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Landmark Ruling: Indonesian Court Requires Mutual Consent for Insurance Contract Termination 2025
By Setyawati Fitrianggraeni, Taufik Nuariansyah Tanjung
Introduction
On January 3, 2025, the Indonesian Constitutional Court in decision number 83/PUU-XXII/2024 declared Article 251 of the Commercial Code (Kitab Undang-Undang Hukum Dagang or “KUHD”) to be conditionally unconstitutional. The Constitutional Court found that Article 251 of the KUHD does not explicitly regulate the mechanisms or procedures for contract cancellation when certain facts are concealed in making agreements, except for providing potential outcomes: the agreement becomes void, or the agreement would not have been made, or would have been made under different conditions had the concealed or erroneous information been known beforehand. This ruling declares the provision conditionally unconstitutional, meaning that insurance contract cancellations must be based on mutual agreement between the insurer and the insured or by a court decision, rather than through unilateral action by the insurer. The meaning of “conditionally unconstitutional” is that the article under review is declared conditionally contrary to the 1945 Constitution. In other words, the article is unconstitutional if the conditions established by the Constitutional Court are not met.
Insurance Agreements: Definition and Purpose
Article 246 of the KUHD defines an insurance agreement as a contract where the insurer, upon receiving premiums, is obligated to compensate the insured for losses, damages, or lost profits resulting from uncertain events. Meanwhile, Article 1 number 1 of Law No. 40 of 2014 on Insurance expands this definition to include compensation for losses or payments based on the life or death of the insured. At its core, insurance aims to transfer financial risk from the insured to the insurer, creating a balance in the contractual relationship that became a fundamental consideration in the Constitutional Court’s decision.
Insurance agreements have special characteristics that distinguish them from general agreements, one of which is the principle of utmost good faith. This principle, reflected in Article 251 of the KUHD, requires the insured to honestly disclose material facts and prohibits misrepresentation. Other principles such as insurable interest, indemnity, and subrogation (Articles 250, 252, 253, 284 of the KUHD) also support the essence of insurance agreements, but utmost good faith became the main focus in the Constitutional Court’s decision.
The Constitutional Court’s Considerations on Article 251 of the Commercial Code
Article 251 of the KUHD gives insurers the right to cancel insurance agreements or reject claims if the insured does not disclose material facts, in accordance with the principle of utmost good faith which includes the duty of disclosure and prohibition of misrepresentation. However, the Constitutional Court found this provision problematic because: (1) it is potentially ambiguous, especially if the insured conceals facts in good faith; (2) good faith should be the basis of agreements, not grounds for unilateral cancellation; and (3) as a matter of civil law, cancellation should be based on mutual agreement or court decision, not unilateral decisions by the insurer. The Constitutional Court emphasized that insurance disputes must be resolved through mediation or the courts as a last resort.
Implications of Constitutional Court Decision Number 83/PUU-XXII/2024
This decision brings significant impacts for insurance industry participants:
- Insurance Companies (Insurers): They are now required to prioritize the know-your-customer principle to ensure accurate data as unilateral cancellations are no longer permitted. Dispute resolution through mediation or courts may increase operational costs and time.
- Policyholders (Insured): They receive greater protection from unilateral cancellations, with the right to defend their position through formal processes, ensuring fairness.
Impact on the Legal System
The Court has provided clarification and interpretation of Article 251 of the KUHD. To provide fair legal protection and certainty, Article 251 of the KUHD is interpreted to include the requirement that insurance cancellations must be based on agreement between the insurer and insured or by court decision. This creates two methods for insurance cancellation: through mutual agreement between insurer and insured, or through court litigation, which may increase the number of insurance disputes resolved through the courts.
Comparison Before and After the Constitutional Court Decision
Before the decision, insurers could unilaterally cancel contracts based on Article 251 of the KUHD, leaving the insured vulnerable while providing an informal and low-cost process for insurers.
The following is a comparison of insurance cancellation practices before and after the Constitutional Court decision to provide a more structured overview:
| Aspect | Before the Constitutional Court Decision | After the Constitutional Court Decision |
| Cancellation Authority | Insurers could unilaterally cancel based on Article 251 of the KUHD | Cancellation must be based on mutual agreement or court decision |
| Protection for the Insured | Vulnerable to unilateral cancellation, especially in cases of disclosure errors | Better protected, with fairer processes through mediation or courts |
| Insurer’s Operational Costs | Relatively low, as contracts could be directly cancelled | Increased, as litigation or negotiation may be necessary |
| Dispute Resolution Process | Less formal, often resolved internally by the insurer | More formal, involving mediation or courts |
Future Prospects
Constitutional Court Decision Number 83/PUU-XXII/2024 changes the insurance paradigm in Indonesia by prioritizing consumer protection and contractual fairness. While benefiting the insured, insurance companies need to adjust their operations. Insurance companies need to improve the quality of their business processes, particularly in underwriting and risk management. With good understanding, insurance companies can be more careful in assessing potential customers, thereby minimizing policy cancellations or claim rejections that could potentially lead to disputes. Additionally, insurance agreements need to adjust certain clauses, especially regarding cancellation.
References
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Constitutional Court Decision Number 83/PUU-XXII/2024, quoted from “Examining Constitutional Court Decision No. 83/PUU-XXII-2024 Judicial Review of Article 251 of the KUHD,” Media Asuransi News, https://mediaasuransinews.co.id/opini/mencermati-putusan-mk-no-83-puu-xxii-2024-uji-materi-pasal-251-kuhd/. ↩
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Article 246 of the KUHD, Commercial Code, https://id.wikisource.org/wiki/Kitab_Undang-Undang_Hukum_Dagang/Buku_Kesatu/Bab_IX. ↩
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Law No. 40 of 2014 on Insurance, Article 1 number 1. ↩
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Article 251 of the KUHD, Commercial Code, https://id.wikisource.org/wiki/Kitab_Undang-Undang_Hukum_Dagang/Buku_Kesatu/Bab_IX. ↩
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Article 251 of the KUHD, Commercial Code. ↩
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Constitutional Court Decision Number 83/PUU-XXII/2024, Media Asuransi News. ↩
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“Cancellation of Insurance Agreements in the KUHD Declared Unconstitutional,” Hukumonline, https://www.hukumonline.com/berita/a/pembatalan-perjanjian-asuransi-dalam-kuhd-inkonstitusional–begini-respons-asosiasi-lt677d189df0649/. ↩
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“Impact of the Constitutional Court Decision on Article 251 of the KUHD,” LNG Risk, https://lngrisk.co.id/dampak-putusan-mk-atas-pasal-251-kuhd-era-baru-bagi-klaim-asuransi-di-indonesia/. ↩
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“Examining Constitutional Court Decision No. 83/PUU-XXII-2024,” Media Asuransi News.
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Setyawati Fitrianggraeni serves as Managing Partner at Anggraeni and Partners in Indonesia and Assistant Professor at the Faculty of Law, University of Indonesia, while pursuing her PhD at the World Maritime University in Malmö, Sweden and Taufik Nuariansyah Tanjung is an Associate in the Practice Group Advisory and Commercial Transaction at Anggraeni and Partners.
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Anggraeni and Partners, an Indonesian law practice with a worldwide vision, provides comprehensive legal solutions using forward-thinking strategies. We help clients manage legal risk and resolve disputes on admiralty and maritime law, complicated energy and commercial issues, arbitration and litigation, tortious claims handling, and cyber tech law.
S.F. Anggraeni
Managing Partner
Taufik Nuariansyah
Associate
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