Regulatory Framework of Doctrine of Utmost Good Faith In Takaful (Islamic Insurance)

Regulatory Framework of Doctrine of Utmost Good Faith In Takaful (Islamic Insurance) Prof. Dr. Mohd. Ma'sum Billah 1 Jurisprudential Outlook It is a shari ah responsibility of mankind to observe fairness and justice in all spheres of their every day lives, while refraining themselves from unjustified whatsoever dealings and attitudes, as enshrined by Almighty Allah (s.w.t.): Allah commands justice, the doing of goods and liberality to kith and kin, and He forbids all shameful deeds and injustice and rebellion. He instructs you that you may receive admonition. 2 This commandment also includes fair dealings in any nature of commercial transaction. In order to establish fairness and justice in commercial activities, Prof. S. Misbahul Hassan suggested that the elements of Maisir (gambling), al-garar (uncertainty), Riba (usury), monopolies, restrictive trade practices, hoarding of wealth, fraudulent and deceitful activities, deceptive advertising and other deceptive market strategies, acts of exploitation and discrimination, and dealings in goods and services which are forbidden by the Shari ah principles should be removed from any kind of commercial dealings. 3 1 1 International Islamic Corporate Advisor on Shari ah, Banking, Finance, Takaful @ Insurance, Business, Wealth, Asset & Property Management, Capital Market, Bond Market, Money Market, Investment & e-commerce. Professor of Islamic Finance, Insurance @ Takaful, Banking, & e- Commerce, Faculty of Islamic Finance, University of Camden, USA. E-mail: masum2001@yahoo.com Website: http//.www.applied-islamicfinane.com. 2 al-quran, Surah al-nahl 16: 90. 3 Hassan, S. Misbahul, Good faith and fairness in Commercial transaction: The Common law, the civil law and the Islamic perspective, (u/p.) presented at IIU Malaysia on April 1996, p. 28. 1

Trade and commerce are practised among the human beings with mutual cooperation, solidarity and brotherhood and are always required to be carried out in righteousness and not to be influenced in any manner by evil attitudes. Allah (s.w.t.) commanded: Help you one another in righteousness and piety, but help you not one another in sin and rancour, fear Allah: for Allah is strict in punishment. 4 There are repeated guidance and directions given by Allah (s.w.t.) and also by the Holy Prophet (s.a.w.) so as to maintain honesty, fairness and justice, and of course fear of Allah (s.w.t.) in any form of transaction. Abiding by such honesty, justice and fairness in the utmost good faith 5 is the supreme ethic in any kind of commercial transaction which must be observed in order to ensure a legitimate transaction recognised by the Shari ah principles. Thus, Allah (s.w.t.) prohibits His creatures from wrongful appropriation while He (s.w.t.) advises them to consume through mutual good will: O you who believe eat not up your property among yourselves in vanities, but let there be amongst you traffic and trade by mutual good will. 6 The element of usury involved in the transaction is also an injustice to the person who has to give it. That is why Allah (s.w.t.) forbids us from involving usury in any kind of transaction. Allah (s.w.t.) said: But Allah had permitted trade and forbidden usury. 7 The elements of uncertainty (al-garar) may involve either the subject matter or the terms of the contract. 8 The element of uncertainty (al-garar) in any kind of transaction is also an evil attitude which gives the doer an opportunity to cheat and victimize the innocent. This may be the reason why the Holy Prophet (s.a.w.) prohibited us from practising it. Yahya related to me from Malik from Abu Hazim ibn Dinar from Sa id ibn al-musayyab that the Messenger of Allah (s.a.w.) forbade the sale with uncertainty it. 9 There are various forms of cheating and dishonesty, which may be involved in a transaction. Any kind of transaction which is required and regarded as useful for the harmonious life of mankind is not only permitted but encouraged under the noble teachings of Islam provided that the transaction does not involve any unfair element 4 al-quran, Surah al-maidah, 5:2; See also Sadiq, Chaudhury Mohammad, Islamic insurance (Takaful): Concept and Practice, in Encyclopaedia of Islamic Banking and Insurance, London, 1995, p. 197, 199. 5 See Amkhan, Adnan, Specific Performance in Arab Contract Law, in [1994] ALQ 9:4, p. 324 at 326. 6 al-quran, Surah al-nisa. 4: 29. 7 al-quran, Surah al-baqarah, 2: 275. 8 See El-Hassan, Abd El-Wahab Ahmed, Freedom of Contract, the Doctrine of Frustration, and Sanctity of Contracts in Sudan Law and Islamic Law, in [1985] ALQ, 1:1, p. 51 at 548. 9 Anas, Imam Malik bin, Al-Muwatta, Kitab al- Buyu, op. cit No. 31:75, p. 270. 2

