insurance in america vs. islamic concept of insurance

7/30/2019 Insurance In America vs. Islamic Concept of Insurance

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Insurance in AmericaDoctor

Yoosuf ash-ShubayliComparative Fiqh Professor in the Institute

of Arabic and Islamic Sciences, formerly in WashingtonAssembly Member


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The Importance of Studying this Unit

The importance of studying this unit revolves around [the fact] that insurance is of thecontracts which have spread far and wide, have become a necessity in the general livelihood ofthe people, and in their financial transactions, and have expanded to include multiple fields, andhave even become mandatory in some cases. Therefore, the Muslim must become acquaintedwith the Sharia ruling on this contemporary issue, knowing which of its aspects agree with theSharia and which do not. In this unit, the student will satisfy that inquiry and learn about thevarious types of insurance in the American society, and the ruling for each in the pure Sharia.

Lessons to be Learned in this Unit

Dear student;After studying this unit, you are expected to be capable of differentiating between the

various types of insurance that are prominent in American society, and to know the Sharia rulingfor each type.

Contents of this UnitThis unit contains four lessons.

Lesson 1: Getting to know the insurance contract, its types, and its unique characteristics. Thiswill cover three points:

Point 1Defining the insurance contractPoint 2The types of insurancePoint 3The unique characteristics of the insurance contract

Lesson 2: The opinions of the contemporary scholars about the ruling on commercial insurance.

Lesson 3: The concept ofGhararin the Sharia, and its relationship to insurance contracts. Thiswill cover three points:

Point 1The reality ofGhararPoint 2The conditions forGhararbeing consequentialPoint 3Applying the previous guidelines to insurance contracts

Lesson 4: The differences between commercial insurance and benevolence insurance, and asuggested alternate format for a commercial insurance company. This will cover two points:

Point 1The differences between commercial insurance and benevolence insurancePoint 2Suggesting an alternate format for commercial insurance companies


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Lesson 1Defining the Insurance Contract, its Types, and its Unique Characteri stics.

This will cover three points:

Point 1

Defining the insurance contract

IThe Linguisti c Definition

Tameen (insurance) comes from amn (security), and from their common tri-letter root

(a-mi-na) are all the different conjugations formed.Amn (Security) is the oppositeof fear, asthe Quran says:

and He granted them Amn from fear.

1

Thosefor them is Amn.2

Amnah (trustworthiness) is the opposite of treachery, and eemn is the opposite ofdisbelief, and it (eemn) means believing that something is true.

IIThe Technical Definition

Insurance is defined as a contract between two parties, one is called the insurer and theother is the insured. The insurer provides the insured with a sum of money, or a designated

periodic income, or some other form of financial compensation, in the case of an accident taking

place, or a danger befalling, that was stated in the contract. In exchange, there is a premium, orsome other form of payment, that the insured gives to the insurer.In present times, an individual is not insured by another individual. Rather, there are large

companies that perform this with huge numbers of insurance customers. Their premiumscollectively form large sums, and from these collective premiums are those deserving ofcompensation given when a covered accident takes place. The capital [of these companies]remains as a protective wall, and its profit arises from the difference between what they collectof premiums and what they pay in compensations.

IIIIts History

Insurance, in its current known form, is a development of the modern world. It did notsurface until the 14

thGregorian century, in Italy, wherein individuals existed that bore all the

dangers that ships and their cargo are subject to at sea, in exchange for a determined amount.This is known as marine insurance. Thereafter, fire insurance surfaced, and then life insurance,then insurance and its type spread to include every aspect of life. Nowadays, insurancecompanies guard individuals against every danger they are subject to in their lives, wealth, andliabilities. In fact, some governments now compel their cit izens upon some types of insurance.

1Surat Quraysh, verse 4

2Surat al-Anm, verse 82


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Point 2The Types of Insurance

A - With regards to its structure, insurance is divided into benevolence insurance andcommercial insurance.

IBenevolence, Reciprocity, or Cooperative Insurance. In this type of insurance,several individuals who face similar dangers come together and each pays a decidedcontribution. These contributions are dedicated to paying the deserved compensation tothe individual afflicted by that danger. If the contributions exceed what has been spent oncompensations, then the members have the right to retrieve them. If they are insufficient,the members are asked for additional contributions to cover the deficit, or the deservedcompensations are decreased in proportion to the deficit. The members in cooperativeinsurance do not seek to gain profit, but rather to minimize the losses undergone by somemembers. Hence, they contract to aid one another in bearing the catastrophe that may

befall any of them. This company is managed by its members, wherein each of them isboth the insurer and the insured.

