Insurer Not Liable for Employer’s Delay Penalty

Source: Supreme Court 

Why in News? 

The bench of Justices Aravind Kumar and Prasanna B. Varale in the case of New India Assurance Co. Ltd. v. Rekha Chaudhary and Others (2026) held that the liability to pay penalty under Section 4A(3)(b) of the Employees' Compensation Act, 1923 for delayed compensation payment is a personal liability of the employer and cannot be imposed upon the insurer. 

What was the Background of New India Assurance Co. Ltd. v. Rekha Chaudhary and Others (2026) Case? 

• The case arose from the death of a commercial driver who collapsed while driving his employer's vehicle. 
• The legal heirs of the deceased driver approached the Commissioner under the Employees' Compensation Act, 1923 seeking compensation. 
• The Commissioner awarded compensation of ₹7.36 lakh along with 12% interest and also issued a show-cause notice to the employer for delay in making the payment. 
• As the employer failed to respond to the show-cause notice, a penalty of 35% was imposed on the employer under Section 4A(3)(b) of the Employees' Compensation Act, 1923. 
• The employer's vehicle was insured with the Appellant — New India Assurance Co. Ltd. 
• While the insurer accepted liability for the compensation amount and interest, it contested its liability to pay the penalty. 
• The Delhi High Court, however, directed the insurer to pay not just compensation and interest but also the penalty imposed for the employer's delay, prompting New India Assurance Co. Ltd. to appeal before the Supreme Court. 

What were the Court's Observations? 

• The bench, in a judgment authored by Justice Aravind Kumar, held that the insurer cannot be held liable for the personal fault or negligence of the employer. 
• The Court relied on the precedent laid down in Ved Prakash Garg v. Premi Devi (1997) 8 SCC 1, wherein it was established that the burden of penalty imposed under Section 4A(3)(b) of the Employees' Compensation Act, 1923 must be borne by the employer alone and cannot be passed on to the insurance company. 
• The Court observed that "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 further noted that when the Act imposes a statutory liability on the employer for delayed payment, that liability cannot be transferred to the insurer merely on account of a contractual insurance arrangement. 
• The Supreme Court set aside that part of the Delhi High Court's order which had fastened the penalty liability upon the Appellant-insurer, and directed the employer (Respondent No. 4) to pay the penalty amount within eight weeks from the date of the order. 
• Accordingly, the appeal was allowed in favour of New India Assurance Co. Ltd. 

What is the Employee's Compensation Act, 1923? 

About: 

• The Employee's Compensation Act, 1923 (formerly known as the Workmen's Compensation Act, 1923) is a social security legislation designed to provide compensation to employees and their dependents in case of accidents arising out of and in the course of employment. 
• The Act was enacted to provide financial protection to workers and their families in case of work-related injuries, disabilities, or death. 
• The Act defines 'dependent' to include certain relatives of the deceased employee who were wholly or in part dependent on the earnings of the worker at the time of death. 

Section 4A — Compensation to be paid when due and penalty for default: 

Basic Rule (Sub-section 1): 

• Compensation must be paid as soon as it falls due — no delay is permissible. 

Disputed Liability (Sub-section 2): 

• If the employer disputes the full claim, he must still make a provisional payment for the portion he accepts. 
• This provisional payment goes to the Commissioner or directly to the employee. 
• Making provisional payment does not bar the employee from claiming the remaining amount. 

Default & Consequences (Sub-section 3): 

• If the employer fails to pay within one month from the due date, the Commissioner shall:  
• (a) Interest — Direct the employer to pay 12% simple interest per annum (or a higher rate up to the maximum lending rate of any scheduled bank, as notified by the Central Government) on the arrears. 
• (b) Penalty — If no justification exists for the delay, direct the employer to pay an additional penalty up to 50% of the arrears amount. 
• The employer must be given a reasonable opportunity to show cause before any penalty order is passed. 

Beneficiary of Interest & Penalty (Sub-section 3A): 

• Both the interest and penalty amounts are payable to the employee or their dependant, not to the state. 

Key Takeaway: 

• Default triggers a two-tier consequence — mandatory interest + discretionary penalty — and the burden of both falls on the employer personally, not on any insurer.