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CASE NO.: Appeal (civil)  2333 of 2006

PETITIONER: New India Assurance Co. Ltd.   

RESPONDENT: Harshadbhai Amrutbhai Modhiya & Anr.

DATE OF JUDGMENT: 28/04/2006

BENCH: S.B. Sinha

JUDGMENT: J U D G M E N T [Arising out of S.L.P. (Civil) no.20126 of  2005]

S.B. SINHA, J :  

       Leave granted.

       Whether interest is payable by an insurer while indemnifying the  insured the amount of compensation awarded against him under the  Workmen’s Compensation Act, 1923 (for short "the Act") is the question  involved in this appeal which arises out of a judgment and order dated  10.05.2005 passed by the High Court of Judicature of Gujarat, Ahmedabad  in First Appeal No. 1061 of 2005.

       Before adverting to the contentions raised by the parties herein, we  may notice the contract of insurance.  By reason of the said contract, the  insurer has made itself  liable to reimburse the insured if during the period of  insurance any employee in his immediate service sustained personal injury  by accident or disease arising out of and in the course of employment by the  insured in the business wherefor he would be liable to pay compensation  either under: (i)     the law set out in the Schedule or (ii)    at common law

       However, therein a proviso has been added which reads as under:

"Provided that the insurance granted hereunder is  not extended to include: (i)     any interest and/ or penalty imposed on  the insured on account of his/ her failure  of comply with the requirements laid  down under the W.C. Act, 1923 and (ii)    any compensation payable on account of  occupational diseases listed in part ’C’ of  schedule III of the W.C. Act, 1923."

       Sanjay Amrutbhai Modhiya was a sales man employed by the insured  \026 Respondent No. 1.  He met with an accident on 24.8.1996.  His heirs and  legal representatives filed an application for grant of compensation before  the Workmen’s Compensation Court, Godhra claiming a sum of Rs.  2,25,220/-.  The Appellant herein raised a contention as regards its limited  liability in terms of the contract of insurance.  By an order dated 1.6.2004,  the Commissioner of Workmen’s Compensation awarded a sum of Rs.  2,25,220/- with 9% interest thereon from the date of filing of application till

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realization in favour of the claimants.  A direction was also issued to the  Appellant to pay the said amount.  The appeal thereagainst was preferred by  the Appellant in terms of Section 30 of the Act which by reason of the  impugned judgment has been dismissed relying on or on the basis of the  decisions of this Court in Ved Prakash Garg v. Premi Devi and Others  [(1997) 8 SCC1] and L.R. Ferro Alloys Ltd. v. Mahavir Mahto and Another  [(2002) 9 SCC 450].

       The insurer is in appeal before us.

       The learned counsel appearing on behalf of the Appellant would  submit that having regard to the contract of insurance, the insurer was not  liable to pay any interest on the awarded sum.

       Mr. Shridhar Y. Chitale, learned counsel appearing on behalf of the  Respondent, besides disputing this position, would submit that even if the  insurer is not liable, the First Respondent would be liable therefor.

       Section 3 of the Act provides for the employer’s liability to pay  compensation in the event a workman suffers personal injury by an accident  arising out of and in the course of his employment.  The amount of  compensation is required to be calculated in accordance with the provisions  contained therein.

       Section 4 of the Act provides for the mode and manner in which the  amount of compensation is to be calculated.  While so calculating, the  Workmen’s Compensation Court is required to take into consideration the  factors enumerated therein.

       Section 5 provides for the method of calculating wages.   

       Section 8 stipulates the manner in which the amount of compensation  would be distributed.  Sub-section (4) of Section 8 reads as under:

"4) On the deposit of any money under sub- section (1), as compensation in respect of a  deceased workman the Commissioner shall, if he  thinks necessary, cause notice to be published or  to be served on each dependant in such manner  as he thinks fit, calling upon the dependants to  appear before him on such date as he may fix for  determining the distribution of the compensation.  If the Commissioner is satisfied after any inquiry  which he may deem necessary, that no dependant  exists, he shall repay the balance of the money to  the employer by whom it was paid. The  Commissioner shall, on application by the  employer, furnish a statement showing in detail  all disbursements made."

       Section 12 of the Act provides for the mode and manner of payment  of compensation by a principal employer and/ or his contractor.  Section 17  of the Act nullifies contracting out in the following terms:

"Contracting out.\027Any contract or agreement  whether made before or after the commencement  of this Act, whereby a workman relinquishes any  right of compensation from the employer for  personal injury arising out of or in the course of  the employment, shall be null and void in so far as  it purports to remove or reduce the liability of any  person to pay compensation under this Act."

       By reason of the provisions of the Act, an employer is not statutorily

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liable to enter into a contract of insurance.  Where, however, a contract of  insurance is entered into by and between the employer and the insurer, the  insurer shall be liable to indemnify the employer.  The insurer, however,  unlike under the provisions of the Motor Vehicles Act does not have a  statutory liability.  Section 17 of the Act does not provide for any restriction  in the matter of contracting out by the employer vis-‘-vis the insurer.   

       The terms of a contract of insurance would depend upon the volition  of the parties.  A contract of insurance is governed by the provisions of the  Insurance Act.  In terms of the provisions of the Insurance Act, an insured is  bound to pay premium which is to be calculated in the manner provided for  therein.  With a view to minimize his liability, an employer can contract out  so as to make the insurer not liable as regards indemnifying him in relation  to certain matters which do not strictly arise out of the mandatory provisions  of any statute.  Contracting out, as regards payment of interest by an  employer, therefore, is not prohibited in law.

