Azman Ismail www.iifin.net

Comprehensive Course : Introduction To Insurance & TakafulDay 2 Azman Ismail Azman Ismail www.iifin.net

Principles of insurance Insurable Interest Utmost good faith Indemnity Subrogation Contribution Proximate Cause

Insurable interest insured person stands to suffer a financial loss if the insured event occurs Section 18 of the Gaming Act 1845 (replaced with Section 335 of the Gambling Act 2005) insurable interest must exist when the certificate/policy is issued and at the time of loss except in the case of marine insurance, when interest is required only at the time of loss, and in life insurance when interest is required only at the inception.

Cont... There has been a gradual expansion in the concept of “insurable interest” as decided by the Court of Appeal in Feasey v Sun Life Assurance Corporation of Canada (2003). According to Professor Robert Merkin, the Court approved a line of cases, to the effect that a subcontractor has an insurable interest in the entirety of the works project even though he is contributing to only a small part of the project, on the basis that in the event of any casualty the subcontractor could be deprived of the benefit of his contract.

Utmost Good Faith concealment non-disclosure fraudulent misrepresentation innocent misrepresentation material fact

Duty of disclosure S 150 of Insurance Act 1996 (1) Before a contract of insurance is entered into, a proposer shall disclose to the licensed insurer a matter that— (a) he knows to be relevant to the decision of the licensed insurer on whether to accept the risk or not and the rates and terms to be applied; or (b) a reasonable person in the circumstances could be expected to know to be relevant.

Cont... (2) The duty of disclosure does not require the disclosure of a matter that— (a) diminishes the risk to the licensed insurer; (b) is of common knowledge; (c) the licensed insurer knows or in the ordinary course of his business ought to know; or (d) in respect of which the licensed insurer has waived any requirement for disclosure.

Cont... (3) Where a proposer fails to answer or gives an incomplete or irrelevant answer to a question contained in the proposal form or asked by the licensed insurer and the matter was not pursued further by the licensed insurer, compliance with the duty of disclosure in respect of the matter shall be deemed to have been waived by the licensed insurer.

Indemnity Also to reduce the elements of gambling Only this part is payable BEFORE AFTER

Contribution

COMPANY A $75,000 COMPANY B $50,000 $75,000 + $50,000 = $125,000 LOSS = $100,000 BREACH INDEMNITY PRINCIPLE

Proximate Cause Pawsey v. Scottish Union and National (1907) ‘proximate cause means the active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of a force started and working actively from a new and independent source’.

Proximate cause is important to insurers because... they are only issuing cover for certain perils; there may be certain causes which they are excluding; there may be certain results which they are excluding; the premium which has been charged will have taken account of these factors.

Cont... In Etherington v Lancashire and Yorkshire Accidental Insurance Co (1909) a man fell from a horse and sustained injuries that prevented him from moving. As a result he contracted pneumonia due to lying in the wet and died. The proximate cause of his death was held to be the fall not pneumonia.

Remote Causes These are when an original event has occurred and started the motion towards loss, when another new and independent cause occurs and the loss happens. Usually a period of time elapses between the original cause and the remote cause. The following two cases illustrate whether a remote cause can be considered as the proximate cause of a loss:

The cases In Gasgarth v Law Union Insurance Co. (1876) fire damaged a wall and weakened it. Several days later a gale blew down the weakened wall. It was held that fire was NOT the proximate cause. In Roth v South Easthope Farmers' Mutual Insurance Co. (1918) lightning damaged a building and weakened a wall. Shortly afterwards, the weakened wall was blown down by high winds. Lightning was considered to be the proximate cause.

The crucial factor... ... seems to be whether the original peril was still operating and was the dominant cause of the loss. In the first case it was evidently felt that the wall was secure after the fire, whereas in the second case this was not so and the gale operated before remedial action could be taken.

Chain of Events The proximate cause is neither the first nor the last cause, it is the dominant cause (Leyland Shipping Co v Norwich Union (1918) or the efficient or operative cause (P. Samuel & Co Ltd v Dumas (1924)).

The Proximate Cause? x Insured's house

Takaful • The word takaful is derived from the Arabic root word kafala which means to guarantee. Takaful, being a noun, is extracted from the verb takafala. Takafala means “committing one’s self to avert the loss of somebody”. The verb in turn, is derived from the noun Kifl which means “whatever protects the back of the rider”.

“And we ordained that he refused to suck at first, until (his sister came up and said) “shall I point out to you the people of a house that will nourish and take care of him for you.” Al-Qasas : 12.

