Insurance in America

Doctor

Yoosuf ash-Shubayli
Comparative Fiqh Professor in the Institute of Arabic and Islamic Sciences, formerly in Washington Assembly Member

The Importance of Studying this Unit

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

Contents of this Unit

This unit contains four lessons. Lesson 1: Getting to know the insurance contract, its types, and its unique characteristics. This will cover three points: Point 1 Defining the insurance contract Point 2 The types of insurance Point 3 The unique characteristics of the insurance contract Lesson 2: The opinions of the contemporary scholars about the ruling on commercial insurance. Lesson 3: The concept of Gharar in the Sharia, and its relationship to insurance contracts. This will cover three points: Point 1 The reality of Gharar Point 2 The conditions for Gharar being consequential Point 3 Applying the previous guidelines to insurance contracts Lesson 4: The differences between commercial insurance and benevolence insurance, and a suggested alternate format for a commercial insurance company. This will cover two points: Point 1 The differences between commercial insurance and benevolence insurance Point 2 Suggesting an alternate format for commercial insurance companies

Lesson 1
Defining the Insurance Contract, its Types, and its Unique Characteristics. This will cover three points: Point 1 Defining the insurance contract I The Linguistic 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 opposite of fear, as the Quran says:

and He granted them Amn from fear.1

Those for them is Amn.2 Amnah (trustworthiness) is the opposite of treachery, and eemn is the opposite of disbelief, and it (eemn ) means believing that something is true. II The Technical Definition Insurance is defined as a contract between two parties, one is called the insurer and the other 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, or some 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 premiums collectively form large sums, and from these collective premiums are those deserving of compensation 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 collect of premiums and what they pay in compensations. III Its History Insurance, in its current known form, is a development of the modern world. It did not surface until the 14 th Gregorian 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, insurance companies guard individuals against every danger they are subject to in their lives, wealth, and liabilities. In fact, some governments now compel their citizens upon some types of insurance.
1 2

Surat Quraysh, verse 4 Surat al-Anm, verse 82

Point 2 The Types of Insurance A - With regards to its structure, insurance is divided into benevolence insurance and commercial insurance. I Benevolence, Reciprocity, or Cooperative Insurance. In this type of insurance, several individuals who face similar dangers come together and each pays a decided contribution. These contributions are dedicated to paying the deserved compensation to the individual afflicted by that danger. If the contributions exceed what has been spent on compensations, 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 deserved compensations are decreased in proportion to the deficit. The members in cooperative insurance do not seek to gain profit, but rather to minimize the losses undergone by some members. 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 is both 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 this type of insurance, the insured is obligated to pay fixed premiums to the insurer, which is a company comprised of shareholders that differ from those insured. These shareholders are the beneficiaries of the companys profit. Therefore, the insured in this fixed premium insurance is other than the insurer who always seeks to profit. This differs greatly from the cooperative insurance where he never seeks to profit, for their sole objective is help one another bear the dangers. This noble, humane objective only exists in cooperative insurance, and does not exist whatsoever in fixed premium insurance. Hence, the concept of optimizing profit is the basis here, while the idea of aiding one another is nothing but a sparkling casing for it. B With regards to its coverage, insurance is divided into two major categories. I Risk Insurance. This deals with the dangers concerning which the insured is liable, 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 for the loss he incurred in his wealth such as fire and theft insurance. ii. Liability Insurance, and this entails protecting the insured against being responsible to compensate a third party due to harm that befell them. Its most important forms are insuring against what arises from car accidents or work accidents. In risk insurance, the insurer is obliged to compensate the insured, upon the occurrence of an accident, within the limits of the insured amount. In other words, the insurer 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 cannot combine between [receiving] the insured amount and [making] the claim for compensation against those at fault in the accident. The insurer becomes the representative of the insured in making claims against those responsible for the loss . II Personal Insurance. This deals with every type of insurance that is related to the insured individual himself. It involves paying someone a particular amount in the case of his presence or safety, which is determined by the insurer and mutual agreement, and is not affected by the harm the afflicts the insured. The insured individual can combine

