In June 1983, Metal Powder purchased 15.06 MT of yellow phosphorus from a West German company. The goods were sent through MV Palam Trader to be delivered to Port Bombay and then to Metal Powder's factory in Tamil Nadu. The goods were insured through Oriental Insurance Co. for Rs. 2.65 lakhs. During transit the ship caught fire (October 1983). Since the cost of repairs of the ship was much ghigher than the insured value of the ship, the shipowners deemed the loss as a total loss and had given a notice of abandonment of the ship to its insurers. These facts were communicated by the shipowners to the insured and the insured in turn promptly communicated the same to the insurer. On lodging of the claim, the insurer repudiated the claim on the ground that the ship was abandoned by its owner due to bankruptcy and Clause 4.6 of the applicable Institute Cargo Clauses (A) excluded loss, damage or expense arising from insolvency or financial default of owners, managers, operators, or charterers of the vessel from the scope of insurance. The defendant had also raised another contention regarding the refusal by the insured to take up the insurer's offer of transporting by a third party of the cargo to the insured's destination at an additional cost of USD 900 (In this post, we will focus on the first contention). The insured's contention was that Clause 5.1 of the Institute Cargo Clauses (A) covered the risk of "non-delivery" and that the insurer was liable.
The matter came up eventually before the Supreme Court where the Supreme Court decided in favour of the insured. The court held that since the risk of "non-delivery" was expressly covered in the insurance policy, the insurer could not resort to the exclusion contained in Clause 4.6 considering that insolvency was a matter of "authoritative determination under the relevant municipal laws of a country and that the insurer had not produced anything of that sort before the court. The court further held that merely because the repair cost of the material exceeded the insured value and because the owner had abandoned the ship did not mean that the owners were adjudged insolvent.
The decision can be accessed from this link.
The present provisions of the ICC make such an exclusion very narrow. See this link for further reading on the subject.