Principles of Contract
An insurance policy binds the parties unilaterally by an offer and an acceptance in reliance on the principles of contract. The fundamentals required in an insurance policy are the parties to the contract, legal capacities of the parties, offer and acceptance, consideration, subject matter, insurable interest and good faith, most of which are found in the general type of contracts. For example, a contract is a promise by an offer and an acceptance, which must be fulfilled as Allah (S.W.T.) has commanded to the effect: "O ye who believe! Fulfil your obligations." Surah al-Maidah, 5:1
As for the legal capacity as to age of the parties to the contract of insurance, a minor below the age of 15 (the age of rushd or majority or puberty) is not able to buy a policy unless the guardian holds the full supervision over the policy and also the policy should be for the benefit of the minor.
The Takaful Siswa allows an infant between the age of the majority and the fifteenth day of birth to hold a Takaful policy for education which is under the supervision of the respective guardian. This operational method may be justified by the following Qur’anic sanction: "Make trial of orphans until they reach the age of marriage; if then you find sound judgment in them, release their property to them; but consume it not wastefully" Surah an-Nisa, (4): 6
The requirement of minimum age of the parties in an insurance policy is the same as required in general contract. Hence the above principles and other relevant principles relating to contract are basically applied to the formation of an insurance contract.
Principles of Liability
An insurance policy covers losses arising from the death, accident, disaster and other losses to human life, property or business. The insurer (insurance company) undertakes in the policy to compensate against the losses to the agreed subject matter. Such undertaking is considered as vicarious liability. For instance, in the case of ‘Aquila practised in the ancient Arab tribes approved by the Holy Prophet (PBUH) if a person was killed by another from a different tribe either mistakenly or negligently, this would bring a liability to the members of his tribe to pay blood wit to the heirs of the slain. See Uddin M. Musleh, Concept of Civil Liability in Islam and the Law of Torts, Islamic Publication Ltd. Lahore, 1982 at 62, See also Niazi Liaqat Ali Khan, Islamic Law of Tort, Research Cell Dayal Singh Trust Library, Lahore, 1988, p. 339.
Moreover, the rights and obligations in an insurance policy mainly arise from the law of contract and tort. For example, in a case of a motor accident, the operator (insurance company) is liable on behalf of the person who causes that accident (i.e. the insured) to compensate the victim. Here, the operator is bound by the terms stipulated in the proposal to pay that compensation under the principles of vicarious liability under the law of Tort.
Principle of Utmost Good Faith
In an insurance contract, for the enforcement of the policy, the parties involved in it should have good faith. Therefore, non-disclosure of material facts, involvement of a fraudulent act, misrepresentations or false statements are all elements which could invalidate a policy of insurance, Allah (S.W.T.) says: "....Do not misappropriate your property among yourselves in vanities but let there be amongst you traffic and trade by mutual good will......" Surah an-Nisa, 4:29
Principles of ‘Mirath’ And ‘Wasiyah’
In a life policy, the assured (Muslim) appoints a nominee who must not be an absolute beneficiary. It must be noted that a nominee in a life insurance policy of a Muslim is a mere trustee who receives benefits from the policy and distributes them among the heirs of the deceased, in accordance with the principles of ‘Mirath’ and ‘Wasiyah’.
"For instance, A nominee shall receive the policy moneys payable on the death of the policy owner as an executor and not solely as a beneficiary and any payment to the nominee shall form part of the estate of the deceased policy owner and be subject to his debts and the licensed insurer shall be discharged from liability in respect of the policy moneys paid".
In the light of this provision, it is concluded that the nominee in a policy nominated by a Muslim policyholder should be treated as a mere executor and not as an absolute beneficiary of the policy.
Principles of Al-Wakala (Agencies)
The appointment of the agent by the insurer and the broker by the insured are of utmost important, in fact, such appointments are widely practiced for the purpose of making the transaction and dealings between the insurer and the insured more effective. The governing principles for the agents and brokers are laid down in the Mejelle as follows: "Wakalat is for someone to put business of his on another and to make him stand in his own place in respect of that business." See Mejelle al-Ahkam al-Adliyah by Tyser (trans.), C.R., The Mejelle, Law Publishing Company, Lahore n.d. art 1449.