between [collecting] the insured amount from the insurer, in addition to the compensation from 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, or one 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 is alive. - Mixed Insurance, and this is when the insurer is obligated to pay the insured amount, either to the insured on a particular date if he remains alive until then, or to a particular beneficiary, or to the heirs of the insured if he dies before that date. The premium in this case would be greater than the previous two types, and this [final] type is the most widespread in life insurance. ii. Bodily-Injury Insurance. This is the second type of personal insurance, wherein the insurer is obligated to pay a sum of money to the insured, or to a particular beneficiary if the insured dies, when the insured experiences a bodily accident during the period of insurance coverage. C Private Insurance and Social Security i. Private Insurance is what the insurer obligates himself with in regards to a particular risk, and the incentive behind it is personal interests. ii. Social security is what serves to insure the individuals, whose livelihoods depend on the income from their jobs, against the risks they experience which debilitate them from work such as disease, senility, unemployment, and incapacity. It sprouts from the concept of social solidarity, and contributes in paying the premium along with the insured employee. The nation is what carries the greater load of this. D Mandatory Insurance and Voluntary Insurance i. 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 3 The Unique Characteristics of the Insurance Contract 1 It is a contract of mutual consent, considering that the acts of offering and accepting are 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 the insurer. 2 It is a contract that is binding upon its two parties, whereby each party is indebted with duties towards the other, and these duties arise from the moment that the c ontract is completed via offering and accepting. 3 It is a probabilistic contract, since profit and loss for both parties of the contract are unknown at the time of contracting.

4 It is an ongoing contract, whereby the fulfillment of duties entailed by the contract does not take place immediately. Rather, the fulfillment of this obligation takes a lengthy time the duration of the contract. 5 It is a compliance contract, whereby one of the two parties denotes the conditions he wants, and it demands them from the other party. If the first party accepts them without objection, or modification, then the contract is performed. Otherwise, then no. 6 It is a compensative contract, considering that each of its two parties takes something in exchange for what it gives. 7 It is formal contract, and formal contracts are those subordinate to the general rulings with regards to them taking place, and the effects of that.

Lesson 2
The Opinions of the Contemporary Scholars about the Ruling on Commercial Insurance Insurance was not known to our earlier jurists, for it was not addressed by a specific text in Sharia, nor was anyone of the Sahaba, or Mujtahid Imm(s), ever involved in addressing its ruling. The first jurist to discuss its ruling was Ibn bideen, the Hanafi jurist, in his footnotes on [ad-Durr al-Mukhtr]. The contemporary scholars have three opinions regarding the ruling on insurance, and we will allude to these opinions with a bit of brevity. 1st Opinion: Strictly Prohibited Of the leading evidences for this opinion is: 1 This contract is based on gambling and Gharar , for it is a contract that is contingent upon a harm that may or may not take place, which is essentially gambling. Also, it is because at the time of creating this contract, neither party knows what it will give or take, and the profit margin for either party is proportionate to the loss margin of the other. Therefore, this contract revolves between winning and forfeiture and that is the essence of a Gharar contract. 2 This contract involves Rib , for insurance is the exchange of money (the insurance premium) for money (the compensation) without immediacy or being identical [amounts]. In the case of life insurance, an interest rate is paid to the insured for the premium he paid, if he remains alive, until the contracts term comes to an end. This evidence, that it involves Rib , was contested for two reasons: Firstly, the reality of this exchange is between a monetary premium that is paid to the insurer and a benefit awarded following a catastrophe that is guaranteed to relieve its harm. Hence, one of the two compensations is a benefit, and that is not one of the Rib constituents. Secondly, what the insurer pays to the insured is not in exchange for the premium, and the proof is that he may not pay anything as is the case with many insurance scenarios and does not pay unless the danger takes place. Therefore, this payment happens conseque ntly, and is an exchange for the consequences of the accident. Otherwise, this argument would necessitate the correctness of describing every form of gambling as Rib . 3 This contract involves consuming peoples wealth unfairly, for the insurer consumes the insurance premium without return if the insured does not experience any harm. 2nd Opinion: The Permissibility of Insurance Of the most prominent scholars who view this are Shaykh Mustaf az-Zarq and Shaykh Ali al-Khafeef may Allah bestow mercy upon them both. Of their leading evidences is: 1 Insurance is a new contract that was not addressed by a specific text of our Sharia, nor is there any principle of Sharia that forbids it, and hence it remains upon the default which is lawfulness. 2 - Employing Qiys on what the Hanafi jurists mentioned about guaranteeing against the danger of a road. Basically, that is when an individual says to another: Take this road, for it is safe, and I am liable if anything afflicts you. If the person takes that road and is robbed for his money, the guarantor is liable. The resemblance between that and insurance contracts is that the guarantor here is liable despite not causing the harm himself , making him liable for something unknown, or for a possible occurrence. In the same manner, the insurer can be liable despite not causing [the harm], so long as he is committed to that, and even if the compensation is unknown. This evidence, namely the validity of this Qiys, was contested for two reasons: Firstly, the Hanafis deeming him liable if this is correct is because he was in fact the cause, since he encouraged the other to embark on this dangerous road. Secondly, what the Hanafi jurists mentioned refers to cases when he is guaranteed without compensation. As for here, the insurer guarantees with a compensation.

