Penalty For Delayed Compensation Is The Employer's Personal Fault — Insurance Company Cannot Be Made To Pay For The Employer's Own Default: Supreme Court

"The Insurer Cannot Be Made Liable To Reimburse The Penalty Amount — The Employer, Because Of His Own Fault And Negligence, Will Have To Bear The Entire Burden": Supreme Court Draws A Decisive Line Between Compensation, Interest And Penalty Under The Employees' Compensation Act, 1923

In a ruling of critical importance for every insurance law practitioner, labour law advocate, and employer dealing with employees' compensation claims, the Supreme Court of India on February 23, 2026 holding that while an insurance company is fully liable to indemnify the employer for compensation and interest payable under the Employees' Compensation Act, 1923, it cannot be made to bear the penalty imposed under Section 4A(3)(b) of the Act for the employer's unjustified delay in paying compensation.

A bench of Justices Aravind Kumar and Prasanna B. Varale set aside the Delhi High Court's judgment to the extent it had fastened the penalty liability upon New India Assurance Company Limited, and directed the employer — Respondent No. 4 — to pay the penalty of Rs. 2,57,838/- within eight weeks from his own pocket. The ruling reaffirms and consolidates a line of Supreme Court precedent that directly impacts how compensation claims under the EC Act are structured, argued, and finally resolved.

A Driver Who Collapsed At The Wheel And A Compensation Battle That Reached The Supreme Court

The facts of this case are straightforward and human in equal measure. Shri Sandeep was employed as a commercial driver by Respondent No. 4, Shri Manoj Kumar. On February 13, 2017, at about 1:00 p.m., while Sandeep was driving a Maruti Swift Dzire Cab bearing registration No. HR 63C 6448, he collapsed at the wheel. The passengers in the car brought him to a hospital where he was declared dead. His legal heirs — wife and family — filed a claim petition on July 13, 2017 before the Commissioner, Labour Department, GNCT of Delhi, seeking compensation under the Employees' Compensation Act, 1923.

The Commissioner, by order dated November 19, 2020, held that an employer-employee relationship existed between Shri Manoj Kumar and the deceased Sandeep, and that since the death had occurred during and in the course of employment, the employer was liable to pay compensation. Applying the relevant factor prescribed under Schedule IV of the EC Act, the Commissioner arrived at a compensation amount of Rs. 7,36,680/- along with interest at 12% per annum from the date of the incident, i.e., February 13, 2017. Since a valid Commercial Vehicle Package Policy issued by New India Assurance Company was in force at the time of the incident (covering the period June 26, 2016 to June 25, 2017), the Commissioner directed the employer to indemnify the compensation by claiming it from the insurer.

The Commissioner simultaneously issued a show cause notice to the employer under Section 4A(3)(b) of the EC Act asking why a penalty not exceeding 50% of the compensation amount should not be imposed for failure to pay compensation within the statutory period of one month from the date it fell due. Respondent No. 4 — the employer — neither appeared nor filed any reply to this show cause notice, offering no justification whatsoever for the delay. The Commissioner, by order dated February 8, 2021, accordingly imposed a penalty of 35% on the employer — amounting to Rs. 2,57,838/-.

The claimants filed an appeal before the Delhi High Court under Section 30 of the EC Act seeking enhancement of compensation and challenging the fastening of primary liability upon the employer rather than the insurer. The High Court did not enhance the compensation but, by its impugned judgment dated May 21, 2025, set aside the Commissioner's orders to the extent they imposed primary liability on the employer and fastened the liability for compensation, interest and penalty upon the Insurance Company. It is the fastening of the penalty component upon the Insurance Company that the Supreme Court has now reversed.

The Core Question: Does "Liability Arising Under The Compensation Act" Within The Meaning Of Section 147 Of The Motor Vehicles Act, 1988 And The Insurance Policy Include Penalty Under Section 4A(3)(b)?

This was the precise legal question that had divided the Commissioner, the High Court, and ultimately required the Supreme Court's intervention. The respondents' counsel Shri Manish Maini advanced what appeared at first blush to be an attractive argument: that Section 4A of the EC Act does not distinguish between the extent of liability of the employer and its authorized insurer; that the plain reading of the provision indicates that the entire liability to pay compensation along with interest and penalty lies upon the employer without distinction; that the insurer, having collected the premium and issued the policy, automatically stepped into the shoes of the employer to protect the interest of the employee and his family; and that the appellant's attempt to "carve out any exception under Section 4A(3)(b)" was an effort to exonerate itself from liability it was contractually and statutorily bound to discharge.

The Supreme Court rejected every limb of this argument. The key to the Court's reasoning lies in two analytically distinct but complementary pillars — first, a careful reading of the legislative history of Section 4A itself revealing a deliberate parliamentary choice to separate penalty from compensation and interest, and second, the binding precedent of this Court in Ved Prakash Garg vs. Premi Devi [(1997) 8 SCC 1] which had already settled this precise question.