Principles of Dhaman (Guarantee)
In an insurance policy, the insurer undertakes to provide material security for the insured against unexpected future loss, damage or risk. The idea of such guarantee is justified by the principles of ‘Dhaman’ or guarantee under Islamic law. In Fiqh, insurance can only be classed under Dhaman (guarantee), which is governed by some essential conditions. Among them the guarantor can only take upon himself a liability which has fallen or may possibly fall upon a person or property. Thus, Dhaman or guarantee may only be payable to the victim or if the victim dies, to his legal heirs, according to their respective shares in inheritance.
Principles of al-Mudharabah and al Musharakah
The operation of an insurance policy under Shariah is in fact based on the principles of al-Mudharabah financing, which is an alternative to the contemporary interest-based transaction. However, an insurance policy is a transaction wherein both parties agree that the participant pays regular contributions and the operator invests the accumulated contributions in a lawful business, in which both the insured and the operator share the profits in an agreed portion. At the same time, the insurer also undertakes to provide the insured with compensation (in consideration of the paid-contribution) against an unexpected future loss or damage occurring on the subject matter of the policy. This is how the principles of al-Mudharabah financing in an insurance policy. An insurance policy also operates on the basis of the principle of ‘al-Musharakah as both the operator and the participants are partners in the policy run by the insurance company.
Principles of Rights and Obligations
An insurance policy is based on the principles of rights and obligations arising from humanity and nature. For instance, it is logical and natural for every person in the society to feel obliged to provide material security and protection as a right for themselves, their property, family, for the poor and helpless widows, and for children against unexpected perils and dangers. Such a natural obligation and right could well be justified by the following Tradition of the Holy Prophet (PBUH.): "Narrated by Saad bin Abi Waqas ® ... the Holy Prophet (PBUH.) said ..... it is better for you to leave your offspring wealthy than to leave them poor asking others for help....."
The Holy Prophet (PBUH.) had also emphasized the importance of providing material security for widows and poor dependents in the following Tradition: "Narrated by Safwan bin Salim ®, the Holy Prophet (PBUH.) said: The one who looks after and works for a widow and a poor person, is like a warrior fighting for Allah’s cause or like a person who fasts during the day and prays all the night...."
Principles of Humanitarian Law
It is one of the purposes of humanitarian law to inculcate mutual understanding in the community, to protect one against unexpected loss, damage or other forms of risks or hardships. Hence, an insurance policy contributes towards alleviating hardships from a person arising from unexpected material risks, which is of course within the scope of the principles of humanitarian law. This has been justified in the following Tradition of the Holy Prophet (PBUH.), which reads: "Narrated by Abu Huraira ®, ...the Holy Prophet (PBUH.) said ... whosoever removes a worldly grief from a believer, Allah (S.W.T.) will remove from him one of the grieves of the day of judgment. Whosoever alleviates a needy person, Allah (S.W.T.) will alleviate from him in this world and the next..."
Principles of Mutual Co-Operation
In a policy, both the operator and the participant mutually agree to lawful co-operation, in which the participant provides capital (through the payments of contributions) to the operator (insurance company), enabling the insurer to invest the accumulated contributions in a lawful business (on the basis of al-Mudharabah) . Meanwhile, the insurer, in return for the payments of the contributions, mutually agrees to compensate the insured in the occurrence of an unexpected loss or damage or risk on the subject matter. Such mutual co-operation among the parties in an insurance policy has been justified by the Divine principles of mutual co-operation, solidarity and brotherhood. Allah (S.W.T.) commanded: "... co-operate you one another in righteousness and piety" Surah al-Maidah, 5:3
CONCLUSION
SECP should move faster in this area of law and amending the existing law is no more a lasting and appropriate solution. In furtherance, the Insurance department needs to be equipped with necessary information and appropriate human resource. Many people are of the opinion that Islamic banks are under capitalized and are still growing more than average interest based banks. This is high time that people could have the alternate solution of Insurance, that is, Islamic Insurance – Takaful.