II Commercial Insurance with fixed premiums. This is the prominent form

nowadays that is entailed by the word insurance when used in its absolute form. In thistype of insurance, the insured is obligated to pay fixed premiums to the insurer, which isa company comprised of shareholders that differ from those insured. These shareholdersare the beneficiaries of the companys profit. Therefore, the insured in this fixed premiuminsurance is other than the insurer who always seeks to profit. This differs greatly fromthe cooperative insurance where he never seeks to profit, for their sole objective is helpone another bear the dangers. This noble, humane objective only exists in cooperativeinsurance, and does not exist whatsoever in fixed premium insurance. Hence, the conceptof optimizing profit is the basis here, while the idea of aiding one another is nothing but asparkling casing for it.

BWith regards to its coverage, insurance is divided into two major categories.

I Risk Insurance. This deals with the dangers concerning which the insured isliable, and serves to compensate for the loss incurred by the insured due to an accident.This insurance divides into two types:

i. Property Insurance, and this entails compensating the insured forthe loss he incurred in his wealthsuch as fire and theft insurance.

ii. Liability Insurance, and this entails protecting the insured againstbeing responsible to compensate a third party due to harm thatbefell them. Its most important forms are insuring against whatarises from car accidents or work accidents.

In risk insurance, the insurer is obliged to compensate the insured, upon theoccurrence of an accident, within the limits of the insured amount. In other words, theinsurer pays to the insured the lesser of the two amounts; the insured amount, and the

amount that covers the damage incurred from the accident. Also, the insured cannotcombine between [receiving] the insured amount and [making] the claim forcompensation against those at fault in the accident. The insurer becomes therepresentative of the insured in making claims against those responsible for the loss.

IIPersonal Insurance. This deals with every type of insurance that is related tothe insured individual himself. It involves paying someone a particular amount in the caseof his presence or safety, which is determined by the insurer and mutual agreement, andis not affected by the harm the afflicts the insured. The insured individual can combine


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between [collecting] the insured amount from the insurer, in addition to the compensationfrom the party at fault. Hence, the insurer does not represent the insured in this case.

Personal insurance covers two major types:i. Life Insurance. It has many forms, the most important of them are:

- Death Insurance, and this could be a lifetime matter, orone that is temporary, or life insurance depending on

the agreement.- Life Insurance, and of its examples is that which entails

the insured paying installments for a certain period,after which he starts to get a salary as long as he isalive.

- Mixed Insurance, and this is when the insurer isobligated to pay the insured amount, either to theinsured on a particular date if he remains alive untilthen, or to a particular beneficiary, or to the heirs of theinsured if he dies before that date. The premium in thiscase would be greater than the previous two types, andthis [final] type is the most widespread in life insurance.

ii.

Bodily-Injury Insurance. This is the second type of personalinsurance, wherein the insurer is obligated to pay a sum of moneyto the insured, or to a particular beneficiary if the insured dies,when the insured experiences a bodily accident during the periodof insurance coverage.

CPrivate Insurance and Social Securityi. Private Insurance is what the insurer obligates himself with in

regards to a particular risk, and the incentive behind it is personalinterests.

ii. Social security is what serves to insure the individuals, whoselivelihoods depend on the income from their jobs, against the risksthey experience which debilitate them from work such asdisease, senility, unemployment, and incapacity. It sprouts fromthe concept of social solidarity, and contributes in paying the

premium along with the insured employee. The nation is whatcarries the greater load of this.

DMandatory Insurance and Voluntary Insurancei. The first is obligated by the nation upon its citizens, such as social

security and car insurance.ii. The second is whatever is opposite of that.

Point 3The Unique Characteristics of the Insurance Contract

1It is a contract of mutual consent, considering that the acts of offering and acceptingare an essential part of it, whereby its execution is by simply via offering and accepting.However, it is usually not recognized without an insurance policy document that is signed by theinsurer.

2 It is a contract that is binding upon its two parties, whereby each party is indebtedwith duties towards the other, and these duties arise from the moment that the contract iscompleted via offering and accepting.

3It is a probabilistic contract, since profit and loss for both parties of the contract areunknown at the time of contracting.


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4It is an ongoing contract, whereby the fulfillment of duties entailed by the contractdoes not take place immediately. Rather, the fulfillment of this obligation takes a lengthy timethe duration of the contract.

5It is a compliance contract, whereby one of the two parties denotes the conditions hewants, and it demands them from the other party. If the first party accepts them withoutobjection, or modification, then the contract is performed. Otherwise, then no.

6It is a compensative contract, considering that each of its two parties takes somethingin exchange for what it gives.7It is formal contract, and formal contracts are those subordinate to the general rulings

with regards to them taking place, and the effects of that.


