I. Background
On 3 January 2025, the Constitutional Court of Indonesia (“MK“) issued a decision No. 83/PUU-XXII/2024, which has a significant ruling on the judicial review of Article 251 of the Indonesian Commercial Code (“ICC“), which previously allowed insurers to void policies due to inaccurate or undisclosed information, regardless of intent. This practice led to significant business concerns, particularly for policyholders who acted in good faith but faced unfair claim denials. The uncertainty created by this provision affected businesses relying on insurance as a critical risk management tool, as insurers could retroactively invalidate policies, leaving unexpected financial risks.
The ruling arose from a case where an insurer denied full benefits on a life insurance claim due to an undisclosed pre-existing condition, even though the policyholder had no intent to mislead. By declaring that policies cannot be annulled unless misstatements were intentional or grossly negligent, the Court has introduced greater legal certainty, requiring insurers to prove that any misrepresentation directly influenced underwriting decisions.
II. Ruling of the Constitutional Court
In Decision No. 83/PUU-XXII/2024, the Constitutional Court declared that Article 251 of the ICC are contrary to the 1945 Constitution of the Republic of Indonesia and shall have no binding legal force, except when interpreted to mean that the annulment of insurance coverage must be based on the mutual agreement of the insurer and the insured or a court ruling.
III. Conclusion
The Constitutional Court’s decision reshapes Indonesia’s insurance sector. As a result, businesses and insurers need to be mindful of the following key implications:
- Enhanced Protection for Policyholders
The ruling provides stronger legal safeguards for policyholders by limiting insurers’ ability to rescind policies arbitrarily. Policyholders now have a legal right to prove that they acted in good faith.
- Revised Standards for Underwriting and Claims Handling
Insurers must adopt more transparent underwriting procedures and ensure that any policy annulment is grounded in verifiable and legally sound reasoning rather than unilateral discretion.
- Shift in Burden of Proof
The shift in the burden of proof to insurers significantly reduces the possibility of bad-faith policy annulments. Insurers must now demonstrate with clear and convincing evidence that a policyholder’s misrepresentation was intentional or grossly negligent.
- Impact on Insurance Regulations and Industry Practices
Insurers might also need to revise policy wording and dispute resolution mechanisms to comply with the new standard.
- Greater Legal Certainty in Insurance Disputes
The ruling enables policyholders who believe they have been wrongfully denied coverage to challenge such decisions through legal or arbitration channels, reinforcing due process and legal certainty. Courts and arbitration panels will now evaluate policy annulments based on stricter legal scrutiny rather than insurer discretion.
This landmark decision represents a fundamental shift in Indonesia’s insurance landscape, ensuring a fairer balance between insurers and policyholders. Moving forward, businesses should reassess their insurance strategies and engage with insurers to align with the new legal framework. In contrast, insurers must adapt their practices to maintain compliance and uphold trust in the industry.