Employees' Compensation Act | Insurer Not Liable To Bear Penalty Imposed On Employer For Delayed Compensation Payment : Supreme Court

The Supreme Court on Monday (February 23) observed that an employer's liability to pay a penalty for delaying payment of compensation to its employee cannot be fastened upon the insurance company.

A bench of Justices Aravind Kumar and Prasanna B. Varale set aside that part of the Delhi High Court's order which had fastened the liability of the employer to pay a penalty to the employee for the delayed payment of the compensation upon the Appellant-New India Assurance Co. Ltd.

The case arose from the death of a commercial driver who collapsed while driving his employer's vehicle. His legal heirs approached the Commissioner under the Employees' Compensation Act seeking compensation. The Commissioner awarded compensation of ₹7.36 lakh with 12% interest and issued a show-cause notice to the employer for the delay in payment. When the employer failed to respond, a penalty of 35% was imposed under Section 4A(3)(b) of the Employees Compensation Act, 1923, which empowers the Commissioner to impose a penalty on employers who default on compensation payments for more than one month.

While the employer's vehicle was insured with New India Assurance Co. Ltd., the insurer accepted liability for compensation and interest but contested the penalty.

The Delhi High Court, however, directed the insurer to pay not just compensation and interest but also the penalty, prompting the insurer's appeal to the Supreme Court.

Before the Supreme Court, the Appellant-insurer relying on Ved Prakash Garg v. Premi Devi, 1997 (8) SCC 1, contended that the burden of payment of penalty as imposed by the Commissioner under Section 4A(3)(b) of EC Act has to be made good by the employer himself and same cannot be imposed upon the Insurance company since imposition of penalty under the said provision is the result of personal fault and negligence on the part of the employer.

Finding force in the Appellant's contention, the judgment authored by Justice Aravind Kumar observed that the insurer cannot be held liable for the personal fault of the employer.

“when the statute itself has obligated the employer to make the payment within one month, such obligation cannot be countenanced as sub-servient to any contractual obligation or bypassing the statutory obligation, as the same would tantamount to disregard of the legislative intent envisaged under the said provision.”, the court observed, pointing that when the Act has imposed a statuty liability on the employer, their liability to pay penalty for delayed payment of the compensation amount cannot be fastended onto the insurer.

“Consequently, the Impugned Judgement and Order…is set aside, so far as it imposes the liability of paying the penalty under Section 4A(3)(b) of Employees' Compensation Act, 1923 on the Appellant-Insurance Company and the said liability is fastened upon the Employer i.e., Respondent no. 4 herein to pay the amount of penalty…within a period of eight (8) weeks from today.”, the court ordered.

Accordingly, the appeal was allowed.

Headnote

Employees' Compensation Act, 1923; Section 4A(3)(b) — Liability to pay Penalty — The Supreme Court reiterated that while an Insurance Company is liable to indemnify the employer for the principal compensation amount and interest, it cannot be fastened with the liability to pay the penalty component - Noted that the penalty under Section 4A(3)(b) is imposed due to the "personal fault and negligence" of the employer for failing to deposit compensation within the stipulated one month.

Statutory Interpretation — Section 4A — Following the 1995 Amendment, the components of compensation/interest (Clause 'a') and penalty (Clause 'b') have been severed - The legislative intent behind this severance was to ensure that the burden of penalty which is not a natural corollary of the indemnity contract remains a deterrence for the employer rather than being passed onto the insurer - The Supreme Court set aside the High Court's order regarding the penalty. It held that the employer (Respondent No. 4) is solely liable to pay the penalty amount of Rs. 2,57,838/- within eight weeks. [Relied on Ved Prakash Garg v. Premi Devi (1997) 8 SCC 1; Paras 10-22]

Cause Title: NEW INDIA ASSURANCE CO. LTD. VERSUS REKHA CHAUDHARY AND OTHERS

Citation : 2026 LiveLaw (SC) 187

Click here to download judgment

Appearance:

For Petitioner(s) : Mr. Salil Paul, Adv. Ms. Manjeet Chawla, AOR Mr. Sahil Paul, Adv. Mr. Sandeep Dayal, Adv. Ms. Kanupriya Mehta, Adv. Ms. Jyoti, Adv.

For Respondent(s) : Mr. Manish Maini, Adv. Mr. Akash, Adv. Mr. Mahesh Dutt Shukla, Adv. Mr. Abhimanyu Singh, Adv. Mr. Ram Chandra, Adv. Mr. Ashish Pandey, AOR