Supreme Court Defines Interest Liability in Employee Compensation Claims
In a landmark decision, the Supreme Court of India in Shanti & Ors. v. National Insurance Company, 2025 INSC 234, provided clarity on the issue of interest liability under the Employee’s Compensation Act, 1923. The judgment, delivered by Justice K. Vinod Chandran, underlines the statutory obligation to pay interest on delayed compensation and examines the liability of insurance companies in such cases.
Background of the Case
The case arose from a dispute over the payment of compensation following the death of an employee. The legal representatives of the deceased had filed a claim for compensation under the Employee’s Compensation Act. The primary contention was whether the interest payable on delayed compensation should be borne by the employer alone or also extend to the insurance company that indemnified the employer.
The National Insurance Company, the Respondent in the Appeal, contested the claim on the ground that an insurer cannot be held liable for interest arising out of the employer’s default in making timely payments. The Appellants, on the other hand, contended that there is a statutory obligation under Section 4A(3) of the Employee’s Compensation Act, which mandates an interest rate of 12% per annum on delayed payments, irrespective of any contractual terms between the insured and the insurer.
Key Legal Issues
The central question before the Supreme Court was:
- Whether the interest on delayed compensation under Section 4A(3) of the Employee’s Compensation Act is mandatory and non-discretionary?
- Whether the insurance company is liable to bear the burden of interest along with the employer?
- Whether the rate of interest should be at the statutory minimum of 12% per annum or at a lower rate as awarded by the Commissioner?
Supreme Court’s Observations
The Court made the following significant observations and rulings:
- Statutory Obligation to Pay Interest: The Court reaffirmed that under Section 4A(3) of the Employee’s Compensation Act, interest at 12% per annum is mandatory in cases where the employer fails to pay the compensation within one month of it becoming due. The only discretion available to the Commissioner is to increase the rate of interest but not to reduce it below 12%.
- Employer’s Responsibility and Insurance Company’s Role: The Court ruled that the employer is primarily responsible for the payment of compensation and any default attracts statutory interest. However, once the liability of compensation is passed onto the insurance company through an insurance policy, the insurance company is equally responsible for paying the interest amount unless it had previously contested this obligation.
- Liability of the Insurance Company: The Court rejected the insurer’s argument that it is not liable for interest. It held that once the insurance company is directed to pay compensation, it cannot later claim exemption from paying the statutory interest. Furthermore, the insurance company did not appeal against the original order imposing interest liability, and hence, it could not contest the matter at a later stage.
- Rate of Interest Adjustment: The Court modified the Award to increase the interest rate from 6% to 12% per annum, effective from the date of the accident rather than the date of the claim filing. The Court clarified that interest must be calculated from the date when the compensation became due, reinforcing that delay in payments should not harm the beneficiaries.
- Penalty on the Employer: The Court also reviewed the penalty imposed on the employer under Section 4A(3)(b). The 40% penalty awarded was found to be within the prescribed limit, which allows for a maximum of 50% penalty for defaulting employers. The Court upheld this aspect of the judgment, emphasizing that employers should not neglect their statutory duty.
- Finality of Prior Decisions: The Court noted that the claimants had previously approached the High Court, which had upheld their right to claim compensation. Since the insurance company had not challenged the High Court’s ruling, it could not later dispute its liability to pay interest.
Final Judgment and Conclusion
The Supreme Court allowed the appeal, ruling that:
- The interest on compensation must be calculated at 12% per annum from the date of the accident.
- The insurance company remains liable for the interest payment, as it had been directed to indemnify the employer without challenging the award in an appeal.
- The penalty imposed at 40% of the compensation amount remained unchanged.
This judgment provides crucial clarity on the statutory mandate regarding interest payments under the Employee’s Compensation Act, 1923. It reinforces the principle that employees and their families should not suffer due to procedural delays and ensures that compensation reaches the affected parties in a timely and just manner.
Shikha Pandey
Associate
The Indian Lawyer & Allied Services
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