Liability of Insurer under Workmen Compensation Policy for Interest Awarded

Employers in India are liable under the Employees Compensation Act, 1923 (called Workmen Compensation Act, 1923 before the amendment of 2009) for compensation for injury / death caused to employees by accident arising out of and in the course of employment. The non-life insurance industry offers to cover the statutory liability of the employer under the Act, in addition to their liability under the Fatal Accidents Act, 1855 and the Common Law, under the Workmen Compensation Policy.

Sec 4A(3) of the Act makes a provision for payment of interest by the employer where he is in default of paying the compensation within the statutorily mandated one month from the date of accident. There is also a provision under the same section, that where, in the opinion of the Workmen Compensation Commissioner, there is no justification for delay, he may direct the employer to pay a penalty not exceeding 50% of the compensation amount and the interest and the interest thereon.

It's been a common contention between the parties concerned if the liability for the interest component would fall under the Workmen Compensation Policy. Insurer’s have relied on the Exclusion d) of the Policy which says that ‘the Policy shall not cover the liability of the insured for interest and / or penalty imposed on the insured under any law or otherwise’. The matter has also come up before the Courts on several occasions.

In?New India Assurance Company v. Harshadbhai Amrutbhai Modhiya (2006) 5 SCC 192, the Supreme Court agreed with the insurer that it is not liable for the interest component. The decision was based on the following grounds -

1)????Unlike the Motor Vehicles Act, 1988, which not only provides for the statutory liability of the owner of the vehicle, but also mandates an insurance Policy before a vehicle is brought to a public place, there is no statutory requirement for the employer to buy a Workmen Compensation Policy. Hence, the WC Policy was only a contractual arrangement between the insured and the insurer, and as in the case of the general law of contract, the insurer was free to put a limit to its liability or contact itself out of any component of liability under the Employee Compensation Act, 1923.

2)????The WC Policy did provide that the insurer would not be liable for interest liability imposed on the employer.

In view of the decision in?New India Assurance Company v. Harshadbhai Amrutbhai Modhiya, it would appear that the question of insurer’s liability for interest has been settled. But are matters of law settled that easily? Can there be another argument?

I would like to draw the readers’ attention to two important aspects.

The delay for which interest liability is imposed on the employer could very well be for default on his part. But most often, this delay is caused due to the nature of the proceedings which require things to be proved. As the claimants in most cases are ill equipped and uneducated family members of migrant labourers, this process takes longer than it should.??It is also a condition in the WC Policy that “no admission, offer, promise or payment shall be made by or on behalf of the insured without the consent of the insurer” … Naturally, even when the employer is convinced of his liability, he is not permitted by this condition of the Policy to make an offer of payment before the award of the Workmen Compensation Commissioner, unless the insurer concurs to making such an offer. Not only is the insurer then responsible for the delay, but it is also the beneficiary of the delay, because he gets to withhold the funds and earn interest thereon, till the payment is made in accordance with the award.

As for the freedom of the insurer (where the Policy is not statutorily mandated in a prescribed form as in case of Motor Third Party Policy) to contract out of any component of liability, the following two points are relevant –?

a)?????The Policy wording used by the insurers (all 32 of them at the time of writing) is standard.

b)????There is no option with the insured to choose a Policy which covers the interest component, even on payment of additional premium.

The Supreme Court decision in?New India Assurance Company v. Harshadbhai Amrutbhai Modhiya appears to be unconscionable in cases where the delay has not been caused by the employer.