3 Employing Qiys on the Mliki principle regarding commitments and binding promises. Basically, that [principle] asserts that whoever promises another to give him a loan, or to bear the loss, or the likes of what is not originally an obligation upon him then he is obligated to uphold his promise, especially when that which had been promised becomes necessary, 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 not compensation or in exchange for anything as oppose to insurance. 4 Insurance brings about several benefits. It grants security and peace of mind to the insured, and helps economic growth via evoking the cooperation which leads to a distributing the burden of risks between the insured parties. Furthermore, it involves actualizing their interdependence upon one another, and this is of the public interests which the Sharia came to safeguard. This is contested by the fact that whenever an interest conflicts with the texts of Sharia, then it is nulled and not acknowledged, especially when the benefits of insurance can be attained through the benevolence insurance scheme without falling into Sharia violations. 3rd Opinion: Prohibiting Life Insurance & Permitting Other Insurances such 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 only serve to cover the liability. With medical insurance, it covers treatment, and with car insurance, it covers fixing it, and so forth. Therefore, the intent behind it is not the money itself. As for life insurance, 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 to begin with, and this was the decision of several Sharia councils and assemblies. Of them was the decision of the Senior Council of Scholars in Saudi Arabia (#51, Dated: 4/4/1397), the decision of the Islamic Jurisprudence Assembly (the Muslim World League) in its very first convention (Shabn 1398), and the International Islamic Jurisprudence Assembly (Organization of the Islamic 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 is due 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 10 th through the 16 th of Rabee ath-Thni 1406H, which coincides with the 22 nd through the 28 th of December 1985CE. After following along with the presentations of our scholars and participants in the seminar regarding insurance and re-insuring, and after discussing the studies presented, and after deeply researching its various types and forms, and the principles that uphold it, and the goals that it aims towards, and after analyzing what the juristic assemblies and academic institutions decided about this matter, it has been decided that: 1 The commercial insurance contract that involves a set premium, which is what the commercial insurance companies deal with, is a contract containing substantial Gharar that invalidates the contract. For this reason, it is unlawful in the Sharia. 2 The alternate contract which respects the principles of Islamic transaction is the benevolence insurance contract which is based on the principles of donation and reciprocated support. 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 for benevolence insurance, and also benevolence institutions for re-insurance. This way, Islamic economics can break free of being taken advantage of, and of opposing the system which Allah is pleased with for this Ummah .

And Allah knows best.3 The 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: 1 Life insurance is prohibited for two matters, Rib and Gharar , and we have previously explained that. 2 As 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 is the existence of Gharar therein. Based on that, these types should be dealt with according to the guidelines for Gharar in the Sharia, and upon them should its rulings apply. This leads us to the discussion on Gharar and its guidelines in the Sharia.

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

Lesson 3
The Concept of Gharar in the Sharia, and its Relationship to Insurance Contracts This will cover 3 points: Point 1 The Reality of Gharar Linguistically, Gharar is 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 for Gharar given 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 or not.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 unknown outcome.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, for any 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 while Gharar occurs in sales. Thus, it is said: He sold Gharar , and he played gambling. Point 2 The Conditions for Gharar Being Consequential The default [ruling] for Gharar sales is prohibition. That is proven by the hadith of Abu Hurayrah, may Allah be pleased with him, that the Prophet :

Forbid the sale of pebbles, and the Gharar sale.9 An-Nawawi said:

4 5

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

The prohibition of Gharar is one of the major principles in the chapter of sales, and is proven by innumerable cases and He also said: A sale constituting clear Gharar that can be avoided, and is not warranted by a need, is invalid.10 With regards to its effect on the contract, Gharar is divided into being significant Gharar that is consequential in the contract, and insignificant Gharar that is not consequential. Ibn Rushd al-Hafeed said:

They have agreed that Gharar is divided into that which affects sales and that which has no effect.11 The following conditions must exist for the Gharar to be consequential: The 1 st Condition: The Gharar must be significant. Ibn al-Qayyim said:

If the Gharar is 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 the Messenger of Allah forbid, and those comparable to them due to the congruence between them. These are what hinder the validity of the contract.12 Al-Qarfi said:

: - -
Gharar and ambiguity meaning: in sales are three categories: the significant which is prohibited by consensus, such as a bird in the sky, then the negligible which is permitted by consensus, 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 Gharar by saying:

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

10 11

[Saheeh Muslim: Explained by an-Nawawi] (11/156). [Bidyat al-Mujtahid] (2/187). 12 [Zd al-Mid] (5/820) 13 [Al-Furooq] (3/265) 14 [Al-Muntaq] (5/41)

The 2 nd Condition: The Gharar must exist in that which is contracted itself. For the Gharar to be consequential, it must exist in the very contract itself. As for when the Gharar exists 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 this reason, it was permissible to sell an infant [animal] in the womb as a result of [selling] its mother, 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 its tree, due to the Prophet saying:

Whoever purchased a palm tree before it was harvested, then its fruits belong to the seller, 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 of Gharar therein did not harm.16 The 3 rd Condition: The contract must not be warranted by a need. But if the people are in need, the Gharar does not affect the contract, and hence the contract is valid. Ibn Taymiyah said:

The harm in Gharar is lesser than Rib , and thus it was consented in cases of need, for its prohibition [in that case] is more harmful than the harm of Gharar . An example [of that] is selling an estate as a single entity, even when the interior of the walls, and the foundation, is not known.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

15

Collected by al-Bukhri in his [Saheeh](#2205) in the [Book of Giving 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)

An-Nawawi said:

Invalidity due to Gharar , and validity despite it, all depends on whether there was a need to undergo this Gharar , or whether this could be avoided without hardship, or if this Gharar was 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 the ground, such as carrots and carrots, and selling items whose edible portion is internal, such as watermelon and eggs despite the Gharar that contains. It was only made permissible because of the need to buy these things without opening them, or extracting them from the Earth. The 4 th Condition: This Gharar must exist in contracts of monetary exchange. This condition was only stipulated by the Mlikis, who believe that consequential Gharar is that which exists in contracts of exchange. As for benevolence contracts, Gharar has no effect on them. This view was chosen by Ibn Taymiyah, Ibn al-Qayyim, and others 20. The evidence supports the Mliki view, for the Prophet forbade the Gharar sale, and hence the prohibition is particular to sales. Hence, everything else remains upon its original [state of] lawfulness. This is also supported by the narration about him being approached by a man from the Ansr, and with him was a bundle of hair that he took from the spoils. 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 despite not knowing the amount that was being gifted22. Point 3 Applying the Previous Guidelines to Insurance Contracts The aforesaid has explained that commercial insurance is unlawful because of the Gharar it contains, and that applies to everything but life insurance. Having established that, then whenever a condition for Gharar being consequential is absent, that insurance becomes permissible. This is because upon analyzing the Gharar contracts which the Sharia came to invalidate such as selling the fetus of the pregnant [animal], selling pebbles, and the Mulmasah and Munbadhah sales one realizes that the unlawful Gharar is that which resembles play and gambling, and is that which reaps no benefit to the nation, nor serves the interests 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 of Gharar , the principles of the Sharia did not forbid the likes of these.
19 20

[Al-Majmoo] (9/258) [Bidyat al-Mujtahid] (2/402), [Majmoo Fatw Ibn Taymiyah] (31/270), and [Alm al -Muwaqqieen] (2/9) 21 Collected by Abu Dwud in his [Sunan] )#2319) in the [Book of Jihd: Ransoming a Prisoner with Money], anNasi in his [Sunan] (#3628) in the [Book of Gift: Chapter on Gifting Waifs], Ahmad in his [Musnad al-Mukthireen Min as-Sahbah] (#6441) on the authority of Abdullh ibn Amr ibn al-s may Allah be pleased with them. It was deemed Hasan by al-Albni in [Saheeh Abi Dwud] (#2694) and in [Saheeh an-Nasi] (#3688). 22 [Alm al-Muwaqqieen] (2/9)