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3EmployingQiys on the Mliki principle regarding commitments and bindingpromises. Basically, that [principle] asserts that whoever promises another to give him a loan, orto bear the loss, or the likes of what is not originally an obligation upon him then he isobligated to uphold his promise, especially when that which had been promised becomesnecessary, such as him saying: Get married, and I will give you the dowry.

This is contested by the fact that this is a Qiys of matters that are dissimilar; the

Mliki view of the binding promise is that which is voluntarily promised to begin with, and is notcompensation or in exchange for anythingas oppose to insurance.

4Insurance brings about several benefits. It grants security and peace of mind tothe insured, and helps economic growth via evoking the cooperation which leads to a distributingthe burden of risks between the insured parties. Furthermore, it involves actualizing theirinterdependence upon one another, and this is of the public interests which the Sharia came tosafeguard.

This is contested by the fact that whenever an interest conflicts with the texts ofSharia, then it is nulled and not acknowledged, especially when the benefits of insurance can beattained through the benevolence insurance scheme without falling into Sharia violations.

3rd

Opinion: Prohibiting Life Insurance & Permitting Other Insurancessuch as medical and property insurance. The evidence of this view is that

medical and property insurance do not serve the purpose of acquiring money. Rather, they onlyserve to cover the liability. With medical insurance, it covers treatment, and with car insurance, itcovers fixing it, and so forth. Therefore, the intent behind it is not the money itself. As for lifeinsurance, the intent behind it is money. Thus, the Rib involved is clear, for the insured party

pays less money in installments in order to attain large sums of money later.The Strongest View

It appears and Allah knows best that commercial insurance is prohibited tobegin with, and this was the decision of several Sharia councils and assemblies. Of them was thedecision of the Senior Council of Scholars in Saudi Arabia (#51, Dated: 4/4/1397), the decisionof the Islamic Jurisprudence Assembly (the Muslim World League) in its very first convention(Shabn 1398), and the International Islamic Jurisprudence Assembly (Organization of theIslamic Conference) in decision (#2 (2/9), Dated: 1406H/1985CE). It reads:

In the name of Allah, the Most Merciful, the Bestower of Mercy. All praise isdue to Allah, Lord of the worlds. And may peace and blessings be upon the seal of the prophets,our chief Muhammad, and upon his family and companions.

Decision #2: Regarding Insurance and Re-Insuring. To proceed:The Islamic Jurisprudence Assembly, which sprouts from the Organization of the

Islamic Conference, held its second conference in Jeddah from the 10th

through the 16th

ofRabee ath-Thni 1406H, which coincides with the 22 nd through the 28th of December 1985CE.

After following along with the presentations of our scholars and participants inthe seminar regarding insurance and re-insuring, and after discussing the studies presented, andafter deeply researching its various types and forms, and the principles that uphold it, and thegoals that it aims towards, and after analyzing what the juristic assemblies and academicinstitutions decided about this matter, it has been decided that:

1The commercial insurance contract that involves a set premium, which is whatthe commercial insurance companies deal with, is a contract containing substantial Ghararthatinvalidates the contract. For this reason, it is unlawful in the Sharia.

2The alternate contract which respects the principles of Islamic transaction isthe benevolence insurance contract which is based on the principles of donation and reciprocatedsupport. The same applies to the case of re-insuring on the basis of benevolence insurance.

3 Inviting the Islamic countries to work towards establishing institutions forbenevolence insurance, and also benevolence institutions for re-insurance. This way, Islamiceconomics can break free of being taken advantage of, and of opposing the system which Allahis pleased with for this Ummah.


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And Allah knows best.3The likes of this has been decided by the Jurisprudence Assembly of the MWL,

and was decision of the Senior Scholars Council in the Kingdom of Saudi Arabia.What should be noticed here is the cause of prohibition, and that will be explained

by the following:1Life insurance is prohibited for two matters,Rib and Gharar, and we have

previously explained that.2As for the other types of commercial insurance,Rib existing therein is not

apparent, and this [claim] is not safe from contention. What is actually clear with these types isthe existence ofGharartherein. Based on that, these types should be dealt with according to theguidelines forGhararin the Sharia, and upon them should its rulings apply.

This leads us to the discussion on Ghararand its guidelines in the Sharia.

3[Majallat al-Majma] (2/731).


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Lesson 3The Concept ofGharar in the Sharia, and its Relationship to Insurance Contracts

This will cover 3 points:

Point 1The Reali ty ofGharar

Linguistically, Ghararis a verbal noun that comes from Taghreer which means danger,trickery, and a person subjecting himself or his wealth to loss

4. There have been multiple

definitions forGharargiven by the scholars:It was defined by as-Sarkhasi as that which contains an unknown outcome.