An insurance policy binds the parties unilaterally by an offer and an acceptance in reliance on the principles of contract. The fundamentals required in an insurance policy are the parties to the contract, legal capacities of the parties, offer and acceptance, consideration, subject matter, insurable interest and good faith, most of which are found in the general type of contracts. For example, a contract is a promise by an offer and an acceptance, which must be fulfilled as Allah (S.W.T.) has commanded to the effect: "O ye who believe! Fulfil your obligations." Surah al-Maidah, 5:1
As for the legal capacity as to age of the parties to the contract of insurance, a minor below the age of 15 (the age of rushd or majority or puberty) is not able to buy a policy unless the guardian holds the full supervision over the policy and also the policy should be for the benefit of the minor.
The Takaful Siswa allows an infant between the age of the majority and the fifteenth day of birth to hold a Takaful policy for education which is under the supervision of the respective guardian. This operational method may be justified by the following Qur’anic sanction: "Make trial of orphans until they reach the age of marriage; if then you find sound judgment in them, release their property to them; but consume it not wastefully" Surah an-Nisa, (4): 6
The requirement of minimum age of the parties in an insurance policy is the same as required in general contract. Hence the above principles and other relevant principles relating to contract are basically applied to the formation of an insurance contract.
Principles of Liability
An insurance policy covers losses arising from the death, accident, disaster and other losses to human life, property or business. The insurer (insurance company) undertakes in the policy to compensate against the losses to the agreed subject matter. Such undertaking is considered as vicarious liability. For instance, in the case of ‘Aquila practised in the ancient Arab tribes approved by the Holy Prophet (PBUH) if a person was killed by another from a different tribe either mistakenly or negligently, this would bring a liability to the members of his tribe to pay blood wit to the heirs of the slain. See Uddin M. Musleh, Concept of Civil Liability in Islam and the Law of Torts, Islamic Publication Ltd. Lahore, 1982 at 62, See also Niazi Liaqat Ali Khan, Islamic Law of Tort, Research Cell Dayal Singh Trust Library, Lahore, 1988, p. 339.
Moreover, the rights and obligations in an insurance policy mainly arise from the law of contract and tort. For example, in a case of a motor accident, the operator (insurance company) is liable on behalf of the person who causes that accident (i.e. the insured) to compensate the victim. Here, the operator is bound by the terms stipulated in the proposal to pay that compensation under the principles of vicarious liability under the law of Tort.
Principle of Utmost Good Faith
In an insurance contract, for the enforcement of the policy, the parties involved in it should have good faith. Therefore, non-disclosure of material facts, involvement of a fraudulent act, misrepresentations or false statements are all elements which could invalidate a policy of insurance, Allah (S.W.T.) says: "....Do not misappropriate your property among yourselves in vanities but let there be amongst you traffic and trade by mutual good will......" Surah an-Nisa, 4:29
Principles of ‘Mirath’ And ‘Wasiyah’
In a life policy, the assured (Muslim) appoints a nominee who must not be an absolute beneficiary. It must be noted that a nominee in a life insurance policy of a Muslim is a mere trustee who receives benefits from the policy and distributes them among the heirs of the deceased, in accordance with the principles of ‘Mirath’ and ‘Wasiyah’.
"For instance, A nominee shall receive the policy moneys payable on the death of the policy owner as an executor and not solely as a beneficiary and any payment to the nominee shall form part of the estate of the deceased policy owner and be subject to his debts and the licensed insurer shall be discharged from liability in respect of the policy moneys paid".
In the light of this provision, it is concluded that the nominee in a policy nominated by a Muslim policyholder should be treated as a mere executor and not as an absolute beneficiary of the policy.
Principles of Al-Wakala (Agencies)
The appointment of the agent by the insurer and the broker by the insured are of utmost important, in fact, such appointments are widely practiced for the purpose of making the transaction and dealings between the insurer and the insured more effective. The governing principles for the agents and brokers are laid down in the Mejelle as follows: "Wakalat is for someone to put business of his on another and to make him stand in his own place in respect of that business." See Mejelle al-Ahkam al-Adliyah by Tyser (trans.), C.R., The Mejelle, Law Publishing Company, Lahore n.d. art 1449.