Based on that, it can be said that the default in insurance is prohibition, and it is not permissible to obligate the people with an insurance system that is based o n a profitable exchange between the insurer and the insured. As for entering an insurance contract on an individual 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 in that contract is overlooked. There is no harm upon a Muslim entering this [contract], and this scenario has several examples. Of them is: 1 The insurance provided by companies for their employees as a benefit granted to 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 and electric appliances regardless 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 actual transaction of the appliance. 3 Insuring a rental car if the renter insures the car as part of the rental contract itself, even if the value of the rental increases because of the insurance. 4 Insuring items when shipping them, if the shipping company offers the insurance 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 Gharar is the implicit [form] which cannot be separated from its origin, such as the fruit upon the palm tree. As for here, the insurance can be separated from its origin, and hence cannot be considered implicit. The response is that it isnt necessary for the implicit Gharar to be bound to the original, 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 seller, unless the purchases stipulates [keeping them]. Here, separating the fruit from the palm tree without stipulation is the default, and yet 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 it occurs in unison with the contract. The second is that insurance in these mentioned examples has an effect on the price. This differs from the fetus in the womb, the fruit upon the palm tree, and the likes, which the jurists mention as examples of overlooked Gharar for these subsequent matters have no price. The response is that these examples which the jurists mention do, in fact, affect the price of the original sale. There is no doubt that the pregnant camel, for instance, is more expensive than others, and for this reason was the blood money for intentional killing augmented against the criminal to 40 pregnant camels. Likewise, a buyer has the right to stipulate keeping the fruits from the palm tree or not, but the price would surely vary based on the presence or absence of this stipulation. The third is that insurance is essentially prohibited, whereas the fetus, fruit, milk, and the likes are essentially lawful.

The response is that there exists no difference between insurance and these matters which are mentioned. They are all, when singled out in a distinctive contract, unlawful to sell. 2nd Scenario: The insurance is warranted by a need. Here, a need entails that difficulty and 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 contract as 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 other permissible 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 differs from what the owner of a private vehicle needs, and the need for home insurance in a land where disasters are common differs from the land where they are rare. Of the examples that fall under this scenario are: 1 Medical 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. 3 Insuring homes and Islamic centers against accidents, theft, and fires if 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 services aside from insurance such 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 is overlooked due to being of the benevolence contracts, and because benevolence/cooperative insurance differs from commercial insurance in its objectives and effects. The cooperative serves to actualize solidarity and cooperation between those insured, and thereby actualizes one of the objectives of the Islamic Sharia, while commercial insurance targets profit and compensat ion. 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. 3 Medical insurance which is subsidized by the state, and charges premiums that are usually nominal. 4 Support organizations, the insurance used in trade unions, and the likes.

Lesson 4
The Differences between Commercial Insurance and Benevolence Insurance, and a Suggested Alternate Format for a Commercial Insurance Company Point 1 The Differences between Commercial Insurance and Benevolence Insurance Most contemporary scholars view the unlawfulness of commercial insurance and the permissibility 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 Islamic Jurisprudence Assembly (under the MWL), the Jurisprudence Assembly (under the OIC), and others. This was based on the Gharar , gambling, and unlawful consumption of wealth that exists in 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 will realize what balance and moderation this view contains, how much it agrees with the objectives of the Islamic Sharia, serves the peoples interests, and satisfies their needs without cheating or harm. Insurance statistics are the greatest testimony to that; the fact is that the commercial insurance 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 wealthy minority monopolizing the advantages of insurance and its services, while the poor majority remains 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 the many experiments with benevolence insurance that have surfaced in a number of modern countries and were more successful, and better fulfilled the aims of insurance, than the commercial insurance companies. The difference between these two types is clarified by the fact that the commercial insurance system is based on a separate company manages the insurance scheme, apart from the insured parties themselves. This company has the right to all the insurance premiums in exchange for being committed to pay the insured amount to those deserving it. Whatever remains of premiums with the company thereafter, it does not get returned to the insured party, for it considers that amount in exchange for its commitment to the agreed upon compensation. At the same time, if this collected premium does not amass to equal the compensation being paid, it does not have to right to return and request more of an insurance premium.

