Constitutional Court Decision No 83/PUUXXII/2024: Examining the Position Imbalance Between Policyholders and Insurers in Insurance Contracts

GETPOST.ID, Jakarta – The Indonesian Constitutional Court has declared Article 251 of the Indonesian Commercial Code (“KUHD”) partially unconstitutional, on the basis that the language permits insurers to unilaterally cancel policies. Through this ruling, the Constitutional Court affirms that termination of insurance contracts must be based on mutual agreement or a court decision, but how will this impact industry practices? This article explores the ruling’s impact and its future implications.

Insurance as a Contract: Disclosure Obligations

As a contract, insurance must fulfill all the legal requirements of a valid agreement as stipulated in Article 1320 of the Indonesian Civil Code (KUH Perdata), namely mutual consent, legal capacity, a specific object, and a lawful cause. In addition to these general contract requirements, an essential aspect of an insurance contract is that the policyholder must not conceal any relevant information. This is regulated under Article 251 of KUHD, which states:

“Any incorrect or false statements, or any concealment of circumstances known to the policyholder, even if made in good faith, which would have led to the contract not being concluded or being concluded under different terms had the insurer known the actual circumstances, shall render the insurance contract void.”

Based on this article, even if made in good faith, an insurance contract becomes void if the policyholder conceals information that, had it been disclosed, would have led the insurer to either refuse the contract or agree to different terms. The purpose of Article 251 of KUHD is to protect the insurer and prevent unfair risk transfer. This provision does not consider whether the policyholder acted in good or bad faith.

Constitutional Court Decision No. 83/PUUXXII/2024: From Good Faith to The Position Imbalance Between Policyholders and Insurers

On June 12, 2024, a petition for judicial review of Article 251 of KUHD was filed by an applicant who claimed that their constitutional rights had been violated. The applicant argued that Article 251 of KUHD contradicts the 1945 Constitution, particularly Article 1 Paragraph (3), Article 27 Paragraph (1), Article 28D Paragraph (1), and Article 28G Paragraph (1).

One of the key arguments was that Article 251 of KUHD violates the principle of legal certainty. The applicant argued that the provision grants insurers absolute authority to unilaterally cancel policies without allowing policyholders to defend themselves. This, in turn, undermines legal certainty and fairness, leading to a breach of constitutional rights for the policyholder. The applicant asserted that contract termination should follow proper procedures as outlined in Article 1266 KUH Perdata, which requires court intervention unless both parties agree to termination.

Additionally, the applicant argued Article 251 of KUHD to be inconsistent with the principles of protection, fairness, and equality before the law, positing that an agreement should ensure equal standing for both parties, but Article 251 of KUHD disrupts this balance as the provision grants the insurer exclusive powers to unilaterally cancel the policy, creating an unequal relationship between the insurer and the policyholder.

In its consideration, the Constitutional Court emphasized that the principle of utmost good faith is fundamental to ensuring legal protection for both insurers and policyholders. The Court observed that the language of Article 251 of KUHD contains elements of ambiguity, as it does not clearly outline the termination process with regards to the contract termination on the basis of concealed information. The court recognized that the intention of Article 251 of KUHD was to serve as a warning to policyholders. However, the Constitutional Court found that the interpretation of Article 251 of KUHD failed to deliver the intended legal certainty and sense of justice, as maintaining a balanced position for all parties is paramount, including in contract termination.

The Court further reasoned that given good faith is a primary condition in agreeing to an insurance contract, it cannot justify unilateral cancellation of a contract based on newly discovered information, further stating that any disputes arising from an insurance contract should first be resolved through mutual agreement. If no agreement is reached, termination must be determined by a court as a last resort.

Ultimately, the Constitutional Court Decision No. 83/PUU-XXII/2024 ruled that Article 251 of KUHD does not provide fair legal protection and certainty. It also noted that the provision, a remnant of Dutch colonial law, is outdated and no longer aligns with contemporary legal and societal needs. Therefore, Article 251 of KUHD was declared partially unconstitutional unless interpreted to mean that insurance contract termination must be based on mutual agreement or a court ruling

Insurance Contracts: What’s Next?

Insurance (pertanggungan), as defined in Article 246 of KUHD, is a contract in which an insurer commits to a policyholder, in exchange for a premium, to provide compensation for a loss, damage, or expected profit loss that may occur due to an uncertain event.

The ruling has declared Article 251 of KUHD unconstitutional. However, in practice, its interpretation does not significantly differ from the established mechanisms in Indonesian civil law. By default, contract termination procedures are governed by Articles 1266 and 1267 KUH Perdata, which stipulate that contract annulment must be sought through the courts as a general rule. Additionally, a party alleging a breach of contract may petition the court for annulment while also seeking compensation for costs, losses, and interest.

In practice, however, this requirement to obtain court approval for contract termination is commonly waived through a specific clause negating the application of Articles 1266 and 1267. This waiver is a standard boilerplate provision frequently included in commercial agreements, including insurance policies.

We expect that insurance companies will continue to uphold the waiver of Articles 1266 and 1267 in their agreements, and this practice is unlikely to change. It will be interesting to observe whether government authorities, such as the Financial Services Authority (OJK), issue any regulations or directives regarding the interpretation of this decision. However, this remains to be seen.

Writer:  Novirianti and Partners