5

It was defined by al-Qarfi as that which one does not know whether it will happen ornot.

6

It was defined by as-Subki as that which its nature is vague and its outcome is hidden.7

It was defined by Shaykh al-Islm Ibn Taymiyah as that which has an unknownoutcome.

8

These definitions are all similar. Gharar is when a person enters a transaction while

unaware of its outcome. In such a case, the contract revolves between winning and forfeiture, forany one of the two contractors winning necessitates the forfeiture of the other. The difference

between Gharar and gambling is that gambling takes place in games and competitions whileGhararoccurs in sales. Thus, it is said: He sold Gharar, and he played gambling.

Point 2The Conditions for Gharar Being Consequential

The default [ruling] forGhararsales is prohibition. That is proven by the hadith of AbuHurayrah, may Allah be pleased with him, that the Prophet :

Forbid the sale of pebbles, and theGharar

sale.

9

An-Nawawi said:

:

4[Al-Misbh al-Muneer] (p. 324)

5 [Al-Mabsoot] (13/68)6

[Al-Furooq] (3/265)7

[Takmilat al-Majmoo] (9/257)8

[Al-Qawid an-Noorniyyah] (p. 138)9

Collected by Muslim in his [Saheeh] (#2783) in the chapter on [Sales: The Invalidity of Selling Pebbles and Sales

that Contain Gharar], Abu Dwud in his [Sunan] (#2932) in the chapter on [Sales: Gharar Sales], at-Tirmidhi in his

[Sunan] (#1151) in the chapter on [Sales: What has Come Regarding the Dislike of Gharar Sales], an-Nasi in his[Sunan] (#4442) in the chapter on [Sales: Selling Pebbles], and Ibn Mjah in his [Sunan] (#2185) in the [Book of

Trade: Chapter on the Prohibition of Pebble Sales and GhararSales].


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The prohibition ofGhararis one of the major principles in the chapter of sales, and is proven byinnumerable casesand He also said:A sale constituting clearGhararthat can be avoided,

and is not warranted by a need, is invalid.10

With regards to its effect on the contract, Ghararis divided into being significantGharar

that is consequential in the contract, and insignificant Gharar that is not consequential. IbnRushd al-Hafeed said:

They have agreed that Ghararis divided into that which affects sales and that which has noeffect.

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The following conditions must exist for the Ghararto be consequential:

The 1st

Condition: The Ghararmust be significant. Ibn al-Qayyim said:

If the Ghararis slight, or cannot be avoided, then it does not hinder the validity of the contract.This differs from the significant [amounts] that can be avoided, which are the types that theMessenger of Allahforbid, and those comparable to them due to the congruence between

them. These are what hinder the validity of the contract.12

Al-Qarfi said:

--:Ghararand ambiguitymeaning: in salesare three categories: the significant which is

prohibited by consensus, such as a bird in the sky, then the negligible which is permitted byconsensus, such as the foundation of a wall and the cotton of a cloak, and then the mediocre

which they differed over whether it belongs under the first or the second.13

Al-Bji explained the gauge for significant Ghararby saying:

Significant Ghararis that which is predominant in the contract, to the degree that the contractitself is symbolic of it.14

10[Saheeh Muslim: Explained by an-Nawawi] (11/156).

11[Bidyat al-Mujtahid] (2/187).

12[Zd al-Mid] (5/820)

13[Al-Furooq] (3/265)

14[Al-Muntaq] (5/41)


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The 2nd

Condition: The Ghararmust exist in that which is contracted itself. Forthe Ghararto be consequential, it must exist in the very contract itself. As for when the Ghararexists in what results from that contract, this has no effect on the contract. It is of the established

juristic principles that matters which results implicitly are more overlooked than others. For thisreason, it was permissible to sell an infant [animal] in the womb as a result of [selling] itsmother, and it was permissible to sell milk in the udder along with the animal. Similarly,

although selling a fruit that has not yet ripened was impermissible due to the Prophet prohibiting the sale of fruits until they have ripened, it was permitted when sold along with itstree, due to the Prophet saying:

Whoever purchased a palm tree before it was harvested, then its fruits belong to the sel ler,unless the purchases stipulates [keeping them].

15

Ibn Qudmah reported a consensus on the permissibility of this sale, and said:

This is because when he sold it along with its tree, it occurred as an implicit result of the sale,and thus the presence ofGharartherein did not harm.

16

The 3rd

Condition: The contract must not be warranted by a need. But if thepeople are in need, the Gharardoes not affect the contract, and hence the contract is valid. IbnTaymiyah said:

The harm in Ghararis lesser thanRib, and thus it was consented in cases of need, for itsprohibition [in that case] is more harmful than the harm ofGharar. An example [of that] is

selling an estate as a single entity, even when the interior of the walls, and the foundation, is notknown.

