Exclusion Of Interest In Insurance Policy Is Conditional; Insurer Must Plead & Prove Employer's Failure To Comply With Act To Avoid Liability: Kerala High Court

"Exclusion of interest is not an absolute one and it is a conditional exclusion only... in order to invoke the exclusion clause, the Insurance Company ought to have stated in their written statement that the applicant or the employer has failed to comply with the requirements laid down under the Act," Kerala High Court has held that an insurance company cannot escape its liability to pay interest on compensation awarded under the Employee’s Compensation Act, 1923, unless it specifically pleads and proves that the employer or the claimant failed to comply with statutory requirements.

A Single Bench of Justice M.A. Abdul Hakhim, while allowing a review petition, observed that the exclusion of interest clauses in insurance policies are conditional and must be interpreted narrowly against the insurer.

The Review Petitioners, M/s. Poabs Enterprises Private Limited, sought a review of a 2025 judgment which had modified an award passed by the Employees Compensation Commissioner. Initially, the Commissioner had awarded Rs. 6,12,360 with 12% interest to the dependents of a deceased employee, directing the insurer, New India Assurance Co. Ltd, to deposit the amount. However, in the appeal, the High Court had exempted the insurer from interest liability based on the Supreme Court's ruling in Harshadbhai Amrutbhai Modhiya, shifting the burden of interest to the employers.

The primary question before the court was whether the non-consideration of binding Division Bench precedents regarding the conditional nature of interest exclusion clauses constituted a valid ground for review. The court was also called upon to determine whether the insurer could invoke an exclusion clause without specifically pleading the particulars of the employer's alleged failure to comply with the Employee’s Compensation Act.

Non-Consideration Of Binding Precedents Constitutes Ground For Review

The court began by clarifying the scope of its review jurisdiction, noting that the failure to notice binding precedents from coordinate or higher benches is a manifest error. The bench observed that while rendering the impugned judgment, it had relied on Supreme Court decisions but missed two crucial Division Bench rulings of the Kerala High Court that squarely addressed the issue at hand.

The Court noted that it is a settled law that non-consideration of a binding precedent is a ground for review. It further observed that the Division Bench judgments in The New India Assurance Company Limited v. J. Chellappan and Others and Branch Manager, New India Assurance Co. Ltd. v. Kaleeswari and Another were essential to deciding the insurer's liability but were overlooked in the earlier proceedings.

Exclusion Of Interest Liability Not Absolute Under Insurance Policies

Analyzing the merits of the review, the Court emphasized that any clause in an insurance policy that seeks to exclude the insurer's liability for interest is not absolute. The bench noted that such exclusions are conditional and depend on the specific facts regarding statutory compliance by the parties involved in the claim.

The Court held that the exclusion of interest is not an absolute one and it is a conditional exclusion only. It further observed that coverage provisions under an insurance policy are to be interpreted broadly, whereas exclusion clauses must be read narrowly, ensuring that the beneficial object of the Employee’s Compensation Act is not defeated by technical contractual interpretations.

Burden Of Proof Lies On Insurer To Invoke Exclusion Clause

The Court highlighted that the onus of proving an exception to the policy coverage lies entirely upon the insurance company. It held that to successfully avoid paying interest, the insurer must not only plead the exclusion clause but also provide evidence showing exactly which statutory requirement was violated by the employer or the claimant.

In order to invoke the exclusion clause, the Insurance Company ought to have stated in their written statement that the applicant or the employer had failed to comply with the requirements laid down under the Act. The bench remarked that the insurer must specify the particulars of the requirement which the party failed to fulfill and subsequently prove the same through evidence.

Insurer Liable If Written Statement Lacks Specific Averments On Non-Compliance

Applying these principles to the present case, the Court found that New India Assurance Co. Ltd had failed to meet the pleading standards required to escape liability. The bench observed that the insurer’s written statement was silent on any specific failure by the employer or the applicant to comply with the provisions of the Employee’s Compensation Act.

The Court noted that in the written statement filed by the Respondent No.1, there is no averment that either the applicant or the employer failed to comply with the requirements laid down under the Act. It further observed that no evidence was led by the Insurance Company before the Commissioner to substantiate any such failure, rendering the previous exemption from interest unsustainable.

Final Directions and Modification of Judgment

Concluding that the earlier judgment contained an error apparent on the face of the record, the Court modified its findings. It answered the substantial question of law in favor of the claimants and the employers, holding the insurer liable for the interest component on the primary compensation amount it was directed to indemnify.

The Court reviewed and modified the impugned judgment, holding that the Insurance Company is liable to pay interest at the rate of 12% per annum from the date of accident till realization on the compensation amount of Rs. 4,54,013. The Review Petitioners were directed to pay interest at the same rate on the balance amount of Rs. 1,58,347 payable by them, while all other findings of the original judgment were confirmed.

Date of Decision: 22 June 2026