“So her Lord (Allah) accepted her with goodly acceptance. He made her grow in a good manner and put her under the care of Zakariya (Zechariah). (Ali-Imran : 37)

Sahil Ibn Said reported that “The Messenger of Allah (may Allah bless his soul said) “Myself and the Orphan’s Protector are close like my fingers in paradise”

Position Of Insurance • Scholars are divided, some permitted it while others prohibited it. AZMAN ISMAIL

Reasons For permissibility • Legal Maxim (Permissibility principle) • Istihsan • Maslahah • Uruf • Tabarru’ (legal maxim on contracts) AZMAN ISMAIL

Permissibility principle • "The original legal position on any matter is permissibility until them is evidence prohibiting it." • We have subjugated to you all that is in the heavens and the earth (45:13) • "He has explained to you that which is forbidden to you, unless you are compelled thereto."

Istihsan Departing from the manifested qiyas to the “hidden” qiyas Making an analogy appropriately, taking into consideration not only the text but the context Insurance ->???

Maslahah concept إن درء المفاسد مقدم على جلب المصالح MASALIH FIQH AULAWIYAT MAFASID قواعد الأحكام في مصالح الأنام

Maslahah in Insurance • One's next of kin will suffer a huge burden after his death. • Provide security

Uruf • 'uruf establishes insurance to protect public and individual • insurance contract is not a contract of exchange but falls under the concept of tabarru‘ AZMAN ISMAIL

Tabarru' • Policyholder knows that the premium paid will not be returned and he/she has agreed to it • “The rule in contracts is based on the objectives and meaning and not on the words and sentence contruction”

Other arguments Premium is a fee for looking after his (the insured's) property. Guarantee for a fee – like LC issued by Islamic banks

Reasons For Prohibition • Insurance is an exchange contract and not tabarruc • Contains the elements of gharar, maisir and riba • Investment • Insurance is not tabarruc AZMAN ISMAIL

Exchange Contract E.g. sale contract Insurance equated with sale contract Tenets and conditions of sale contract are compared with insurance contract

Tenets of a sale contract Seller Buyer Price Goods Offer Acceptence AZMAN ISMAIL

Conditions For Contracting Parties Can be held responsible Not prohibited from contracting Not forced into contract AZMAN ISMAIL

Conditions For Goods Must exist Seller able to deliver Consists of “mal” Buyer has clear knowledge AZMAN ISMAIL

Exceptions Salam Sale Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. Istisna’ Sale ‘Istisna’ is the second kind of sale where a commodity is transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. If the manufacturer undertakes to manufacture the goods for him with material from the manufacturer, the transaction of istisna’ comes into existence. But it is necessary for the validity of istisna’ that the price is fixed with the consent of the parties and that necessary specification of the commodity (intended to be manufactured) is fully settled between them.

Conditions For Price Price mentioned at inception Conditions for payment clearly stated AZMAN ISMAIL

Condition For Sighah Must jive AZMAN ISMAIL

Prohibited Sales Sale of birds in the air Sale of fruits on the trees Sale of fish in the water Sale of foetus in the womb Sale by catching Sale by touching

Bai’ al-Hast & bai’ al-gharar Abu Huraira (Allah be pleased with him) reported that Allah's Messenger (may peace be upon him) forbade a transaction determined by throwing stones, and the type which involves some uncertainty.

Gharar, Maisir, Riba • Gharar • Uncertainty • Maisir • Gambling • Riba • Interest

Where in the insurance contract is Gharar? • whether insured will get the compensation promised?; • how much the Insured will get? • when the compensation will be paid? • Can the above be considered gharar? If yes, what kind of gharar, trifling or excessive?

Prohibition of Gambling • “O Believers! intoxicants and gambling - and divining arrows are an abomination of satan’s handiwork. Leave it aside in order that you may prosper. Indeed satan intends to sow enmity and hatred among you by means of intoxicants and gambling and to prevent you from remembrance of Allah and your prayer. Will you not therefore abstain from these thing? Obey Allah and His Messenger and abstain from these things ….” (Qur’an 5: 90-92);

Is Insurance Gambling? • Yes? • Similarities • No? • Differences

Insurance contains riba • What Is Riba? Types of Riba Riba al-Buyu` (sale/ exchange) Riba al-Duyun (loan) Fadl (unequal exchange values) Nasi’ah (deferment) Nasi'ah (deferment)

Juristic Views On Takaful • AAOIFI • Commitment to make donations • Payment to insurance fund • Assign the management of that fund • Operations - remunerated wakala (agency) contract. • Investment - mudaraba or investment agency.

Cont… • Company entitled to agency fee its specific share of the profits through mudaraba or investment agency. • “Company bears all the expenses of its operations including those relating to its tasks for investing the insurance assets.” • Policyholders fund is entitled to the contributions and the returns thereon, the provisions and reserves relating to insurance business, and the insurance surplus. • Fund bears all direct expenses pertaining to management of insurance operations.”

Contractual Relationships • Musharaka (partnership) among the participants • Wakala relationship in regard to management, and a mudaraba or investment agency relationship in regard to the investment of the fund’s assets. • donation commitment btw policyholders and fund

Azman Ismail www.iifin.net