In every police Professional Indemnity (PI) Insurance there is an important clause that is often overlooked but has a significant impact in the event of a dispute: the Governing Law Clause. This clause determines which law will be used to interpret, enforce, or resolve disputes regarding the policy. Misunderstanding this clause can result in significant losses, especially for companies operating across borders. This article, written by Mhd. Taufik Arifin, ANZIIF (Snr. Assoc) CIIB, an insurance broker with 40+ years of experience, will examine the crucial role of the Governing Law Clause and why a broker like L&G Insurance Broker can ensure you are optimally protected.
Contact L&G Insurance Broker now at 08118507773 for a free consultation before the risks haunt your business.
Governing Law Clause in Police PI: Understanding the Applicable Law
In the world of professional insurance, or Professional Indemnity (PI) Insurance, every word in a policy has strong legal significance. One often overlooked yet crucial clause is the Governing Law Clause. This clause establishes the law applicable to interpreting, enforcing, and resolving policy-related disputes. Without a proper understanding, the insured can become trapped in an unfamiliar, costly, and time-consuming legal system.
Why Is This Clause Important?
- Legal certainty – Determining the applicable law from the outset avoids ambiguity if a dispute arises.
- Resolution efficiency – Disputes will be resolved more quickly if they use laws that are already understood by the parties.
- Jurisdictional differences – Each country has different contract and insurance rules. This can influence result of police interpretation.
Examples in Indonesia
In Indonesia, insurance policies are generally subject to the Commercial Code (KUHD) and regulations from the Financial Services Authority (OJK). If the Governing Law Clause specifies “Indonesian law,” then any claim disputes will be resolved according to Indonesian legal principles, including resolution mechanisms in district courts or local arbitration. This provides the benefits of domestic legal certainty, lower costs, and easier access.
Examples abroad
English/European – Many international policies use English law as their governing law. This is because the English legal system is considered mature, clear, and widely used in global contracts. However, for Indonesian companies, this can mean having to hire expensive foreign lawyers.
United States – Legal systems differ between states. If a policy is governed by New York or California law, dispute resolution must follow the provisions of that state. This can create additional complexity.
Singapore – As Asia’s financial hub, many international policies designate Singaporean law as governing law. While Singapore’s legal system is efficient and neutral, it still presents cost and access challenges for Indonesian companies.
Risks If Not Understood
- Litigation costs are high due to having to hire foreign law firms.
- Injustice because the insured is facing a foreign legal system.
- The settlement time is long, especially if the dispute has to be tried abroad.
The Role of Insurance Brokers
This is where a broker like L&G Insurance Broker becomes crucial. Experienced brokers understand the implications of each clause and can help:
Negotiating so that governing law is in accordance with the client’s interests (for example, Indonesian law).
Explain the differences in consequences between using Indonesian, English, or Singaporean law.
Protecting clients from hidden risks resulting from differences in legal systems.
The Governing Law Clause is not merely a formality, but rather the legal foundation of an IP policy. Mistakes in selecting or understanding this clause can lead to significant losses. With the assistance of an experienced broker like L&G, companies can ensure that their IP policy truly provides fair, efficient, and legal protection in accordance with Indonesian law.
Example of Governing Law Clause
Using Indonesian Law
“This Policy shall be governed by and construed in accordance with the laws of the Republic of Indonesia. Any dispute arising under this Policy shall be subject to the exclusive jurisdiction of the courts of the Republic of Indonesia.”
➡This means that this policy is subject to Indonesian law, and in the event of a dispute, Indonesian courts have jurisdiction. It’s more accessible and litigation costs are relatively manageable.
Using English Law
“This Policy shall be governed by and construed in accordance with the laws of England and Wales. Any dispute arising under this Policy shall be subject to the exclusive jurisdiction of the courts of England and Wales.”
➡Meaning: Disputes must be resolved under English law, and the proceedings may even have to be conducted in London. This is suitable for international policies, but potentially expensive for Indonesian companies.
Using Singapore Law (often chosen in Southeast Asian regional contracts)
“This Policy shall be governed by and construed in accordance with the laws of Singapore. Any dispute arising under this Policy shall be referred to arbitration in Singapore under the SIAC Rules.”
➡Meaning: More neutral than the laws of large countries, the arbitration process is faster, costs are more affordable, and the legal system is internationally recognized.
🔑The key takeaway: Never ignore the Governing Law Clause. An experienced broker like L&G Insurance Broker will help you choose the safest and most efficient legal clauses to suit your business needs, both in Indonesia and internationally.
Conclusion & Recommendations
The Governing Law Clause in Professional Indemnity (PI) Insurance policies is often considered a mere formality, but in reality, this clause is the “legal foundation” that determines the direction of dispute resolution between the insured and the insurer. Without this clause, or if it doesn’t align with the insured’s interests, the company could face significant problems when a claim arises.
Imagine an Indonesian consulting firm purchasing a PI policy from an international market that stipulates English law as its governing law. When a claim arises, even if the loss is suffered in Indonesia, the dispute must be resolved under English law. The company not only has to pay expensive foreign legal fees but also faces a complex legal system that differs from the Commercial Code or the Financial Services Authority (OJK). This is clearly detrimental, especially for medium-sized companies with limited funds.
On the other hand, if this clause affirms that Indonesian law applies, the company has more accessible legal certainty. Litigation or arbitration processes are more efficient, costs are more manageable, and the insured does not have to deal with a foreign legal system. Therefore, this clause is not only about legality but also about cost efficiency, speed of resolution, and fairness for the insured.
For international policies, the use of English, United States, or Singaporean law is reasonable because it is considered stable and credible. However, it is important for Indonesian companies to understand the consequences before agreeing. A wrong decision in choosing governing law could turn a PI policy, which should be a protection, into an additional burden.
Recommendation
- Understand the policy’s contents from the outset. Don’t just look at the premium, but also pay attention to the applicable legal clauses.
- Prioritize Indonesian law whenever possible. This will further protect companies from the risk of costs and difficulties in accessing legal services.
- Use local or regional arbitration. If foreign law is unavoidable, consider arbitration in Singapore or Jakarta for efficiency.
- Consult with an experienced insurance broker. Brokers like L&G Insurance Broker have in-depth knowledge of international legal implications and can negotiate more favorable terms.
- Don’t delay reviewing your policy. This clause should be confirmed from the outset, not after a dispute has already arisen.
With the support of L&G Insurance Broker, companies in Indonesia need not worry about facing detrimental governing law pitfalls. L&G ensures that every IP policy is a truly robust, fair, and appropriate protection instrument for clients’ legal needs.
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