Principles of Dhaman (Guarantee)
In an insurance policy, the insurer undertakes to provide material security for the insured against unexpected future loss, damage or risk. The idea of such guarantee is justified by the principles of ‘Dhaman’ or guarantee under Islamic law. In Fiqh, insurance can only be classed under Dhaman (guarantee), which is governed by some essential conditions. Among them the guarantor can only take upon himself a liability which has fallen or may possibly fall upon a person or property. Thus, Dhaman or guarantee may only be payable to the victim or if the victim dies, to his legal heirs, according to their respective shares in inheritance.
Principles of al-Mudharabah and al Musharakah
The operation of an insurance policy under Shariah is in fact based on the principles of al-Mudharabah financing, which is an alternative to the contemporary interest-based transaction. However, an insurance policy is a transaction wherein both parties agree that the participant pays regular contributions and the operator invests the accumulated contributions in a lawful business, in which both the insured and the operator share the profits in an agreed portion. At the same time, the insurer also undertakes to provide the insured with compensation (in consideration of the paid-contribution) against an unexpected future loss or damage occurring on the subject matter of the policy. This is how the principles of al-Mudharabah financing in an insurance policy. An insurance policy also operates on the basis of the principle of ‘al-Musharakah as both the operator and the participants are partners in the policy run by the insurance company.
Principles of Rights and Obligations
An insurance policy is based on the principles of rights and obligations arising from humanity and nature. For instance, it is logical and natural for every person in the society to feel obliged to provide material security and protection as a right for themselves, their property, family, for the poor and helpless widows, and for children against unexpected perils and dangers. Such a natural obligation and right could well be justified by the following Tradition of the Holy Prophet (PBUH.): "Narrated by Saad bin Abi Waqas ® ... the Holy Prophet (PBUH.) said ..... it is better for you to leave your offspring wealthy than to leave them poor asking others for help....."
The Holy Prophet (PBUH.) had also emphasized the importance of providing material security for widows and poor dependents in the following Tradition: "Narrated by Safwan bin Salim ®, the Holy Prophet (PBUH.) said: The one who looks after and works for a widow and a poor person, is like a warrior fighting for Allah’s cause or like a person who fasts during the day and prays all the night...."
Principles of Humanitarian Law
It is one of the purposes of humanitarian law to inculcate mutual understanding in the community, to protect one against unexpected loss, damage or other forms of risks or hardships. Hence, an insurance policy contributes towards alleviating hardships from a person arising from unexpected material risks, which is of course within the scope of the principles of humanitarian law. This has been justified in the following Tradition of the Holy Prophet (PBUH.), which reads: "Narrated by Abu Huraira ®, ...the Holy Prophet (PBUH.) said ... whosoever removes a worldly grief from a believer, Allah (S.W.T.) will remove from him one of the grieves of the day of judgment. Whosoever alleviates a needy person, Allah (S.W.T.) will alleviate from him in this world and the next..."
Principles of Mutual Co-Operation
In a policy, both the operator and the participant mutually agree to lawful co-operation, in which the participant provides capital (through the payments of contributions) to the operator (insurance company), enabling the insurer to invest the accumulated contributions in a lawful business (on the basis of al-Mudharabah) . Meanwhile, the insurer, in return for the payments of the contributions, mutually agrees to compensate the insured in the occurrence of an unexpected loss or damage or risk on the subject matter. Such mutual co-operation among the parties in an insurance policy has been justified by the Divine principles of mutual co-operation, solidarity and brotherhood. Allah (S.W.T.) commanded: "... co-operate you one another in righteousness and piety" Surah al-Maidah, 5:3
CONCLUSION
SECP should move faster in this area of law and amending the existing law is no more a lasting and appropriate solution. In furtherance, the Insurance department needs to be equipped with necessary information and appropriate human resource. Many people are of the opinion that Islamic banks are under capitalized and are still growing more than average interest based banks. This is high time that people could have the alternate solution of Insurance, that is, Islamic Insurance – Takaful.