17

Al-Kaml said about the Salam contract:

.

Clearly, its permissibility is contrary to the Qiys, since it falls under selling what does not exist,but resorting to it was consented by the text and consensus due to both the buyer and seller

having a need for it.18

15Collected by al-Bukhri in his [Saheeh](#2205) in the [Book ofGiving Drink: A Man Having a Passageway], and

Muslim in his [Saheeh] (#2851) in the [Book of Sales: Whoever Sells a Palm Tree Carrying Fruits].16

[Al-Mughni) (4/231)17

[Al-Qawid an-Noorniyyah] (p. 140)18

[Fat-h al-Qadeer] (6/206)


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An-Nawawi said:

Invalidity due to Gharar, and validity despite it, all depends on whether there was a need toundergo this Gharar, or whether this could be avoided without hardship, or if this Ghararwas

insignificant. If so, then the sale is permissible. Otherwise, it is not.19

The evidence for this condition is the permissibility of selling unseen items in theground, such as carrots and carrots, and selling items whose edible portion is internal, such aswatermelon and eggsdespite the Ghararthat contains. It was only made permissible becauseof the need to buy these things without opening them, or extracting them from the Earth.

The 4th

Condition: This Ghararmust exist in contracts of monetary exchange.This condition was only stipulated by the Mlikis, who believe that consequential Ghararis thatwhich exists in contracts of exchange. As for benevolence contracts, Ghararhas no effect onthem. This view was chosen by Ibn Taymiyah, Ibn al-Qayyim, and others

20.

The evidence supports the Mliki view, for the Prophet forbade the Ghararsale, and hence the prohibition is particular to sales. Hence, everything else remains upon itsoriginal [state of] lawfulness. This is also supported by the narration about him beingapproached by a man from the Ansr, and with him was a bundle of hair that he took from thespoils. He said to him:

As for whatever belongs to me, then it is yours.21

The point here is that the Prophet allotted his share of the bundle to him despitenot knowing the amount that was being gifted

22.

Point 3Applying the Previous Guidel ines to Insurance Contracts

The aforesaid has explained that commercial insurance is unlawful because of the Ghararit contains, and that applies to everything but life insurance. Having established that, thenwhenever a condition for Gharar being consequential is absent, that insurance becomes

permissible. This is because upon analyzing the Ghararcontracts which the Sharia came toinvalidate such as selling the fetus of the pregnant [animal], selling pebbles, and theMulmasah and Munbadhah sales one realizes that the unlawful Gharar is that whichresembles play and gambling, and is that which reaps no benefit to the nation, nor serves theinterests of the individual or society, nor results of a need. This differs from the contracts which

people cannot do without; even if they involve a shade ofGharar, the principles of the Sharia didnot forbid the likes of these.

19[Al-Majmoo] (9/258)

20[Bidyat al-Mujtahid] (2/402), [Majmoo Fatw Ibn Taymiyah] (31/270), and [Alm al-Muwaqqieen] (2/9)

21Collected by Abu Dwud in his [Sunan] )#2319) in the [Book of Jihd: Ransoming a Prisoner with Money], an-

Nasi in his [Sunan] (#3628) in the [Book of Gift: Chapter on Gifting Waifs], Ahmad in his [Musnad al-MukthireenMin as-Sahbah] (#6441) on the authority of Abdullh ibn Amr ibn al-s may Allah be pleased with them. It wasdeemed Hasan by al-Albni in [Saheeh Abi Dwud] (#2694) and in [Saheeh an-Nasi] (#3688).22

[Alm al-Muwaqqieen] (2/9)


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Based on that, it can be said that the default in insurance is prohibition, and it is notpermissible to obligate the people with an insurance system that is based on a profitableexchange between the insurer and the insured. As for entering an insurance contract on anindividual level, then it is permissible in the following scenarios:

1st

Scenario: The insurance results implicitly in the contract, and is not its objective.

When the contract is for something, and the insurance ensues subsequently, then its existence inthat contract is overlooked. There is no harm upon a Muslim entering this [contract], and thisscenario has several examples. Of them is:

1The insurance provided by companies for their employees as a benefit grantedto those they employ. This insurance is one of several benefits that the employee is entitled to,though the wage contract (employment) was not based on it.

2 The warranties provided when purchasing merchandise such as cars andelectric appliancesregardless of whether a separate amount, atop the price of the merchandise,was demanded for it or not. This is contingent upon this warranty being acquired in the actualtransaction of the appliance.

3Insuring a rental car if the renter insures the car as part of the rental contractitself, even if the value of the rental increases because of the insurance.

