How Does Article 251 of the Indonesian Commercial Code Apply?

The principle of utmost good faith demands honesty and full disclosure from both the insurers and the insured parties. In Indonesia, this principle has come under scrutiny, particularly through the lens of Article 251 of the Indonesian Commercial Code (Kitab Undang-Undang Hukum Dagang or the “KUHD”), which previously allowed automatic cancellation of insurance policies due to erroneous or incomplete disclosures. Recent Constitutional Court decisions, notably No. 83/PUU-XXII/2024 and No. 52/PUU-XXI/2023, have challenged the constitutionality of this provision. These rulings have sparked significant debate across the insurance industry, prompting concerns about increased litigation, new terms within the policies, and even reducing support from foreign reinsurers.

LEGAL FRAMEWORK & ANALYSIS

Pursuant to Article 251 of KUHD, any incorrect or false notification, or any concealment known to the insured may render the insurance policy to be cancelled and voided. There are two consequences of cancellation of an insurance agreement. If the cancellation is due to bad faith from an insured party then according to Article 282 of KUHD, the insurer is entitled to receive the premiums paid by the insured. On the other hand, according to Article 281 of KUHD, if an agreement is cancelled, as long as there is no element of the insured acting in bad faith, then the insurer is obliged to return all or part of the premiums that has been received during the insurance period.

In Indonesia, courts have used Article 251 of KUHD as a legal basis to determine an insurance case and to render its verdict. For example, Case No. 466/PDT/1995/PT. DKI between PT Kartika Abef International Vs. Bank Rakyat Indonesia (Jakarta Veteran Branch Office) which involves dispute over insurance for export goods. The court in the first instance initially granted the plaintiff’s (the insured) claims for the defendant (the insurer) to pay the insurance claim submitted by the plaintiff. However, the decision in the appeal-stage decide otherwise, where it is proven that the plaintiff has concealed facts and therefore violate Article 251 of KUHD resulting the insurance coverage becomes void.

Further, the recent OJK Regulation No. 22 of 2023 on Consumer and Public Protection in the Financial Services Sector (“POJK 22/2023”) highlights the good faith principle for financial institutions, including insurance companies, when conducting business activities or providing products or services to consumers. To be fair and square, financial institutions also have the right to legal protection against bad-faith actions by the consumers.

The above precedent and POJK 22/2023 highlight the importance of the good faith principle and Article 251 of KUHD for the insurer and the insured. The following charts are the brief explanations on the Constitutional Court’s decisions to the petitions which challenged the applicability of Article 251 of KUHD.

CONCLUSION

The principle of utmost good faith remains a foundational element in Indonesian insurance law, particularly as stipulated in Article 251 of KUHD. While previously this provision has granted insurers the power to void policies based on false information or concealment by the insured, recent Constitutional Court’s decision has rendered a critical re-evaluation of its practical application. Ultimately, the enforcement of good faith requires transparency and honesty from all parties involved to ensure fair and sustainable insurance practices.