General Insurance Article - Uninsured liabilities could cost employers dearly


Towergate Health & Protection is warning employers that they could unwittingly be leaving themselves open to uninsured liabilities that could cost them hundreds of thousands of pounds if their employee benefits are not aligned with their contracts of employment.

 Many companies will be renewing their employee benefits during April, and it is particularly important that they are aware of any potential pitfalls before they sign on the dotted line.

 Many employers offer useful and valued benefits like group life assurance, group income protection, and group critical illness cover. These are effective and important benefits, but issues can occur if the employee’s contract is not an accurate reflection of the cover.

 With nearly 10 million of the circa 28 million employees(1) in the UK covered by group life assurance(2), it is an issue that may affect huge numbers of employers.

 David Williams, head of group risk at Towergate Health & Protection, explains: “The crux of the issue is that what employers offer in employment contracts does not always fully tally with the actual insurance cover. Both must be aligned or the employer could be liable to pay a shortfall in the insurance pay out.”

 Example
 A group life assurance policy may be set up in a number of different ways, for instance to cover employees from day one of employment or after a probationary period. If an employer offers a role with a probationary period, the new employee may not be covered under the life assurance policy until this period has been completed. This is not an issue, so long as the employee’s contract does not offer life cover until after this period too. The issue arises when employers use standard contracts, or offer off-the-shelf benefits, but do not align the two.

 If an employee were to die before the probation period had been completed, and their contract states they will receive a multiple of salary from day one of employment - then this must be paid to fulfil the promise in their contract of employment, whether or not the employee is actually covered by the policy

 In this example, with life cover at three-times salary, the family of an employee earning £50,000, would be due £150,000 which, if it is not paid out by the insurance company, would have to be paid by the employer.
 
 State pension age
 Another example relates to how maximum ages apply for these benefits. For many years, employers operated a default retirement age of 65 and they routinely stopped providing benefits at that age. Although the default retirement age was removed in 2011 the state pension age effectively remained at age 65 for most employees until recently (simplistically speaking, the actual application is complex and linked to dates of birth). This creates a potential false sense of security for employers who may not see the need to provide insurance beyond age 65.

 The state pension age changed in October 2020, going up from 65 to 66 years of age. When speaking to potential new customers and checking their insurance details for the first time, it is not uncommon for us to see employees working beyond age 65 who have inadvertently dropped off their employer’s group life assurance policy without anyone realising.

 Similarly, we see cases of ongoing group income protection claimants who have suddenly lost their monthly claim payment simply because they’ve passed age 65 These are more examples of anomalies between insurance cover and contractual promises where the employer may stand to foot the bill.

 Specialist advice
 The problem is not in the insurance products, or in the employee contracts, it is in the lack of reconciliation between the two. When taking out any insurances for employees it is important for employers to receive advice from a group risk specialist. An expert in the field will be able to carry out an audit to ensure that the relevant documents and policies all align, and that the employer is not leaving themselves open to the risk of having to make a large payment themselves.

 David Williams concludes: “The simple message is to take expert advice, speak to a specialist. Group risk policies like life assurance are highly valued benefits and cost relatively little to provide, but if the promise does not match the policy, it could prove very costly for the employer.”
  

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