Employees’ Compensation Act | Insurer Not Automatically Liable To Indemnify Employer For Interest On Delayed Payment Of Compensation: J&K High Court

The Jammu and Kashmir & Ladakh High Court has ruled that an insurance company cannot be, as a matter of rule, asked to indemnify an employer for the interest and penalty payable for delayed payment of compensation under the Employee's Compensation Act, 1923.

A single bench of Justice Sanjeev Kumar held,

"It is true that under the policy of insurance covering the injuries and death of the workmen working under the employer, the insurer undertakes to indemnify the employer in respect of any compensation payable to such injured/deceased workmen during the course of his employment, but such contract to indemnify the employer in respect of payment of compensation cannot ipso facto extend to the payment of interest and penalty that becomes due from the employer only in case he commits default in payment of compensation due within a period of one month."

It said unless there is a specific contract of insurance between the employer and the insurer, that the insurer would indemnify the employer in respect of interest and penalty also, no liability can be fastened on the insurer to indemnify the employer for the amount of interest and penalty that may become payable by the employer for committing a default in making the payment of compensation due under the Act within one month from the date of accident.

The bench was hearing appeals filed by four workers who had sustained severe injuries during blasting operations directed by their employer on July 26, 2004. The injuries resulted in permanent disabilities, rendering them unable to continue working. Seeking justice, the workers filed separate claim petitions under Section 3 of the Employees' Compensation Act, 1923.

Upon reviewing the evidence presented by the workers and the absence of rebuttal evidence from the employer and insurer, the Commissioner of Workmen's Compensation ruled in favour of the workers and awarded a total compensation amount of Rs. 12,79,130, to be paid by the employer, with the United India Insurance Company Limited directed to deposit the awarded compensation as indemnification.

However, the Commissioner failed to address the issue of interest and penalty as mandated by Section 4-A of the Act, leading the workers to file appeals before the High Court.

Assailing the award the appellants primarily contended that the Commissioner erred in denying them interest and penalty, which are mandatory under Sub Section (a) and (b) of Section 4-A.

Adjudicating upon the matter Justice Sanjeev Kumar highlighted that the compensation under Section 4 of the Employees Compensation Act becomes payable as soon as it falls due on the date of the accident and not on the date adjudication is made by the Commissioner under Section 4 of the Act.

“In case the employer commits a default in making the payment of compensation due under the Act within one month from the date it fell due, the Commission is under an obligation to direct the employer to pay in addition to the amount of compensation, the simple interest @ 12% per annum or at such higher rate not exceeding the maximum of the lending rates of any scheduled bank as may be specified by the Central Government by a notification in the official gazette”, the court elaborated.

Upon examining the case at hand, the court noted that the Commissioner provided no explanation for not awarding interest and penalty, thereby indicating an omission in its decision. It also clarified that the responsibility for paying interest and penalty lies squarely with the employer, unless there is a specific agreement between the employer and the insurance company.

Accordingly, the Court held the workers are entitled to receive interest at a rate of 12% per annum from the day of the accident—July 26, 2004. However, given the absence of determination by the Commissioner regarding any justification for the delayed payment, the court refrained from imposing a penalty on the employer at this late stage, almost 19 years after the accident.

“Having regard to the facts and circumstances of the case and for the reasons explained above, I would like to put a lid on the litigation by providing that the employer, in addition to the interest as directed above, shall also be liable to pay a penalty @ 10% of the awarded amount”, the bench concluded.

Case Title: Mohd. Abdullah Vs Manager, Trumboo Cement Industry Limited and Another

Citation: 2023 LiveLaw (JKL) 184

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