Law of Insurance

Ghali Fairuzy Windiansyah

KKI 2014
1406640291
Lecturer: Pak Cornellius Simanjuntak

What is Insurable Interest and Principle of Utmost Good Faith?

As the insurance is a contract between the insurer and the insured, and also it is part of
the private law of Indonesia we must refer to the usage of the Article 1320 B.W. where there are
4 requirements in order for a contract to be legal, which are: consent of both parties, legal
capacity, specific matter, and the matter must be legal. If these 4 requirements are fulfilled then
the contract can be established but it is different in the insurance law because there are 2
additional requirements for a contract in insurance law, which the additional requirements are the
Insurable Interest and the Principle of Utmost Good Faith. These 2 additional requirements are a
must in the contract of insurance because it determines on how the legal relationship between the
insurance company and also the insurer regarding the object that is protected, how to claim, and
also how to benefit both the insurer and insured.

Firstly, I am going to talk about the Insurable Interest, the insurable interest is the legal
rights to insure an object that rises from financial relationship between the object and the insured.
Which for example: the person has insurable interest of their health because if they do not insure
then how can they prolong their life? (benefit of them). The insurable interest provides the sense
of belonging factor where the insured shows that they have the legal rights over the object that
wants to be insured. Furthermore, the insurable interest implies that the insured must suffer direct
financial loss if the unwanted events happened to that insured object. Without insurable interest,
the insured can do anything to claim the compensation that is promised by the insurer which the
insured seems to aim for profit rather than protecting their object but by insurable interest the
insured has the sense of belonging and they will claim the compensation if there is unexpected
loss if the object is being damaged.

The case without the insurable interest can be seen in the blue-eyed six story, where this
story is about an old man that does not have the life expectancy for long. He expects that he will
die shortly because of his illness, thus 6 blue eyed men came to the old man and they put the life
insurance to the old man. Ideally if the man dies then the life insurance can be claimed by the 6
men, but what the 6 men have expected turned out to be a boomerang for them where the old
man eventually lived longer than what they have expected. As the life insurance premium is so
high, the 6 men are pressured to pay the premium which gives result to the 6 men reached a
decision that they must kill the old man in order to obtain their claim. The 6 men then murdered
the old man in order collect the life insurance, which in my opinion in this modern days it is so
gruesome that the purpose of insurance is for the protection of the object that we put insurance
to, while the 6 men are aiming for profit. If the insurance becomes profit-oriented it may create
a situation where all people just give insurance to anything that they want as long as they obtain
profit over it, this situation is the same as gambling and it is not favored to the public policy as
it causes harm to the whole society.

Another case is regarding the property insurance, if person A does not have insurable
interest over his car, we can not determine the amount of loss if that person As car experience an
unwanted event (such as car accident, burnt or stolen). If we can not determine the amount of
loss to the person, the insurer can not determine the compensation that they must give to the
insured which this means that it violates the principles of indemnity where this principle
explains that the amount of compensation paid to the insured must be adequate to the loss that
they have experienced. So without the insurable interest, the compensation paid for the car (and
all other properties) can be more or lower as the insurer can not determine the level of loss.

The insurable interest also has the function to know who really has the legal right when
they want to claim for compensation and to avoid the abuse in getting claims for compensation
because the only one who can claim the compensation is the one that truly has the insurable
interest, comparing to the blue-eyed six story above, the 6 men do not have the legal rights to
claim for compensation because they do not have the insurable interest over the old man as they
only want profit.

The legal consequence if the insurable interest is not fulfilled is based on Article 250 of
the Indonesian Commercial Code which states:

If a person insuring for himself or a person on whos a third party makes an insurance, at a
time when the insurance concerned does not have interests in the form of insured goods, the
insuring party shall not be obligated to pay compensation for loss.

From what we have seen from the wording of this Article, we can take a conclusion that

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the legal consequence if the insured is proven to have no insurable interest of what the
object that they have insured then the insurer has the legal rights to avoid the payment of
compensation to that insured.

Secondly, I am going to talk about the Principle of Utmost Good Faith. The principle of
utmost good faith in Latin Uberrima Fidei is the principle that reflects that all information
given by the insured and insurer must be disclosed (must state all of the facts and they must be
honest in saying it). The disclosure of information has the surrender system which it is like you
give your life to that person, in this case both insured and insurer.

For example, in property insurance: I want to insure a car but my car experienced engine
failure last year, when the insurance company asked if my car has experienced engine failure for
the past years I stated that my car has never experienced engine failure, thus from this illustration
I am not disclosing the information regarding my car which means that I am violating the
principle of utmost good faith.

Another example is in life insurance: I have experienced asthma (chronic disease) for the
last 3 years, the insurance company asked that if I have experienced a chronic disease or not for
the past 5 years but I said no, I have not experienced a chronic disease for the last 5 years which
in fact I have asthma up until now. Thus from this illustration I am violating the principle of
utmost good faith because I have asthma but I stated to the insurer that I have none.

The function of this principle is so that to determine whether the insurer have the capacity
to accept that risk or not from all of the information that has been stated by the insured and for
the insured, the insurer must tell all the policy in truth in order so that the insured knows which
risk can be covered by the insurance and also the capacity of the insurer to insure the object.

The legal consequence if the principle of utmost good faith has been violated is that
based on Article 251 of Indonesian Commercial Code, stated:

Every incorrect or false notice, or every concealment of facts known by the insured party, even
though made in good faith, the nature of which is such that the agreement concerned would not
have been made, or would not have been made under the same conditions if the insuring party
learnt the factual situation of all these matters, shall render the insurance concerned void.

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 As we know the insurance is a contract between the insured and the insurer, a contract
can be legal and can be void which legal means that it can be enacted (enforced) while void
means that the contract is accepted as non-existence from the start (the condition must be
returned back to the condition before the contract is made). From this article we can conclude
that if either insurer or the insured violates the principle of utmost good faith, then the
contract is void. For example: if the insured has claimed the compensation to the insurer and the
compensation has been given to, but after that it is known that the insured has not disclosed all of
the information that he has given to the insurer thus the condition must be returned back to
before the insurance contract has been made, thus the compensation given to the insured must be
given back to the insurer.