(cheating etc.). The Holy Prophet (s.a.w.) advised the contracting parties in a transaction before its conclusion to declare to the counter party that there is no cheating in the transaction. Narrated by Abdullah bin Umar: A person came to the Prophet (s.a.w.) and told him that he was always betrayed in purchasing. The Prophet (s.a.w.) told him to say at the time of buying, no cheating. 10 The Holy Prophet (s.a.w.) in another tradition strongly prohibited us from practising Najsh (a kind of cheating or false trick used in the transaction to deceive the other party). The Holy Prophet (s.a.w.) said: Narrated by Ibn Umar: Allah Messenger s (s.a.w.) forbade Najsh. 11 Again reported to the same effect: Ibn Abi Aufa said, one who practises Najsh is a riba eating, traitor. And such a practice is a false trick which is forbidden, and the Prophet (s.a.w.) said deception would lead to the Hell (fire) and whoever does a deed which is not in accord with our tradition, that deed will not be accepted. 12 In a transaction it is one of the primary obligations of the parties to observe utmost good faith strictly for the purpose of making the transaction a clean one. A clean transaction (with utmost good faith) deserves blessing from Allah (s.w.t.) in favour of the parties to the transaction. In contrast an unclean transaction (with dishonesty and falsehood) may bring to the doer otherwise than blessing. The Holy Prophet (s.a.w.) said: Narrated by Halim bin Hizam( r.a). Allah s Messenger (s.a.w.) said: the seller and the buyer have the right to keep or return the goods so long as they have not parted or till they part and if both the parties spoke the truth and described the defects and qualities (of the goods) then they would be blessed in this transaction, and if they told lies or hid something then the blessings of their transaction would be lost. 13 The Holy Prophet (s.a.w.) declared the consequences against those trading parties in the transaction used to violate utmost good faith (with dishonesty, falsehood, etc.) in the transaction: Obaid bin Rafia from his father reported that the Holy Prophet (s.a.w.) said: the merchants will be gathered on the Resurrection day as transgressors except those who were fearful of Allah, pious and truthful. 14 The Holy Prophet (s.a.w.) brought good news for those who observe utmost good faith (honesty and trustworthiness) in transactions. The Holy Prophet (s.a.w.) said: No. 6, p. 269. 10 Sahih al-bukhari, Kitab al- Buyu, (Trans.) op. cit, Vol. III, No. 328, p. 186. 11 Id, No. 352, p. 199. 12 See, in Id, at Chapter 61 (An-Najsh), p. 198. 13 Sahih al-bukhari, Kitab al- Buyu (Trans.) op. cit Vol. III, No. 293, p. 166. 14 Mishkatul Masabih, Kitab al-buyu, Karim, al-haj Maulana Abdul, (trans), op. cit, Book II. 3