4 Insuring items when shipping them, if the shipping company offers theinsurance service along with the shipping contract itself.In all of these cases, it is permissible to participate in insurance, and to collect the

compensation upon qualifying for it.There are several arguments which could be made against these examples:

The first is that the overlooked Ghararis the implicit [form] which cannot beseparated from its origin, such as the fruit upon the palm tree. As for here, the insurance can beseparated from its origin, and hence cannot be considered implicit.

The response is that it isnt necessary for the implicit Ghararto be bound to theoriginal, and inseparable from it. This is proven by the aforementioned hadith of Ibn Umar,wherein he (saws) said:

Whoever purchased a palm tree before it was harvested, then its fruits belong to the sel ler,unless the purchases stipulates [keeping them].

Here, separating the fruit from the palm tree without stipulation is the default, andyet subsequently selling it alongside the tree was permitted upon stipulation. This proves that if a

buyer demands insurance (a warranty) on an item from its seller, this stipulation is valid if itoccurs in unison with the contract.

The second is that insurance in these mentioned examples has an effect on theprice. This differs from the fetus in the womb, the fruit upon the palm tree, and the likes, whichthe jurists mention as examples of overlooked Ghararfor these subsequent matters have no

price.

The response is that these examples which the jurists mention do, in fact, affectthe price of the original sale. There is no doubt that the pregnant camel, for instance, is moreexpensive than others, and for this reason was the blood money for intentional killing augmentedagainst the criminal to 40 pregnant camels. Likewise, a buyer has the right to stipulate keepingthe fruits from the palm tree or not, but the price would surely vary based on the presence orabsence of this stipulation.

The third is that insurance is essentially prohibited, whereas the fetus, fruit, milk,and the likes are essentially lawful.


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The response is that there exists no difference between insurance and thesematters which are mentioned. They are all, when singled out in a distinctive contract, unlawful tosell.

2nd

Scenario: The insurance is warranted by a need. Here, a need entails that difficultyand hardship will befall a person if he does not insure, and does not require that it reach the

degree of being a dire necessity. Rather, the presence of a need suffices to permit this contractas we have previously established.In this scenario, it is required that the conditions for being a need actually exist; it must

be an actual need and not presumed, and that it be estimated accordingly, and that no otherpermissible contract exists that can satisfy that need. Needs may vary with various people,circumstances, places, and time. For instance, what the owner of a public vehicle needs differsfrom what the owner of a private vehicle needs, and the need for home insurance in a land wheredisasters are common differs from the land where they are rare.

Of the examples that fall under this scenario are:1Medical insurance in lands where treatment costs are expensive, whereby the

resident cannot afford them without insurance.2 Vehicle insurance in lands where the local laws of the resident make that

mandatory. However, he must limit himself to the minimal degree which absolves the need,which is the minimal degree that the laws of the land oblige with.3Insuring homes and Islamic centers against accidents, theft, and firesif the

need warrants the likes of this.4 Insuring against unexpected road delays through service companies, such as

AAA, especially when this company offers other servicesaside from insurancesuch as maps,directions, a telephone hotline for driving tips, and otherwise.

3rd

Scenario: The insurance is cooperative. This is because the Gharar in this contract isoverlooked due to being of the benevolence contracts, and because benevolence/cooperativeinsurance differs from commercial insurance in its objectives and effects. The cooperative servesto actualize solidarity and cooperation between those insured, and thereby actualizes one of theobjectives of the Islamic Sharia, while commercial insurance targets profit and compensation.Thus, the latter was forbidden.

Of the contemporary forms of cooperative insurance are:1 Social security which the governments and public institutions provide their

citizens with.2 Retirement and savings programs which invest the saved wealth through

lawful means of investment.3Medical insurance which is subsidized by the state, and charges premiums that

are usually nominal.4Support organizations, the insurance used in trade unions, and the likes.


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Lesson 4

The Differences between Commerci al Insurance and Benevolence Insurance,and a Suggested Alternate Format for a Commercial Insurance Company

