Insuring the Liability: Employees' Compensation Policy

The liability is the employer's

Chapter VII of the Code on Social Security, 2020 makes the employer liable to pay compensation for work injuries. It contains no provision requiring the employer to insure that liability. Whether another law or a contract requires a policy for a particular business is a separate question, not covered here.

The Code refers to insurers only incidentally. One instance is section 87: where an employer that has insured its Chapter VII liability becomes insolvent, the employer's rights against the insurer for that liability are transferred to the employee.

What the policy does

An employer can transfer the liability to an insurer through an Employees' Compensation Insurance Policy, known in the trade as workmen's compensation (WC) insurance. The insuring clause indemnifies the insured employer, up to the limit of indemnity, for sums it is liable to pay as compensation for an employee's injury by accident arising out of and in the course of employment. It also pays defence costs incurred with the insurer's consent.

It is a liability cover. The policyholder and the person indemnified is the employer, not the employee. It is not a personal accident or health policy for the workforce, although the employee is the one who finally receives the compensation.

Premium: market practice, no tariff

IRDAI's notification of 20 March 2024 de-notified the remaining insurance tariffs, including the Workmen's Compensation insurance tariff, with effect from 1 April 2024. Cover for these risks is now subject to the IRDAI (Insurance Products) Regulations, 2024, and insurers were told not to withdraw the tariff products that already existed.

As market practice, and not as a rule of the Code, insurers ask for the number and description of employees, the wages declared for the policy period and the nature of work. They rate on those along with the industry and past claims experience. No rate table is given here.

In the wordings reviewed, the declaration matters at claim time too. They carry an average clause: if the employees or wages declared are less than the actual figures, the indemnity is reduced in proportion.

Exclusions and points to check

In the insurers' wordings reviewed for this lesson, medical expenses, occupational diseases and employees of contractors are excluded from the base policy unless specifically covered. Insurers offer these as optional extensions for extra premium. The Code separately makes the employer reimburse actual medical expenses, so whether the extension has been taken is a point to check in the policy schedule. Interest and penalty imposed under any law are also excluded in those wordings.

The wordings reviewed still name the Employees' Compensation Act, 1923, which was repealed from 21 November 2025. Some also say that if the law is changed or replaced the policy stays in force, with the insurer's liability limited to what it would have been had the law remained unaltered. How a given wording responds to a liability under the Code depends on its terms, and no outcome is predicted here.

Rules at a glance

Key points

• Chapter VII places the liability on the employer and does not itself require an insurance policy.
• The policy indemnifies the employer for compensation it is legally liable to pay employees, plus defence costs incurred with the insurer's consent.
• It is a liability cover, not a personal accident or health policy.
• The Workmen's Compensation insurance tariff ceased to be in force from 1 April 2024.
• In market practice premium is based on declared employees and wages, the nature of work, the industry and claims experience.
• In wordings reviewed, medical expenses, occupational diseases and contractors' employees are excluded unless specifically covered.
• Wordings may still name the 1923 Act, so how they fit the Code is a point to check.

Common misunderstandings

• The Code does not make this insurance compulsory: Chapter VII creates the liability but contains no requirement to take a policy.
• The policy is not an accident policy for employees: it indemnifies the employer for its legal liability.
• There is no fixed tariff rate any longer: the tariff was de-notified from 1 April 2024.
• The base policy does not necessarily match every liability under the Code: medical expenses and occupational diseases are excluded in the wordings reviewed unless specifically covered.
• A wording naming the 1923 Act does not settle how it responds to the Code: that depends on its terms.

Questions people ask