Abu Sayed (r.a.) reported that the Messenger of Allah (s.w.t.) said : the truthful trustworthy merchant will be with the Prophets, truthful and martyrs. 15 One of the companions of the Holy Prophet (s.a.w.), Uqba bin Amir highlighted the legal consequences against violation of utmost good faith (with dishonesty, cheating, etc.) in transactions: Uqba bin Amir said: It is illegal for one to sell a thing if one knows that it has a defect, unless one informs the buyer of that defect. 16 In the light of the aforementioned teachings, it is concluded that, for the purpose of having a comfortable life, it is necessary and important for mankind to involve themselves in various commercial activities as they like and require. Involvement in commercial activities, is not merely permitted by the Shari'ah, but are repeatedly encouraged to do so as provided in several Divine sanctions. Under Islamic law, the freedom of commercial activities is not absolute but limited. This means that mankind may involve themselves in commercial activities as they like, provided that all activities should be absolutely in line with the Shari ah principles. It is the supreme requirement for mankind to strictly observe utmost good faith in every aspect of their commercial activities in order to ensure that the activities are valid and may also be blessed by Allah (s.w.t.). In other words, the validity of the commercial activities under Shari'ah principles depends greatly on the principle of utmost good faith. An insurance policy is a part and parcel of commercial activities and therefore, it is fair to conclude that an insurance policy is a contract of utmost good faith, which means that the validity of an insurance policy depends on the principle of utmost good faith. Thus, any form of defect of utmost good faith discovered in a policy, will make the policy an unenforceable one. The central idea of utmost good faith in an insurance policy is that, the parties to the policy should disclose the truth of the facts or the matters affecting the policy. An insurance policy under Islamic law may therefore be held void on the ground of nondisclosure of any truth relevant to the policy. This is because an policy is the contract based upon mutual consent and good will in which the parties concerned are bound by lawful terms and conditions, but they are not bound by terms and conditions made fraudulently. The Holy Prophet (s.a.w.) ruled: Muslims are bound by their conditions except the condition which prohibits the lawful one or the one which permits the prohibited one. 17 In addition, if an insurance policy is concluded upon the influence of non disclosure of the truth relevant to the policy, the policy may not have any legal recognition in the sight of the Shari ah as justified by the following hadith: Narrated by Hakim bin Hizam (r), the Prophet (s.a.w.) said:..and if they spoke the truth and told each other the defects of the things, then blessing 15 Id, no. 4, p. 269. 16 See, Sahih al-bukhari, Kitab al- Buyu, (Trans.) op. cit., Vol. III. No. 291, pp. 165-166. 17 Sunan al-tirmizi, Kitab al- Ahkam, No. 17. 4

would be in their deal, and if they hid something and told lies the blessing of the deal would be lost, 18 Modes of Non-Disclosure In an insurance policy, non-disclosure of the truth by any of the parties may be made through the following ways. Misrepresentation Misrepresentation in an insurance policy may be made either by the operator or the participant or even by an agent. It may be committed both in the subject matter of the policy or in the policy itself. For example, if a person possesses two identical buildings, and the owner, wishing to buy a policy for one of his buildings, presents the building to the operator s knowledge other than the building which is supposed to be covered by the policy; or if any of the parties to the policy puts a clause in the policy with the intention to deceive the other party. In other words, the concept of a misrepresentation in saying or presenting something otherwise than the truth 19. There is no room in the Divine teaching for the commission of misrepresentation, not only in an insurance policy but also in any matter of human dealings. This is justified by Qur anic sanction, which reminds: O you who believe why say you that which you do not, grievously odious is it in the sight of Allah that you say that which you do not. 20 It is, therefore, a moral responsibility upon the parties to the policy that they should disclose the truth and material facts or matters affecting the policy (without any misrepresentation) before its conclusion. Imam Bukhari remarked: If both the seller and the buyer explain the good and bad points concerning the transaction and hide nothing and give sincere advice (then they are blessed in their bargain). 21 18 Sahih Bukhari, Kitab al- Buyu, (Trans.) op. cit, Vol. III, No. 296, p. 167. 19 cf. Arabi, Oussama, al-sanhuri s Reconstruction of the Islamic Law of Contract Defects, in Journal of Islamic Studies, 6:2m 195 p. 153 at 167. 20 al-quran, Surah al-saff, 61: 2-3. 21 Sahih al-bukhari, Kitab al- Buyu, (Trans.) op. cit, Vol. III Chapter 20, p. 165. 5

