21 Feb 2025
Redefining the Principle of Utmost Good Faith: Judicial Review on Article 251 of the Indonesian Commercial Code

In a landmark decision on January 3rd, 2025, the Indonesian Constitutional Court (Mahkamah Konstitusi, or MK) reshaped the landscape of insurance contracts by ruling on Case No. 83/PUU-XXII/2024. The case challenged the constitutionality of Article 251 of the Indonesian Commercial Code (Kitab Undang-Undang Hukum Dagang, or ICC), a provision central to the principle of utmost good faith (uberrimae fidei).

Article 251 of the ICC mandates the highest level of honesty and transparency from the insured in disclosing all material information during the formation and execution of an insurance contract. Crucially, under this article, any incorrect or false notifications, or any concealment of facts, could void the contract, even unintentional or in good faith, if these actions influenced the insurer’s decision to provide coverage or set the policy terms. Essentially, the insurer’s access to complete and accurate information was paramount, and any misrepresentation or omission impacting this could nullify the contract.

The petitioner argued that Article 251 ICC, unfairly favored insurers, allowing unilateral cancellation based on any disclosure error, regardless of intent. 

They contended that this provision was:

• outdated and misaligned with societal developments (Het Recht Hink Achter De Feiten Aan), as it allows policy cancellation based solely on "incorrect information," even without malicious intent, contradicting evolving norms and the need for adaptable legal provisions

• inconsistent with the rule of law, because the unilateral right of the insurer to cancel the insurance policy does not provide a clear and transparent procedure such cancellation may occur

• lacked legal certainty, due to unclear policy cancellation mechanisms, potentially harming insured parties through unilateral insurer action without considering unintentional errors

• contradicted principles of protection, justice, and equality, by potentially penalizing insured parties for unintentional errors or omissions in disclosures, even when made in good faith; and

• potentially infringed on ownership rights, by allowing unilateral policy cancellation without judicial oversight, exposing insured parties' property or rights to insurer action, even absent malicious intent.

Specifically, the petitioner highlighted the lack of a clear and transparent cancellation procedure, the potential for insurer overreach, and the ambiguity surrounding the required level of intent for misrepresentation. 

The Constitutional Court, while not entirely agreeing with the petitioner's call for complete annulment of Article 251, acknowledged the validity of some concerns. The Court ruled that the provision, as it stands, partially violates constitutional rights. Specifically, the Court found that Article 251:

• Lacks clarity on cancellation procedures:  The Court mandated that disputes arising from unintentional errors in disclosure should be resolved through the courts, not unilateral cancellation by the insurer.

• Contradicts legal certainty: The Court determined that cancellation should only occur with the mutual agreement of both parties or a court decision, to ensure greater legal certainty.

• Creates an imbalance: The Court recognized the imbalance between the insurer and the insured, stating that the provision does not fully promote insurance protection.

However, the Constitutional Court stopped short of cancelling Article 251 ICC entirely. Instead, it stipulated that cancellation is permissible only: 

• with the mutual agreement of both insurer and insured, or

• based on a final court decision.

This ruling upholds the legal principles of insurance agreements including good faith, while ensuring adherence to applicable laws, the specific terms of the insurance agreement, or a court ruling. This approach aligns more closely with Article 1266 of the Civil Code, which requires a court decision before unilateral termination of an agreement. That said, it's important to note that Article 1266 itself can be waived by mutual agreement between the parties, adding another layer of complexity (see commentary below). 

ABNR Commentary:

While the Constitutional Court's decision in Case No. 83/PUU-XXII/2024 allows insurers to terminate contracts for disclosure failure (via mutual agreement or court decision), a key question remains: Can contracts still include clauses granting insurers unilateral termination rights for false disclosures? Such clauses could be argued as pre-agreed “mutual agreement.” 

Insurers might argue they permit unilateral termination, given the insured’s prior consent during the formation of the contract. This is further complicated if both parties waive Article 1266 court order requirement. In such cases, express termination clauses for incomplete or false disclosures (regardless of the insurers’ intent) might be deemed valid. 

This ruling shifts the power dynamic in insurance contracts and will likely significantly Indonesian practices. Underwriters may implement more stringent due diligence during underwriting. Crucially, the inclusion of unilateral termination clauses for disclosures will require careful and explicit negotiation during preparation of the insurance contract, underscoring the need for greater transparency and understanding of such clauses for both insurers and insureds. 
 

By partner Ayik C. Gunadi (agunadi@abnrlaw.com) and senior associate Muhammad Muslim (mmuslim@abnrlaw.com).
 

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.