Point 1The Differences between Commercial Insurance and Benevolence Insurance

Most contemporary scholars view the unlawfulness of commercial insurance and thepermissibility of benevolence insurance, and this view was adopted by most Fatwa councils such as the Council of Senior Scholars in the Kingdom of Saudi Arabia, the IslamicJurisprudence Assembly (under the MWL), the Jurisprudence Assembly (under the OIC), andothers. This was based on the Gharar, gambling, and unlawful consumption of wealth that existsin commercial insurance, as oppose to benevolence insurance which is based on cooperation and

solidarity. The one who justly analyzes the reality of how insurance is structured nowadays willrealize what balance and moderation this view contains, how much it agrees with the objectivesof the Islamic Sharia, serves the peoples interests, and satisfies their needs without cheating orharm. Insurance statistics are the greatest testimony to that; the fact is that the commercialinsurance system hauls in loads of money for the insurance companies, while the compensations[they pay out] are trivial in comparison to the profits accrued. This resulted in the wealthyminority monopolizing the advantages of insurance and its services, while the poor majorityremains deprived because it cannot afford the insurance premiums. These companies duped the

people into believing that no other method exists to guard against risks, but this is denied by themany experiments with benevolence insurance that have surfaced in a number of moderncountries and were more successful, and better fulfilled the aims of insurance, than thecommercial insurance companies.

The difference between these two types is clarified by the fact that the commercialinsurance system is based on a separate company manages the insurance scheme, apart from theinsured parties themselves. This company has the right to all the insurance premiums inexchange for being committed to pay the insured amount to those deserving it. Whatever remainsof premiums with the company thereafter, it does not get returned to the insured party, for itconsiders that amount in exchange for its commitment to the agreed upon compensation. At thesame time, if this collected premium does not amass to equal the compensation being paid, itdoes not have to right to return and request more of an insurance premium.


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With benevolence insurance, a number of individuals that are subject to similar riskscome together, and each of them pays a particular membership. These memberships serve to paythe deserved compensation to whomever the harm befalls. If the memberships exceed what has

been spent on compensations, the members bear the right to reclaim them. If they fall short, thenthe members are asked to pay an additional amount to cover the deficit, or the compensation isdecreased in proportion to the deficit. There is nothing that prevents an entity other than the

insured members from managing in benevolence insurance, and earning a wage or salary paid inexchange for their management of the insurance. As well, there is nothing that prevents thatentity from taking a portion of the profits as an investment of the insurance money, whereby itwould serve as their agent in the investment.

From that, it becomes clear that both types of insurance companies can be a distinctcompany apart from those insured themselves, just as it can be a profiting company in bothcases, and that the actual difference between the two types is found mainly 3 matters:

The first difference lies in the objective of the insurer. The premiums paid inbenevolence insurance by those insured serves the objective of helping share the risks, and thesepremiums are taken in the form of a gift (donation). As for commercial insurance, it involvescontracts of speculative monetary exchange.

The second difference lies in the commitment. In commercial insurance, there is an

agreed commitment between the insurance company and those insured. The company iscommitted to pay compensations to those insured, and it deserves the entire paid premium inexchange. In the case of benevolence insurance, there are no grounds for this commitment

because the compensation is paid from the collected premiums that are currently available. If thepremiums are insufficient to pay the due compensations, the members are requested for anadditional contribution to compensate for the difference. Otherwise, the paid compensation is

partial, and in proportion to the available balance.The third difference lies in the source of the profit. Benevolence insurance does not aim

to profit from the disparity between the insurance premiums paid by the insured and thecompensations for harm paid to them by the company. Rather, when the premiums exceed theamounts paid to compensate the ensued harms, this surplus is returned to the insured parties, or iskept as a reserve with the company for future insurance proceduresbut does not enter under thecompanys finances. On the contrary, the surplus in commercial insurance is kept by theinsurance company in exchange for its commitment to compensate those it insures.

The fourth difference lies in how the insurance is managed. In a benevolence insurancecompany, the relationship between the certificate of insurance (COI) holders those insuredand the insurance company is on the following basis:

a) The participants in the company manage the insurance processes themselves.This includes preparing the certificates, collecting the premiums, paying thecompensations, and other related tasksin exchange for a known wage. Thishappens in light of their role in managing the insurance, and this wage isexpressly stated so that each participant may be considered acceptant of it.

b) The participants invest the capital they paid in order to register the companyas a corporation. Also, it can invest the insurance money that was paid by theCOI holders so that the company may accrue a share of what returns from

investing the insurance moneysince it is theMudrib here.c) The company has two separate accounts. One is for investing the capital, and

the other to account for the insurance money. This way, the insurance surpluscan belong solely to the participants (the COI holders).

d) The participants are responsible for whatever expenses theMudrib faces thatare related to investing the money in exchange for a share of the profit fromthisMudrabah just as they are responsible for all the expenses related tomanaging the insurance in exchange for the managerial wage that theydeserve.


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e) The ???is deducted from the returns of the participants investment, and thatbecomes of their rights, in addition to whatever else is related to the capitaland hence must be deducted.

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f) In commercial insurance, the relationship between the COI holders and theinsurance company is one where whatever the certificate holder pays becomesthe property of the company and mixes into its capital in exchange for the

insurance. Hence, two separate accounts do not exist here as they exist inbenevolence insurance.

