Is an Insurance Company Liable to Pay Penalty for Employer’s Delay in Compensation?

The Employees’ Compensation Act, 1923 (formerly the Workmen’s Compensation Act) is a social welfare legislation designed to provide prompt financial relief to employees or their dependents in case of injury or death arising out of and in the course of employment. One recurring legal question under this statute is whether an insurance company, which indemnifies the employer, can also be made liable to pay the penalty imposed on the employer for delay in payment of compensation under Section 4A(3)(b).

This issue was recently revisited by the Supreme Court of India in New India Assurance Co. Ltd. v. Rekha Chaudhary & Ors., decided on 23 February 2026. The Court examined whether an insurer can be saddled with liability for a penalty arising from the employer’s default in timely payment of compensation.

Statutory Framework: Section 4A of the Employees’ Compensation Act

Section 4A governs the time of payment of compensation and the consequences of default. The relevant provision reads:

• Section 4A(1): Compensation shall be paid as soon as it falls due.
• Section 4A(3)(a): If the employer defaults in payment within one month, the Commissioner shall direct payment of interest.
• Section 4A(3)(b): If there is no justification for delay, the Commissioner may direct payment of a penalty not exceeding 50% of the compensation.

Facts of the Case

The deceased employee was a commercial driver who died during the course of employment. The Commissioner awarded:

• ₹7,36,680 as compensation
• 12% interest from the date of death
• 35% penalty for delayed payment

While the insurance company admitted liability for compensation and interest, it challenged the High Court’s direction fastening penalty liability upon it.

Issue

• Whether the insurer can be made liable for the penalty imposed under Section 4A(3)(b)?

Nature of the Employees’ Compensation Act

The Court reaffirmed that the Act is a social welfare legislation requiring liberal interpretation in favour of employees. However, beneficial interpretation cannot override clear statutory intent.

The purpose of Section 4A is twofold:

1. Ensure prompt payment of compensation.
2. Impose deterrent consequences for unjustified delay.

The penalty provision is therefore punitive in character.

Legislative History: Why It Matters

A crucial aspect of the Supreme Court’s reasoning lies in the legislative evolution of Section 4A.

1959 Amendment

Originally, compensation, interest, and penalty formed a combined structure within Section 4A(3). The phrase “together with” indicated a composite liability.

1995 Amendment

The 1995 substitution separated:

• Clause (a): Compensation + interest
• Clause (b): Penalty

This severance was significant. It reflected a legislative intent to treat penalty distinctly from compensation and interest.

The Court observed that the amendment was designed to prevent employers from escaping deterrent consequences by shifting penalty liability onto insurers.

Judicial Precedent: Ved Prakash Garg Principle

The leading authority on this issue is Ved Prakash Garg v. Premi Devi.

The Supreme Court in that case held:

• The insurer is liable to indemnify the employer for compensation and interest.
• The insurer is not liable for penalty under Section 4A(3)(b).
• Penalty arises due to the personal fault and negligence of the employer.

The reasoning was that penalty is not a natural corollary of statutory compensation liability but a consequence of the employer’s default.

Reaffirmation in Subsequent Cases

The principle was reiterated in:

1. L.R. Ferro Alloys Ltd. v. Mahavir Mahto
2. Sheela Devi v. Oriental Insurance Co. Ltd.

These cases consistently held that the insurer cannot be compelled to indemnify the employer for a statutory penalty.

Supreme Court’s Analysis

1. Nature of Penalty

The penalty under Section 4A(3)(b):

• It is discretionary.
• Requires a finding of unjustified delay.
• It is imposed after giving the employer an opportunity to show cause.
• Arises from personal fault.

Therefore, it is not part of the primary compensation liability.

2. Contractual Indemnity v. Statutory Obligation

The respondents argued that the insurer “steps into the shoes” of the employer.

The Court rejected this broad proposition, holding:

• The insurance contract indemnifies liability arising under the Act.
• Penalty is not an automatic statutory liability.
• It arises due to a breach of a statutory duty by the employer.

An insurer cannot be made liable for the consequences of the employer’s misconduct.

3. Deterrent Purpose of Penalty

If penalty liability were shifted to insurers:

• Employers would lack the incentive to pay compensation within one month.
• The deterrent character of Section 4A(3)(b) would become ineffective.
• The statutory objective of prompt payment would be diluted.

Thus, imposing a penalty on insurers would defeat legislative intent.

Final Holding of the Supreme Court

The Supreme Court allowed the appeal and held:

1. The insurer is liable to pay compensation and interest.
2. The employer alone is liable to pay penalty under Section 4A(3)(b).
3. The High Court erred in fastening penalty liability upon the insurance company.
4. The employer was directed to pay the penalty amount within eight weeks.

Conceptual Distinction: Compensation v. Penalty

Key Takeaways

1. The insurer is liable for compensation and statutory interest.
2. The insurer is not liable for penalty under Section 4A(3)(b).
3. Penalty is a consequence of the employer’s unjustified delay.
4. Legislative history supports the separation of penalty from indemnifiable liability.
5. The Supreme Court has consistently upheld this principle.

Conclusion

The Supreme Court’s decision in New India Assurance Co. Ltd. v. Rekha Chaudhary (2026) draws a clear and principled boundary between compensatory liability and punitive responsibility under the Employees’ Compensation Act. While the insurer remains bound to indemnify the employer for compensation and statutory interest, the penalty imposed for unjustified delay in payment is a consequence of the employer’s own failure to comply with a mandatory statutory duty.

By placing the burden of penalty squarely upon the employer, the Court has preserved the deterrent character of Section 4A(3)(b). If insurers were made liable for such a penalty, the statutory obligation to pay compensation within one month would lose its enforceability and practical significance. The ruling, therefore, ensures that employers remain vigilant and proactive in discharging their legal responsibilities toward employees and their dependents.

Ultimately, the judgment reinforces both accountability and social justice. It balances the protective purpose of the Employees’ Compensation Act with the fundamental principle that punitive consequences arising from personal default cannot be shifted onto an indemnifier.

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