The Supreme Court of India has ruled that an insurance company cannot be held liable to pay the penalty component imposed under Section 4A(3)(b) of the Employees’ Compensation Act, 1923 (EC Act). A Bench comprising Justice Aravind Kumar and Justice Prasanna B. Varale held that while the insurer is bound to indemnify the compensation and interest, the penalty is a result of the employer’s personal fault and must be borne by the employer alone.
The Court set aside a Delhi High Court order that had fastened the liability of a 35% penalty—amounting to ₹2,57,838—upon New India Assurance Co. Ltd.
Background of the Case
The matter originated from the death of Shri Sandeep, a commercial driver employed by Respondent No. 4, Shri Manoj Kumar. On February 13, 2017, Sandeep collapsed while driving a Maruti Swift Dzire Cab and was pronounced dead at the hospital. His legal heirs (Respondents 1-3) filed a claim petition seeking compensation under the EC Act.
The Commissioner, Labour Department, GNCT of Delhi, found that an employer-employee relationship existed and awarded compensation of ₹7,36,680 with 12% interest. Additionally, because the employer failed to pay the compensation within one month of it falling due, the Commissioner issued a show-cause notice regarding a penalty. Since the employer failed to justify the delay or even appear, the Commissioner imposed a 35% penalty (₹2,57,838) specifically on the employer.
However, in an appeal filed by the claimants, the Delhi High Court set aside the Commissioner’s findings to the extent that it fastened the primary liability of compensation, interest, and penalty on the employer, instead shifting the entire liability—including the penalty—to the Insurance Company.
Arguments of the Parties
The Appellant-Insurance Company argued that the penalty under Section 4A(3)(b) is a consequence of “personal fault and negligence” on the part of the employer. Relying on the precedent in Ved Prakash Garg v. Premi Devi (1997), they contended that while they are liable for compensation and interest, the penalty must be made good by the employer himself.
Per Contra, the Respondents (Claimants) argued that Section 4A does not distinguish between the extent of liability between the employer and the insurer. They submitted that the insurance company “automatically stepped into the shoes of the employer” to protect the employee’s interests and that the liability to pay is “joint and several.”
The Court’s Analysis
The Supreme Court conducted a detailed analysis of the legislative history of Section 4A. It noted that prior to the 1995 Amendment, compensation, interest, and penalty were grouped together. However, the 1995 substitution severed these components into Clause (a) (compensation and interest) and Clause (b) (penalty).
The Court observed:
“The legislative intent behind severing the penalty component was to address 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… rather such additional burden by way of penalty arose consequent to the default of obligation on the part of employer.”
The Bench emphasized that if insurers were forced to pay the penalty, there would be “no deterrence for the employers to deposit the compensation amount within a span of one month,” rendering the statutory obligation a “mere dead letter.”
The Court explicitly followed the ratio in Ved Prakash Garg v. Premi Devi (1997) 8 SCC 1, which held:
“But so far as the amount of penalty imposed on the insured employer… 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.”
The Court also cited its recent decision in Sheela Devi v. Oriental Insurance Company Limited (2025) to reiterate that statutory penalty is not to be indemnified by the insurer.
Decision
The Supreme Court allowed the appeal and set aside the Delhi High Court’s order dated May 21, 2025, to the extent it imposed penalty liability on the insurance company. The Court ordered Respondent No. 4 (the employer) to pay the penalty amount of ₹2,57,838 within eight weeks. The findings regarding compensation and interest remained undisturbed.
- Case Title: New India Assurance Co. Ltd. v. Rekha Chaudhary and Others
- Case No: Civil Appeal No. 174 of 2026