Point 2Suggesting an Alternate Format for a Commerci al Insurance CompanyPerhaps the most distinct features of this format are what follow:

a) The benevolence insurance [company] should have another company helpsupport in managing it; one where those participating in it are actuallyseparate from the insurance systems finances.

b) This support company can deduct all its managerial and operational expensesfrom the collective insurance premiums, as well as earning wages in light of

being a paid employee that manages the insurance system. Likewise, it has the

right to invest the wealth of those insured in lawful investments, and deservesfor that a share of the profits accrued from these invests since it plays the roleof aMudrib partner.

c) The company must avoid entering into unlawful investments, such as bondsand otherwise, regardless of whether this is done with the investments of thecontributors or the investments of the insurance system.

d) The companys commitment to compensate those insured is two types; lawfuland prohibited. As for the lawful, that is when the company commits tomanaging the insurance operations with honesty and professionalism.Whenever it falls short of that, then it bears the consequences of thatnegligence and compensating for it. As for the prohibited, that is when it bearsan absolute commitment to compensate, irrespective of whether the harmsresulted from the company or otherwise. This conflicts with the very principleof benevolence insurance. Instead of that, the company can have a reservefrom what exceeds the insurance premiums, and these reserves would not fallunder the rights of the participants, but rather under the insurance operations.

e) The company can partake in re-insuring contracts that serve to minimize riskscontingent upon these contracts being of the benevolence insurance type.

23The 12

thal-Barakah Seminar for Islamic Economics; Decisions and Entrustments of the al-Barakah Seminar for

Islamic Economics (p. 212)


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Unit Summary

1) Insurance is a contract between two parties that obligates the insured to pay a monthlypremium to the insurer. In return, the latter is obligated to compensate the insured whenan accident takes place, or a danger ensues that was stated in the contract.

2) Insurance is a development of the modern world that first appeared in Italy during the14

thGregorian century. The Muslims became acquainted with it during the 13

thHijri

century, and the first of the jurists to speak about it was the Hanafi jurist, Ibn bideen.3) With regards to its structure, insurance is divided into benevolence insurance and

commercial insurance.4) With regards to its coverage, insurance is divided into two major categories:

a) Risk Insuranceb) Personal Insurance

Personal insurance covers two major types:- Life insurance, which has many forms- Bodily-Injury insurance

5) The third breakdown of insurance is: private insurance and social security.6) The fourth breakdown of insurance is: mandatory insurance and voluntary insurance.7) The contemporary scholars have 3 views on the ruling of insurance: entirely permissible,

strictly prohibited, and differentiating between them to permit some types and prohibitothers.

8) The default ruling in Ghararsales is unlawfulness, and this is supported by the hadith ofAbu Hurayrahmay Allah be pleased with himthat the Prophet : Forbid the saleof pebbles and the Ghararsale.

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9) The conditions forGharar:Condition 1: The Ghararmust be significant.Condition 2: The Ghararmust exist in that which is contracted itself.Condition 3: The Ghararcontract must not be warranted by a need.

Condition 4: This Ghararmust exist in contracts of monetary exchange.

24Collected by Muslim in his [Saheeh] (#2783) in the chapter on [Sales: The Invalidity of Selling Pebbles and Sales

that Contain Gharar], Abu Dwud in his [Sunan] (#2932) in the chapter on [Sales: GhararSales], at-Tirmidhi in his

[Sunan] (#1151) in the chapter on [Sales: What has Come Regarding the Dislike ofGhararSales], an-Nasi in his[Sunan] (#4442) in the chapter on [Sales: Selling Pebbles], and Ibn Mjah in his [Sunan] (#2185) in the [Book of

Trade: Chapter on the Prohibition of Pebble Sales and GhararSales].


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10)There are differences between benevolence insurance and commercial with regards to theobjective of the insured, the commitment, the source of profit, and the method ofmanaging the company.

11)The Muslims must work to establish the groundwork for benevolence insurancecompanies that can serve the interests of those insured in accordance with the principlesof the Sharia.

12)A person may be compelled to deal with the commercial insurance companies. Forinstance, like if someone needs medical insurance in a land where the cost of treatment isexpensive and the resident cannot afford it without insurance, or vehicle insurance whenthe local laws where an individual resides obligate that. In these cases, he must limithimself to the minimal amount that would satisfy his need, namely the minimal amountthat is obligated by the [governing] system in that land.

Didactic ExerciseDear student; after studying this unitwrite a research paper about the forms of insuranceexistent in the community where you live, and explain the ruling of each form in light ofwhat you have studied in this unit.

insurance in america vs. islamic concept of insurance

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