An insurer is not liable for interest where the policy excludes interest and penalty liability.

The respondents claimed compensation under the Employees’ Compensation Act, 1923, arising from the death of an employee of respondent No. 3-employer.

In Workmen Fatal Case No. 6 of 2012, the Commissioner for Workmen Compensation and Judge, Labour Court, Junagadh awarded compensation of ₹5,34,504 with interest at 9% per annum from the date of the incident until realization, directing the appellant-Insurance Company to pay the amount.

The Insurance Company challenged only its liability to pay interest under Section 30 of the Act.

The insurance policy covered the employees’ risk but expressly excluded “any interest and/or penalty imposed on the insured” for failure to comply with the Workmen’s Compensation Act.

1. Whether, having regard to the terms of the insurance policy, the appellant-Insurance Company was liable to pay interest on the compensation awarded under the Employees’ Compensation Act, 1923.

2. Whether the direction requiring the Insurance Company to pay interest was liable to be quashed and the liability for interest imposed on the employer.

The Court considered Sections 3 and 4 of the Employees’ Compensation Act, 1923, concerning the employer’s liability to pay compensation and the determination of compensation.

It applied the contractual principle that an insurance policy must be construed according to its express terms and in their ordinary meaning.

Relying on New India Assurance Co. Ltd. v. Harshadbhai Amrutbhai Modhiya, 2006 (5) SCC 192, particularly paragraph 23, the Court held that where the policy indemnifies the employer only against compensation and expressly excludes interest and penalty, the insurer cannot be made liable for those amounts unless the exclusion clause is invalidated.

The policy exclusion clause in the present case therefore governed the extent of the insurer’s liability.

The Court found that the policy covered the employees’ risk but did not extend to interest or penalty imposed upon the employer for non-compliance with the Act.

No premium had been paid for covering such additional liability.

Applying the contractual interpretation principle and the ratio of Harshadbhai Amrutbhai Modhiya, the Court held that the Insurance Company had undertaken to indemnify only the principal compensation amount and had not contracted to pay interest.

Since the Commissioner had imposed interest on the insurer without examining the statutory provisions or the policy terms, that part of the award was held legally erroneous.

The Insurance Company was held liable to pay only the principal compensation of ₹5,34,504 and was relieved from liability for interest.

Respondent No. 3-employer was directed to pay interest on the compensation from the date of the incident until realization, recoverable by the original claimants through execution of the order.

Any amount deposited by the Insurance Company in excess of the principal compensation was directed to be refunded, while the principal amount was to be disbursed to the claimants in accordance with law.