Fraud An act or omission created by a person with malice aforethought, or with an evil intention, or a deceptive trick, is a fraud. Under Islamic law, there is no room for fraud, because, a fraud in the commercial activities enables its inventor to hope for an unlawful gain while bringing an injustice against the innocent. Ibn Abi Awfa commented against a fraudulent attitude in any activity of mankind: Ibn Abi Aufa said: One who practices Najsh (a kind of fraud) is a riba eating, traitor. And such a practice is a false trick which is forbidden, and the Prophet (s.a.w.) said : Deception would lead to the hell (fire) and whoever does a deed which is not in accord with our tradition, then that deed will not be accepted. 22 Islamic jurists summarized that the act of fraud in the commercial activities consists of two fundamental elements: (i) exploitation by way of trick; and (ii) inducement of the contracting party into contract. 23 Article 125 of the Civil Code of Egypt provides the ruling against a fraudulent act in the commercial activities that: A contract may be declared void on the ground of fraudulent, misrepresentation when the artifices practiced by one of the parties, or by his representatives are of such gravity that, but for one of them, to other party would not have concluded the contract. 24 Article 151 of the Civil Code of Kuwait also provides to the same effect The contract may be nullified because of fraud (Tadlis) if one party consents to the contract as a result of subterfuge aimed at him by the other party with the intention of deceiving him and compelling him into the contract. It must be shown that the deceived party was not satisfied with the contract and would not have accepted it if it had not been for the treachery aimed at him 25 The Code of Contract Law of Bahrain of 1969 itemises the nature of the evil acts, which constitute fraud in the commercial activities as follows: (i) (ii) (iii) (iv) the representation as a fact of that which is not true by one who knows it to be false or recklessly does not care whether such representation be true or false; the active concealment of a fact by one having knowledge or belief of the fact; a promise made without (at the time of making) any intention of performing it; any other act calculated to deceive; and 22 Sahih al-bukhari, Kitab al- Buyu, (Trans.). op. cit, Vol. 14, chapter 61, p. 198. 23 See, Rayner, S.E. The Theory of Contracts in Islamic Law, op. cit., p. 213. 24 See, The Civil Code of Egypt, (Law no. 131 of 1948), Art. 125. 25 See, The Civil Code of Kuwait, (Law no. 67 of 1980), Art. 151. 6

(v) any such act or omission as the law specially declares to be fraudulent. 26 Similarly Article 185 of the Civil Code of UAE defines a fraudulent act in commercial activities: Taghrir (fraud) is when one of the two contracting parties deceives the other by means of trickery of word or deed which leads the other to consent to what he would not otherwise have consented to. 27 In an insurance policy, a fraudulent act may be used either in the subject matter of the policy or the policy itself or in both and may be made either by the operator or the participant or by their agents (agent or broker). This occurs when for instance, any of the parties to the policy with an evil intention makes a false statement in the policy or about the subject matter of the policy in order to gain with a wrongful appropriation upon deceiving the innocent counter partner. Moreover, if a policy is made upon a fraudulent act, the policy may be deemed invalid on the ground of fraud (breach of utmost good faith). This is justified by the following hadith: Uqba bin Amir (r.a.) said: it is illegal for one to sell a thing if one knows that it has a defect, unless one informs the buyer of that defect. 28 Moreover, a fraudulent statement is unlawful and if such an unlawful statement or act influences an innocent party to enter into a contract in which such fraudulent statement stands as a term or condition in the contract, the innocent party in such a contract may not be bound by the contract. Therefore, if an insurance policy is made upon a fraudulent statement, the innocent party in the policy may not be bound by the fraudulent term or condition used in the policy and the policy may not be enforceable on the ground of the fraudulent term or condition. This is justified by the saying of the Holy Prophet (s.a.w.): The Holy Prophet (s.a.w.) said that : Muslims are bound by the condition except the condition which prohibited the permitted one or the one which permitted the prohibited one. 29 Concealment In any form of commercial transaction under Islamic law, it is not only a legal obligation but also a moral obligation upon the parties involved to make a disclosure with a sincere heart of the material facts or matters relevant to the subject matter of the transaction or in the transaction itself. There is no room for the parties in a transaction to conceal any defect hidden either in the subject matter or the transaction itself. Similarly, an insurance policy is also included in the commercial transaction, in which 26 Law of Contract, Bahrain, 1969, Art. 20(1). 27 The Civil Code of UAE, n.d., Art. 185 ; see also The Civil Code of Jordan (Law no. 43 of 1976), Art 143. 28 Sahih al-bukhari, Kitab al- Buyu, No. 292, p. 166. 29 Sunan at- Tirmizi, Kitab al- Ahkam, No. 17. 7

