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Comprehensive Course : Introduction To Insurance & Takaful Day 2. Azman Ismail. Azman Ismail Principles of insurance. Insurable Interest Utmost good faith Indemnity Subrogation Contribution Proximate Cause. Insurable interest.

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Comprehensive Course : Introduction To Insurance & TakafulDay 2

Azman Ismail

Azman Ismail

principles of insurance
Principles of insurance

Insurable Interest

Utmost good faith




Proximate Cause

insurable interest
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.


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
Utmost Good Faith



fraudulent misrepresentation

innocent misrepresentation

material fact

duty of disclosure
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.


(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.


(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.


Also to reduce the elements of gambling













$75,000 + $50,000 = $125,000

LOSS = $100,000




proximate cause
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
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.


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
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
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
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
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
The Proximate Cause?


Insured's house



  • 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.



Reasons For permissibility

  • Legal Maxim (Permissibility principle)
  • Istihsan
  • Maslahah
  • Uruf
  • Tabarru’ (legal maxim on contracts)



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."

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





قواعد الأحكام في مصالح الأنام


Maslahah in Insurance

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


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


exchange contract
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
Tenets of a sale contract








conditions for contracting parties
Conditions For Contracting Parties

Can be held responsible

Not prohibited from contracting

Not forced into contract


conditions for goods
Conditions For Goods

Must exist

Seller able to deliver

Consists of “mal”

Buyer has clear knowledge



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
Conditions For Price

Price mentioned at inception

Conditions for payment clearly stated


condition for sighah
Condition For Sighah

Must jive


prohibited sales
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
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/


Riba al-Duyun (loan)

Fadl (unequal exchange values)

Nasi’ah (deferment)




Juristic Views On Takaful

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


  • 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

Acceptability depends on…

  • 5/1 Donation commitment, as it should be stipulated that the participant donates his contribution and the returns thereon to the insurance account for payment of indemnity, and may undertake to bear any deficit that may occur as per regulations.
  • 5/2 The company that arranges the insurance deal should maintain two separate accounts: one for its own rights and liabilities, and the other for the rights and liabilities of the policyholders.
  • 5/3 The company should assume the role of the agent in managing the insurance account, and the role of the mudarib or agent in investing the insurance assets.
  • 5/4 The insurance account is entitled to the insurance assets and their returns on investment, and should bear the liabilities relating to these assets.


  • 5/5 The managing company is not entitled to any share of the surplus.
  • 5/6 When the company is liquidated, all provisions and accumulated reserves pertaining to insurance should be spend on charitable purposes.
  • 5/7 Preference should be given to policyholders to participate in management of the insurance operations through appropriate legal arrangements that enable them to exercise their control rights and protect their interest. Such arrangements could include, among others, representation of policyholders in the Board of Directors.
  • 5/8 The Company should adhere to the rules and principles of Islamic Shari’a in all its activities and investments, especially in refraining from provision of insurance coverage for Shari’a banned items, activities or purposes.
  • 5/9 A Shari’a Supervisory Board should be formulated for issuance of fatawa (plural of fatwa i. e. legal opinion) that are binding to the company, and establishment of an internal unit for Shari’a monitoring and auditing.

Malaysian Takaful Contractual Models

  • Mudharabah
    • Company As Entrepreneur and Policyholder (called Participants) As Capital Provider
  • Wakalah
    • Company As The Agent and Participants As Principal
mudharabah rules
Mudharabah Rules...




Based on % of actual

Not % of capital

Not fixed amount


Azman Ismail


Azman Ismail


Azman Ismail


Azman Ismail


Different approaches

For some companies, the takaful participants will be eligible to participate in the distributable surplus provided they have not made any claims or received any takaful benefits from the takaful companies or if the participant has terminated/surrendered his/her takaful certificates before expiry.

For others, the participant is still eligible to the share of surplus if the claim is less than the contribution.

legal aspects
Legal aspects

In Malaysia, the insurance is governed by the Insurance Act 1996 and takaful is governed by the Takaful Act 1984. The Insurance Act 1996, which replaced the Insurance act 1963, contains 18 Parts with 225 Sections. It is an “Act to provide new laws for the licensing and regulation of insurance business, insurance broking business and adjusting business and for other related purposes.”

takaful act 1984
Takaful Act 1984

to “provide for the regulation of takaful business in Malaysia and for other purposes relating to or connected with takaful”.

“takaful business” means business of takaful whose aims and operations do not involve any element which is not approved by the Syariah;


(5) The Director General shall also refuse to register an applicant unless he is satisfied—

(a) that the aims and operations of the takaful business which

it is desired to carry on will not involve any element which is not approved by the Syariah; and

(b) that there is in the Articles of Association of the takaful operator concerned provision for the establishment of a Syariah advisory body, as may be approved by the Director General, to advise an operator on the operations of its takaful business in order to ensure that it does not involve in any element which is not approved by the Syariah.

governing semi governing bodies
Governing/semi governing bodies

Central Bank of Malaysia

International Association of Insurance Supervisors

Islamic Financial Services Board (IFSB)

Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI)


The IFSB plays an active and complementary role to that of the IAIS by issuing prudential and supervisory standards for Takaful that would safeguard the interests of the consumers and the soundness and the stability of the financial system as a whole;

Priority in the IFSB work plan for takaful should be given to specific and immediate regulatory issues that require, as far as reasonably possible, harmonisation across takaful industry; and

To this end, the IFSB is encouraged, as an initial step, to establish a joint working group with the IAIS to produce an issues paper on the applicability of the existing IAIS core principles to the regulatory and supervisory standards for takaful to be developed by the IFSB.

iais ifsb joint working group
IAIS/IFSB Joint Working Group

To provide benchmarks for use by takaful supervisors in all jurisdictions adapting and improving existing regulatory regimes or, where necessary, establishing new ones.

To address regulatory issues, such as risk management and financial stability for the takaful industry.

To provide appropriate levels of consumer protection in terms of both risk and disclosure.

To support the orderly development of the takaful industry in terms of acceptable business and operational models, design and marketing of takaful products.

cash before cover
Cash Before Cover

141. (1) No licensed general insurer shall assume any risk in respect of such description of general policy as may be prescribed unless and until the premium payable is received by the licensed general insurer in such manner and within such time as may be prescribed.

Penalty: Five hundred thousand ringgit.

(2) Where the premium payable under subsection (1) is received by a person on behalf of a licensed general insurer, the receipt shall be deemed to be receipt by the licensed general insurer for the purpose of that subsection and the onus of proving that the

premium was received by a person who was not authorized to receive the premium shall lie on the licensed general insurer.


(3) Where a person receives on behalf of a licensed general insurer premium on a policy of a description prescribed under subsection (1), that person shall remit the amount to the licensed general insurer within such period as the Bank may prescribe in relation to policies of that description.

Penalty: Five hundred thousand ringgit.

(4) A licensed general insurer shall pay directly to the policy owner a refund of premium in relation to a policy of such description as may be prescribed under subsection (1) which may become due to the policy owner for any reason.

Penalty: Five hundred thousand ringgit. Default penalty.


25. (1) Subject to subsections (2) and (3), no operator shall assume any risk in respect of any general business unless and until—

(a) the contribution payable is received by the operator or is guaranteed to be paid by such person in such manner and within such time as may be prescribed; or

(b) deposit of such amount as may be prescribed is made in advance in the manner prescribed.


Haram occupation?






See whiteboard



Azman Ismail