their families in the event of death or disablement. It is also commonplace for employers to arrange for a trustee to manage the policy and receive claim benefits for distribution to employees, instead of the employer doing it themselves.
Benefits of this structure
The group policy structure has a number of benefits:
- lower premium rates due to:
- a large number of lives insured under one policy
- reduced administration costs through dealing with a single employer or trustee rather than individual employees
- limited underwriting, if any, due to the pooled nature of the cover. This reduces administration costs for the insurer and enables employers to procure cover for higher-risk individuals at lower rates. This is facilitated by automatic acceptance limits
- no need for a review before annual renewals
- the employer has control of the policy, enabling it to ensure that obviously unmeritorious claims are not made, so as to avoid rate increases
Issues that can arise when cover is disputed
The group structure raises issues where an employee’s claim is declined in contentious circumstances. What claims – if any – may an employee bring against the insurer, the employer or a trustee?
May an employee bring a claim in contract against the insurer?
Normally, an employee has no direct right against the insurer, as there is no direct contractual relationship between them. The structure has been described by the courts as imposing:
“a curtain between the plaintiff and the second defendants [employees]. The first defendants [employers] were that curtain.”
While s12 of the Contract and Commercial Law Act 2017 (previously s4 of the Contracts (Privity) Act 1982) allows a party upon whom a benefit is conferred by a contract to enforce it, this does not apply where the contract was not intended to create an obligation enforceable by the non-party. Most group life policies expressly provide that the policy is not intended to confer benefits enforceable by an employee.
An employer or trustee who wishes to allow an employee to pursue a disputed claim under a group policy may elect to assign the claim to the employee, subject to any prohibitions in the policy. Unlike the assignment of policies, which must comply with Part 2 of the Life Insurance Act 1908, there is no particular requirement as to the form of the assignment of a claim.
May an employee bring a claim in negligence against the insurer?
Employees have sought to circumvent the difficulty of having no direct contractual right against an insurer by alleging that the insurer owes them a duty in tort to pay a valid claim. Whether a claim in tort could succeed will likely depend upon the nuances of the particular group structure and the duty alleged to be owed by the insurer.
The issue has been considered in England, in the context of an allegation that an insurer owed a duty to an employee (Briscoe) to take proper steps to ascertain whether or not the claim came within the terms of a group policy between the insurer and Briscoe’s employer (Lubrizol).
Like most group policies, Lubrizol was the policyholder. Briscoe had no direct contractual rights against the insurer. However, Briscoe had an employment contract with Lubrizol, under which Briscoe was entitled to the benefits of Lubrizol’s policy with the insurer.
|Briscoe v Lubrizol Ltd – Quick facts|
Whether the insurer owed a duty directly to Briscoe was heard as a preliminary issue. The court at first instance answered in the negative. Briscoe appealed unsuccessfully to the Court of Appeal. The Court held that the insurer did not owe a duty of care to Briscoe, in large part because of the specific contractual matrix that the parties had intentionally employed.
The well-accepted formulae for deciding the question of imposition of a duty of care has three elements:
- sufficient proximity between the parties
- reasonable foreseeability
- a duty is just and reasonable in the circumstances
The Court considered that, although there was sufficient proximity between Briscoe and the insurer, it was not foreseeable that Briscoe would suffer financial harm if the insurer failed to take proper steps to ascertain whether or not the claim came within the terms of the policy. Nor did the insurer assume responsibility for an employee. In fact, the contractual regime was clearly directed at ensuring that was not the case. The court found among other things that “… it was reasonable for the insurers to protect themselves against claims by employees of Lubrizol who might turn out to be impecunious and unable to pay costs.”
The contractual structure was also considered a powerful indication that the proposed duty was not just and reasonable. Specifically, the Court considered that Briscoe was not left without a remedy, because Briscoe had a claim in contract against Lubrizol. This, however, would depend upon the employment contract, and rights against an employer will not exist in all claims.
A group policy should state explicitly that employees have no direct rights or benefits under the policy, that the only relevant contractual relationship is between the insurer and policy holder (employer) and exclude the operation of section 12 of the Contract and Commercial Law Act.
Consider the implications of employees having direct recourse against you, including your obligations under your employment contracts. It may be appropriate to consider expressly disclaiming any obligations to pursue claims under group policies.
Consider whether you have standing to bring a claim against an insurer or an employer.
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