the parties are under a duty to make a fair disclosure to each other about any known defect (hidden to the other party) which exists in the subject matter, or the policy itself without concealing them (defects), for the purpose of making the policy an enforceable and coverable one. In an insurance policy under Islamic law, therefore, if any party to the policy intentionally makes a concealment of a material fact affecting the policy or its subject matter, the policy may be held invalid on the ground of non-disclosure of the material defect to the innocent party. Allah (s.w.t.) appreciates with his blessings the transaction in which the parties make a fair disclosure about the material facts relevant to the transaction but if they do not make a disclosure of the material facts the blessings in transaction may be blotted out. The Holy Prophet (s.a.w) said: Narrated by Hakim bin Hizam Allah s Messenger (s.a.w.) said: the seller and the buyer have the right to keep or return the goods so long as they have not parted or till they part; and if both the parties spoke the truth and described the defects and qualities (of the goods) then they would be blessed in their transaction but if they told lies or hid something, then the blessings of their transaction would be lost. 30 The Holy Prophet (s.a.w.) declared the penalty against those who did not make disclosure by concealing the truth relevant to the transaction. The Holy Prophet (s.a.w.) said: Narrated by Waseleh b. Asqa a (r.a.): I heard the Holy Prophet (s.a.w.) say: whoever sells a defective thing without disclosing it continues to be in the wrath of Allah and angels continue to curse him. 31 On another occasion the Holy Prophet (s.a.w.) spoke about people involved in any kind of commercial transaction with deception as follows: The Holy Prophet (s.a.w.) said: Deception (by way of concealment of defect or any other evil conduct affecting the transaction) would lead to the Hell (Fire) and whoever does a deed which is not in accord with our tradition, then that deed will not be accepted. 32 In regard to the legal effect of intentional concealment of a defect relevant to the transaction, Uqba bin Amir and Imam Malik concluded that such an evil attitude (concealment of defect) is unlawful, which causes the transaction to be held void. 33 Uqba bin Amir said: Uqba bin Amir said: It is illegal for one to sell a thing if one knows that it has a defect, unless one informs the buyer of that defect. 34 Similarly Imam Malik also maintained: 30 Sahih Bukhari, Kitab al- Buyu, (Trans.) op. cit Vol. III, No. 293, p. 166. 31 Mishkatul Masabih, Kitab al- Buyu, (Trans.) Karim, (trans.) op. cit, NO. 55, p. 284. 32 Sahih Bukhari, Kitab al- Buyu, (Trans.), op. cit, Vol. III, Chapter 61, p. 198. 33 See also The Mejelle at Art. 340. 34 Sahih Bukhari, Kitab al- Buyu, (Trans.), op. cit., Vol. iii, No. 292, p. 166. 8