With benevolence insurance, a number of individuals that are subject to similar risks come together, and each of them pays a particular membership. These memberships serve to pay the 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, then the members are asked to pay an additional amount to cover the deficit, or the compensation is decreased 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 in exchange for their management of the insurance. As well, there is nothing that prevents that entity from taking a portion of the profits as an investment of the insurance money, whereby it would serve as their agent in the investment. From that, it becomes clear that both types of insurance companies can be a distinct company apart from those insured themselves, just as it can be a profiting company in both cases, 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 in benevolence insurance by those insured serves the objective of helping share the risks, and these premiums are taken in the form of a gift (donation). As for commercial insurance, it involves contracts 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 is committed to pay compensations to those insured, and it deserves the entire paid premium in exchange. 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 the premiums are insufficient to pay the due compensations, the members are requested for an additional 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 the compensations for harm paid to them by the company. Rather, when the premiums exceed the amounts paid to compensate the ensued harms, this surplus is returned to the insured parties, or is kept as a reserve with the company for future insurance procedures but does not enter under the companys finances. On the contrary, the surplus in commercial insurance is kept by the insurance company in exchange for its commitment to compensate those it insures. The fourth difference lies in how the insurance is managed. In a benevolence insurance company, the relationship between the certificate of insurance (COI) holders those insured and 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 the compensations, and other related tasks in exchange for a known wage. This happens in light of their role in managing the insurance, and this wage is expressly stated so that each participant may be considered acceptant of it. b) The participants invest the capital they paid in order to register the company as a corporation. Also, it can invest the insurance money that was paid by the COI holders so that the company may accrue a share of what returns from investing the insurance money since it is the Mudrib 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 surplus can belong solely to the participants (the COI holders). d) The participants are responsible for whatever expenses the Mudrib faces that are related to investing the money in exchange for a share of the profit from this Mudrabah just as they are responsible for all the expenses related to managing the insurance in exchange for the managerial wage that they deserve.

e) The ??? is deducted from the returns of the participants investment, and that becomes of their rights, in addition to whatever else is related to the capital and hence must be deducted.23 f) In commercial insurance, the relationship between the COI holders and the insurance company is one where whatever the certificate holder pays becomes the 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 in benevolence insurance. Point 2 Suggesting an Alternate Format for a Commercial Insurance Company Perhaps the most distinct features of this format are what follow: a) The benevolence insurance [company] should have another company help support in managing it; one where those participating in it are actually separate from the insurance systems finances. b) This support company can deduct all its managerial and operational expenses from 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 deserves for that a share of the profits accrued from these invests since it plays the role of a Mudrib partner. c) The company must avoid entering into unlawful investments, such as bonds and otherwise, regardless of whether this is done with the investments of the contributors or the investments of the insurance system. d) The companys commitment to compensate those insured is two types; lawful and prohibited. As for the lawful, that is when the company commits to managing the insurance operations with honesty and professionalism. Whenever it falls short of that, then it bears the consequences of that negligence and compensating for it. As for the prohibited, that is when it bears an absolute commitment to compensate, irrespective of whether the harms resulted from the company or otherwise. This conflicts with the very principle of benevolence insurance. Instead of that, the company can have a reserve from what exceeds the insurance premiums, and these reserves would not fall under the rights of the participants, but rather under the insurance operations. e) The company can partake in re-insuring contracts that serve to minimize risks contingent upon these contracts being of the benevolence insurance type.

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The 12th al-Barakah Seminar for Islamic Economics; Decisions and Entrustments of the al-Barakah Seminar for Islamic Economics (p. 212)

Unit Summary
1) Insurance is a contract between two parties that obligates the insured to pay a monthly premium to the insurer. In return, the latter is obligated to compensate the insured when an 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 the 14 th Gregorian century. The Muslims became acquainted with it during the 13 th Hijri 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 Insurance b) 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 prohibit others. 8) The default ruling in Gharar sales is unlawfulness, and this is supported by the hadith of Abu Hurayrah may Allah be pleased with him that the Prophet : Forbid the sale of pebbles and the Gharar sale. 24 9) The conditions for Gharar: Condition 1: The Gharar must be significant. Condition 2: The Gharar must exist in that which is contracted itself. Condition 3: The Gharar contract must not be warranted by a need. Condition 4: This Gharar must exist in contracts of monetary exchange.

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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 Gharar Sales].

10) There are differences between benevolence insurance and commercial with regards to the objective of the insured, the commitment, the source of profit, and the method of managing the company. 11) The Muslims must work to establish the groundwork for benevolence insurance companies that can serve the interests of those insured in accordance with the principles of the Sharia. 12) A person may be compelled to deal with the commercial insurance companies. For instance, like if someone needs medical insurance in a land where the cost of treatment is expensive and the resident cannot afford it without insurance, or vehicle insurance whe n the local laws where an individual resides obligate that. In these cases, he must limit himself to the minimal amount that would satisfy his need, namely the minimal amount that is obligated by the [governing] system in that land. Didactic Exercise Dear student; after studying this unit write a research paper about the forms of insurance existent in the community where you live, and explain the ruling of each form in light of what you have studied in this unit.