       In Ved Prakash Garg (supra), this Court undoubtedly held that in  terms of the contract of insurance entered into by and between the employer  and the insurer under the provisions of the Motor Vehicles Act, 1988, which  would also apply in a given case to the claim under the provisions of the  Workmen’s Compensation Act, the insurer would also be liable for payment  of interest stating:

"\005A conjoint reading of these provisions in the  insurance policy shows that the insurance company  insured the employer-owners of the insured motor  vehicles against all liabilities arising under the  Workmen’s Compensation Act for which statutory  coverage was required under Section 95 of the  Motor Vehicles Act, 1939 which is analogous to  Section 147 of the present Motor Vehicles Act  noted earlier. Section 149 deals with "Duty of  insurers to satisfy judgments and awards against  persons insured in respect of third-party risks".  The moot question is whether the insurance  coverage as available to the insured employer- owners of the motor vehicles in relation to their  liabilities under the Workmen’s Compensation Act  on account of motor accident injuries caused to  their workmen would include additional statutory  liability foisted on the insured employers under  Section 4-A(3) of the Compensation Act. The question posed for our consideration is  required to be resolved in the light of the aforesaid  statutory schemes of the two interacting Acts. It is  not in dispute and cannot be disputed that the  respondent-insurance companies concerned will be  statutorily as well as contractually liable to make  good the claims for compensation arising out of  the employers’ liability computed as per the  provisions of the Compensation Act. The short  question is whether the phrase "liability arising  under the Compensation Act" as employed by the  proviso to sub-section (1) of Section 147 of the  Motor Vehicles Act and as found in proviso to  clause (i) of sub-section (1) of Section II of the  insurance policy, would cover only the principal  amount of compensation as computed by the  Workmen’s Commissioner under the  Compensation Act and made payable by the  insured employer or whether it could also include  interest and penalty as imposed on the insured  employer under contingencies contemplated by

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Section 4-A(3)(a) and (b) of the Compensation  Act."

       Yet again in L.R. Ferro Alloys Ltd. (supra), this Court opined that if  an amount of compensation is not deposited within a period of one month,  the insurance company shall be liable to reimburse the owner only the  amount of compensation with interest therefrom but not the penalty imposed  on insurer \026 employer for default of payment of amount stating:

"The only contention put forth before us is that  the entire liability including penalty and interest  will have to be reimbursed by the insurance  company and this aspect has not been examined by  the learned Single Judge in the High Court and  needs examination at our hands. In Ved Prakash  Garg v. Premi Devi this Court after examining the  entire scheme of the Act held that payment of  interest and penalty are two distinct liabilities  arising under the Act, while liability to pay interest  is part and parcel of legal liability to pay  compensation upon default of payment of that  amount within one month. Therefore, claim for  compensation along with interest will have to be  made good jointly by the insurance company with  the insured employer. But, so far as the penalty  imposed on the insured employer is on account of  his personal fault the insurance company cannot be  made liable to reimburse penalty imposed on the  employer. Hence the compensation with interest is  payable by the insurance company but not penalty.  Following the said decision and for the reasons  stated therein, we modify the order made by the  High Court to that extent. The appeal is allowed in  part accordingly."

       We are, in this case, not concerned with a case where an accident has  occurred by use of a motor vehicle in respect whereof the contract of  insurance would be governed by the provisions of the Motor Vehicle Act,  1988.

       As indicated hereinbefore, a contract of insurance is governed by the  provisions of the Insurance Act.  Unless the said contract is governed by the  provisions of a statute, the parties are free to enter into a contract as for their  own volition.  The Act does not contain a provision like Section 147 of the  Motor Vehicles Act.  Where a statute does not provide for a compulsory  insurance or the extent thereof, it will bear repetition to state, the parties are  free to choose their own terms of contract.  In that view of the matter,  contracting out, so far as reimbursement of amount of interest is concerned,  in our opinion, is not prohibited by a statute.   

       The views taken by us find support from a recent judgment of this  Court in P.J. Narayan v. Union of India and Ors. [2004 ACJ 452] wherein it  was held:

"1. This writ petition is for the purpose of directing  Insurance Company to delete the clause in the  Insurance Policy which provides that in case of  compensation under the Workmen’s Compensation  Act, 1923, the Insurance Company will not be  liable to pay interest. We see no substance in the  writ petition. There is no statutory liability on the  Insurance Company. The statutory liability under  the Workmen’s Compensation Act is on the

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employer. An insurance is a matter of contract  between the Insurance Company and the insured. It  is always open to the Insurance Company to refuse  to insure. Similarly they are entitled to provide by  contract that they will not take on liability for inter  est. In the absence of any statute to that effect,  insurance Company cannot be forced by Courts to  take on liabilities which they do not want to take  on. The Writ Petition is dismissed. No order as to  costs."

       For the reasons aforementioned, the impugned judgment cannot be  sustained.  It is set aside accordingly.  The appeal is allowed.  The Appellant  is not liable for the interest.  However, we make it clear that the employer  shall be liable to pay the amount of interest to the claimant.  In the facts and  circumstances of the case, there shall be no order as to costs.