"Malik (r.a.) said: The generally agreed upon way of doing things among us regarding a person, whether he is an inheritor or not, who sells a slave, slave girl or animal, without a liability agreement, is that he is not responsible for any defect in what he sold unless he knew about the fault and concealed it. If he knew that there was a fault and concealed it, his declaration that he was free of responsibility does not absolve him, and what he sold is returned to him. 35 The nature of concealment is saying or doing something and hiding the actual truth inside the doer s heart, by which the doer hopes to gain by the material world but he will not gain in the sight of Allah (s.w.t.). Allah says: Saying with their lips what was not in their hearts. But Allah has full knowledge of all they conceal. 36 It is one of the severe offences, in the eyes of Allah (s.a.w.), to conceal the truth and say or do something otherwise. Allah (s.w.t.) says: O you who believe! why say you that which you do not, grievously odious is it in the sight of Allah (s.w.t.) that you say that which you do not. 37 That is why Allah (s.w.t.) commanded mankind not to allow themselves to conceal the truth and present something otherwise in their dealings by mixing the truth with the falsehood. Allah says: And cover not truth with falsehood, nor conceal the truth when you know (what it is). 38 Relying on the above authorities, it is concluded that an insurance policy may be treated as irrecoverable should the parties to the policy fail to disclose the material facts (effecting the policy) and/or conceal the truth (relevant to the policy). Limitation for Disclosure An insurance policy revolves around a body of information. The law requires that the parties to an insurance policy must make a disclosure to each other (before the conclusion of the policy) about relevant information affecting the policy. Does the law require the parties to disclose both the material and non-material facts or matters relating to the policy? It would be impossible in practice if the law requires the parties to disclose every fact related to the policy. But what may be fair is that the parties are under an obligation to disclose to each other (before the actual conclusion of the contract) only all those material facts or matters affecting the policy. This is justified by the following Prophetic sanction: Narrated by Hakim bin Hizam the Prophet (s.a.w.) said: The buyer and the seller have the option to conceal or to confirm the deal, so long as they have not parted or till they part, and if they spoke the truth and 35 Anas, Imam Malik bin, Al-Muwatta, Kitab al- Buyu, (Trans.), op. cit No. 314, p. 249. 36 al-quran, Surah al- Imran, 3:167. 37 al-quran, Surah al-saff, 61: 2-3. 38 al-quran, Surah al-baqarah 2:42. 9

told each other the defects of the things, then blessings would be in their deal, and if they hid something and told lies, the blessing of the deal would be lost. 39 There are basically two categories of facts, which may be treated as material to a policy. They are: (i) moral hazard; and (ii) physical hazard. 40 Moral Hazard Moral hazard of the participant is a material fact to the policy, which needs to be disclosed before the conclusion of the policy. Does this duty of disclosure of moral hazard extend to the past, present, and also future moral background of the participant? Under Islamic law, the present moral hazard of the participant may be a material fact which needs to be disclosed before the conclusion of each policy if it is so relevant to the policy in which if the parties to the policy bona fide believe that, a non disclosure of the fact may affect the policy. However, there is no justification to require the past and the future moral hazards of the participant to be disclosed before the conclusion of each policy. This is because, an insurance policy is a kind of mutual financial transaction aiming at sharing the responsibilities toward material security against unexpected risk whenever it happens to one s life, property or even business venture. Each and everyone in the society should have a legitimate freedom to engage in any form of lawful commercial activity regardless of one s moral background (honest or criminal), race, sex, religion or colour. Allah (s.w.t.) does not only permit but encourages mankind (in general) to engage in commercial activities for the purpose of maintaining themselves in this world harmoniously. Allah (s.w.t.) said: But Allah (s.w.t.) had permitted trade and forbidden usury. 41 Again Allah (s.w.t.) encourages: And when the prayer is finished, then may you disperse through the land, and seek the bounty of Allah (s.w.t.) (through trade, business and undertaking lawful professions), and celebrate the promise of Allah (s.w.t.) so that you may prosper. 42 Similarly, in another ayat Allah (s.w.t.) provides for freedom of commercial activities for mankind (regardless whether one is honest or criminal) so long they are carrying on the commercial activities within the law and mutual good will among themselves. Allah (s.w.t.) commands: 39 Sahih al-bukhari, Kitab al- Buyu, (Trans.), op. cit, Vol. III, No. 296, p. 167. 40 See, Zulkifli A. Mazlan, Working System of General Takaful Business, in Takaful (Islamic Insurance), Concept and Operational System from the Practitioner s Perspective, op. cit, pp. 73-74. 41 al-quran, Surah al-baqarah 2: 275. 42 al-quran, Surah al-jumah, 60: 10. 10