The 1995 Amendment And Its Legislative History: Parliament Consciously Severed Penalty From Compensation And Interest To Create A Distinct And Personal Liability

This is the most analytically significant and original contribution of the present judgment — a detailed examination of the legislative history of Section 4A that traces, step by step, how and why the penalty component was deliberately separated from compensation and interest by Parliament in 1995.

The Court noted that Section 4A was not part of the original Employees' Compensation Act, 1923. It was first inserted by the Workmen's Compensation (Amendment) Act of 1959. In its original 1959 form, Section 4A(3) was a single sub-section that kept all three components — compensation arrears, interest, and penalty — within one provision, using the critical expression "together with" before the penalty component. As the Court observed: "The legislative intent was to ensure that entire liability of paying the compensation along with Interest and penalty were fastened upon the employer, if he committed default to pay the compensation within one month from the date it fell due." The consequence was that under the 1959 version, an employer with a valid indemnity contract could pass on the entire liability for all three components — compensation, interest, and penalty — to the insurer.

Then came the Workmen's Compensation (Amendment) Act, 1995, which substituted Section 4A entirely. The 1995 version made a structural change of profound legal significance: it bifurcated sub-section (3) into two separate clauses — Clause (a), which covers compensation arrears and interest, and Clause (b), which covers penalty alone. The expression "together with" was removed. The penalty component was placed in a standalone clause with its own show cause procedure and its own separate conditions for imposition.

The Supreme Court held that this structural severance was not accidental or merely cosmetic — it reflected a deliberate and conscious legislative choice. As the Court explained: "The legislative intent behind severing the penalty component was to address the larger predicament of easing the burden of indemnifiers who were adversely impacted by the obligation to pay the penalty which was not even the natural corollary of the obligation on their part under the indemnity contract to pay compensation and interest, rather such additional burden by way of penalty arose consequent to the default of obligation on the part of employer to pay compensation within the stipulated period of one month from the date it fell due."

The Court further identified the mischief that the 1959 formulation had created and that the 1995 amendment sought to cure: "The employers were reluctant to pay the compensation and interest expeditiously within the stipulated time of one month from the date it fell due which resulted to levy of penalty upon them but since the penalty formed part of compensation and interest component by virtue of expression 'together with,' the indemnifier was compelled to pay the said component of penalty as well, as such, there remained no deterrence for the employers to deposit the compensation amount within a span of one month making the said obligation of depositing the compensation within time frame of one month redundant and the consequent penalty a mere dead letter."

This is a striking piece of legislative interpretation. In simple terms — as long as the insurer paid the penalty, the employer had no incentive to pay compensation on time. Parliament recognized this perverse incentive in 1995 and deliberately corrected it by separating the penalty into a standalone clause that could only be the employer's personal burden. The 1995 amendment was thus not merely a structural reorganization — it was a deliberate policy choice to restore deterrence and ensure that the employer's statutory obligation to pay within one month carried real teeth.

For advocates, this legislative history argument is invaluable: it provides the foundational justification for why the two clauses of Section 4A(3) cannot be read as interchangeable or as a seamless whole. They were deliberately separated, and that separation carries legal consequences.

"Personal Fault And Negligence Of The Employer": The Nature Of Penalty Under Section 4A(3)(b) As A Non-Indemnifiable Liability

The Court next turned to the nature of the penalty under Section 4A(3)(b) to establish why it is inherently non-transferable to the insurer. The statutory scheme of Section 4A(3)(b), as the Court analyzed, reveals that the penalty arises only in a specific and personal context. The Commissioner must first find that the employer has defaulted in paying compensation within one month. The Commissioner must then issue a show cause notice giving the employer an opportunity to explain the delay. Only if the Commissioner, after hearing the employer, is of the opinion that "there is no justification for the delay" is the penalty imposed. The penalty, in other words, is a direct consequence of the employer's own unjustified personal default — it is not a natural or inevitable consequence of the insured risk.

As the Court held in Ved Prakash Garg, which the present bench quoted with full approval: "So far as the amount of penalty imposed on the insured employer under contingencies contemplated by Section 4-A(3)(b) is concerned, as that is on account of personal fault of the insured not backed up by any justifiable cause, the insurance company cannot be made liable to reimburse that part of the penalty amount imposed on the employer. The latter because of his own fault and negligence will have to bear the entire burden of the said penalty amount."

The insurer's obligation under the insurance policy and under Section 147 of the Motor Vehicles Act is to indemnify the employer for "liability arising under the Compensation Act." The penalty under Section 4A(3)(b) does not arise from the accident, the injury, or the death — it arises from the employer's subsequent conduct in failing without justification to pay the compensation that had already been assessed. It is, therefore, not a "liability arising under the Compensation Act" in the conventional sense of a liability flowing from the compensable event — it is a disciplinary financial consequence of the employer's own dilatory and unjustified behavior after the compensable event has occurred.

The Supreme Court thus confirmed that the contractual indemnity between the insurer and the employer cannot override or displace the statutory obligation imposed on the employer by Section 4A(1) — which requires the employer to pay compensation "as soon as it falls due" — and that the penalty for breach of this statutory obligation remains personal to the employer and cannot be shifted to the insurer through the indemnity mechanism.

