Delay Penalty Under Employees’ Compensation Act Lies on Employer, Not Insurer: Supreme Court

The Supreme Court recently set aside the Delhi High Court’s order that had made the insurance company liable to pay the penalty under Section 4A(3)(b) of the Employees’ Compensation Act, 1923, in addition to compensation and interest.

A Bench of Justices Aravind Kumar and Prasanna B Varale held that the law clearly places this responsibility on the employer. Under Section 4A(3), the employer is required to pay compensation within one month from the date it becomes due, and any failure attracts a penalty.

Court emphasised that this statutory obligation cannot be shifted to the insurer through contractual arrangements. It said that allowing such a shift would defeat the legislative intent behind the provision.

The case arose from the death of Sandeep, a cab driver, in 2017, who collapsed while driving passengers.

On a claim filed by his family, the Commissioner, Labour Department, GNCT of Delhi awarded compensation of Rs 7,36,680 along with interest at 12% from the date of the incident. The Commissioner also imposed a penalty of 35%, amounting to Rs 2,57,838, on the employer for delay in depositing the compensation without justification.

When the claimants approached the high court, it did not interfere with the compensation amount but shifted the liability of paying compensation, interest and penalty from the employer to the insurance company.

Challenging this, New India Assurance Co Ltd approached the Supreme Court, specifically contesting the imposition of penalty on it.

Court noted that prior to the 1995 amendment to Section 4A, insurers could be made liable for compensation, interest and penalty if there was a valid indemnity contract. However, the amendment brought a clear distinction by separating compensation and interest from penalty within the same provision.

Explaining the rationale, the Bench said the penalty arises due to the employer’s failure to pay compensation within the prescribed one-month period, and is meant to act as a deterrent. It cannot, therefore, be treated as part of the insurer’s liability.

Court also rejected the argument that the insurance policy covered all financial liabilities, including penalty.

Accordingly, the appeal was allowed and the high court’s order was set aside to the extent it made the insurance company liable for the penalty.

Court held that the employer alone is liable to pay the penalty of Rs 2,57,838 as directed by the Commissioner, while leaving the rest of the high court’s findings undisturbed.

Case Title: New India Assurance Co Ltd Vs Rekha Chaudhary And Others

Bench: Justices Aravind Kumar and Prasanna B Varale

Date of Judgment: February 23, 2026