Settled Precedent: The Supreme Court Reaffirms And Consolidates Three Binding Rulings That High Courts Must Follow

The Supreme Court's ruling in the present case is also significant as a strong statement on the binding nature of precedent, because the Delhi High Court had — inexplicably — fastened the penalty liability on the insurer in the teeth of not one but three binding Supreme Court decisions that had already settled this question.

The first and foundational ruling is Ved Prakash Garg vs. Premi Devi [(1997) 8 SCC 1], a Division Bench decision that had definitively answered the very question arising in this case: the insurer is liable for compensation and interest under Section 4A(3)(a), but not for penalty under Section 4A(3)(b), which is the personal liability of the employer alone.

The second ruling is L.R. Ferro Alloys Ltd. vs. Mahavir Mahto [(2002) 9 SCC 450], which followed Ved Prakash Garg and reiterated that the insurer is liable to indemnify only for compensation and interest, not for the penalty for default in payment.

The third — and most recent — ruling is Sheela Devi vs. Oriental Insurance Company Limited [2025 SCC OnLine SC 827], decided just months before the present case, in which one of the present judges — Justice Aravind Kumar himself — was part of the bench that reiterated the Ved Prakash Garg position, observing: "It is settled law that statutory penalty which is imposed upon the employer under Section 4A(3)(b) of the Act is not to be indemnified by the Insured."

The Supreme Court's displeasure at the High Court's failure to follow this settled line of authority is evident from the manner in which it cited all three decisions and noted that the High Court had "erred in ignoring settled law." For advocates, this is an important reminder that in a case where the Supreme Court has settled a specific legal question across multiple decisions spanning decades, a High Court that ignores that precedent and reaches a contrary conclusion is not merely making a legal error — it is making an error that the Supreme Court will unhesitatingly correct.

The Welfare Legislation Argument Has Limits: Liberal Interpretation Cannot Extend To Fastening Penalty On Insurer Contrary To Legislative Scheme

One of the more nuanced legal arguments advanced by the respondents' counsel was that since the Employees' Compensation Act is a beneficial social welfare legislation, it must be given a liberal and purposive interpretation in favour of the employee — and such interpretation should lead to fastening full liability including penalty upon the insurer so that the employee's family receives complete and prompt satisfaction of the entire awarded amount.

The Supreme Court accepted, in full, the general proposition that the EC Act is a social welfare statute requiring liberal and beneficial interpretation in favour of the employee. Quoting from Fulmati Dhramdev Yadav vs. New India Assurance Co. Ltd. [2023 SCC OnLine SC 1105] and the observations of Justice D.Y. Chandrachud in K. Sivaraman vs. P. Sathishkumar, the Court affirmed: "The 1923 Act is a social beneficial legislation and its provisions and amendments thereto must be interpreted in a manner so as to not deprive the employees of the benefit of the legislation."

However, the Court firmly held that this principle of beneficial interpretation has limits and cannot be stretched to override the express legislative scheme. The principle of liberal interpretation in favour of the employee operates to ensure that the employee receives the compensation and interest to which the statute entitles him — and the insurer remains fully liable for those components. But the principle cannot be extended to fasten upon the insurer a liability that Parliament has deliberately and consciously placed upon the employer alone as a consequence of the employer's personal default.

As the Court reasoned, to allow the welfare legislation argument to override the specific legislative design of the 1995 amendment would be to nullify Parliament's deliberate policy choice — to restore deterrence by ensuring the employer personally bears the consequence of unjustified delay. "Such interpretation cannot extend to fastening statutory penalty on insurer contrary to express legislative scheme and binding precedent," the Court held, striking a careful balance between the welfare purpose of the Act and the integrity of its specific provisions.

For advocates, this ruling carries a broader lesson that transcends the specific context of the EC Act: the principle of beneficial interpretation of welfare legislation is a tool of statutory construction that aids in giving effect to legislative intent — it is not a licence to ignore or override the legislative design when that design is clear, deliberate, and backed by binding precedent.

A Judgment That Draws The Final Map Of Insurer Liability Under The Employees' Compensation Act

The Supreme Court's judgment in New India Assurance Co. Ltd. vs. Rekha Chaudhary & Others is a comprehensive and definitive ruling on the triangular relationship between employer, insurer, and employee under the Employees' Compensation Act, 1923. It maps with precision the boundaries of what the insurer must pay and what the employer must personally bear. The insurer is fully liable for compensation and interest — these flow naturally from the insured risk of employee death or injury during the course of employment. The employer alone is liable for the penalty under Section 4A(3)(b) — this flows not from the insured risk but from the employer's own unjustified personal default in meeting a statutory obligation. The 1995 Amendment had already made this distinction structurally clear. The Supreme Court has now made it judicially unambiguous. Employers who delay payment of compensation without justification cannot look to their insurers to bail them out from the financial consequence of that delay — the penalty is theirs alone to bear.

Date of Decision: February 23, 2026