O you who believe, eat not up your property among yourselves in vanities, but let there be amongst you traffic and trade by mutual good will. 43 There is, therefore, no Divine sanction discriminating one because of his/her moral background to exercise the freedom of commercial activities. One may be accountable or responsible for his own evil moral background either before the court of justice or in the Hereafter, but for such a moral background of the offender, he should not be treated differently in his freedom of commercial activities. In other words, one s evil moral background may be material to the execution of accurate punishment before the court of justice but it should not be material to the exercise of freedom of commercial activities as both the criminal and also the honest man are equal in commercial activities and maintain their lives according to their own wishes. It is again argued here based on the practical argument that, a criminal in the society has a similar right as the one who is honest, to protect or maintain and provide necessary security for his own life, family, and property against any form of risk. If the criminal is being discriminated against due to his criminal behavior or evil moral background, to exercise the above fundamental rights, then how is he going to survive in this world or how he is going to maintain his dependents or provide a security against risk? It is quiet unfair to discriminate against such a person from exercising his personal right for his maintenance and protection especially in commercial matters. Therefore, it is submitted that, a criminal may be accountable for his own evil moral background before a court of justice, but simultaneously he should not be (because of his moral background) deprived from especially commercial rights. It is therefore, concluded that, in an insurance policy, the proposer s past or future moral hazard should not be counted as a material fact to the policy to be disclosed before the conclusion of the policy. Everybody in the society, regardless of one s moral background, should have the opportunity to seek for a reasonable material security against unpredicted loss or damage to the life or property. This is because Allah (s.w.t.) also commands His creatures to maintain mutual co-operation for the noble cause without looking at one s previous background (whether criminal or honest). Allah (s.w.t.) commands: Help you one another in righteousness and piety. 44 In an insurance policy, one's present and existing moral hazard may be regarded as material to the policy for non disclosure of which the policy may be affected. Hence, the moral hazard which is material to an insurance policy under Islamic law is suggested as follows: Existing personal character and attitude Different people possess different attitudes and characters but in an insurance policy, the proposer may be required to disclose only those personal characters or attitudes, the non-disclosure of which might affect the policy. For instance, if the proposer has the habit of killing people and robbing them he might at any time be put in prison or 43 al-quran, Surah al-nisa, 4: 29. 44 al-quran, Surah al-maidah 5: 2. 11

be subject to capital punishment, in which situation he may not be able to contribute the contribution for the policy. The contribution by the policyholder is, however, a fundamental requirement of the policy. This is because in a mutual transaction, the cooperation should not come only from one side but from all parties involve in it. This is justified by the Qur anic sanction: Help you one another in righteousness and piety. 45 In this ayat the direction is to establish a co-operative environment among mankind for noble causes, in which co-operation is expected not only from one side but from all the parties concerned. Existing Financial Condition The institution of insurance is neither a charitable fund nor a welfare organization but it is a financial institution with sincere mutual understanding between the operator and the participant in that both are ready to co-operate (through the contribution by the participant and the material security or indemnity by the operator) against an unexpected risk to the subject matter of the policy. That is why an insurance policy is popularly known as a mutual co-operative financing technique. Therefore, it is necessary for the proposer to disclose his existing financial condition so that the other party (the insurance company) may be able to make a fair decision as to whether to undertake the responsibility of co-operation with him or not. This is because, if the financial condition of the proposer is very bad (because of bankruptcy, etc.), then the proposer may not be able to contribute accordingly, which may subsequently violate the chief objective, that is (mutual co-operation) of insurance practices, (in which both parties are expected to provide their own contributions according to their promises). This is justified by the following Qur anic sanction, in which Allah (s.w.t.) commanded mankind to provide mutual co-operation and He (s.w.t.) commands them (mankind) to keep the promise accordingly. Allah (s.w.t.) says: And co-operate you one another in righteousness and piety. 46 Allah (s.w.t.) also commands: O you who believe! fulfil (all) obligations. 47 Therefore, it is fair and may be justified for the operator if he requires the proposer before the conclusion of the policy to disclose his existing financial position as it is a material fact to the policy. Physical Hazard The question of physical hazard normally arises from the subject matter of the policy. Any fact or matter which exists in the subject matter of the policy and which has not been disclosed by the proposer may mislead the operator in making the decision to accept the proposal with misleading terms and conditions. For example, in a life policy, the life of the participant is the subject matter. If the proposer is already a 45 al-quran, Surah al-maidah 5: 2. 46 al-quran, Surah al-maidah, 5: 2. 47 al-quran, Surah al-maidah, 5: 1. 12

permanently insane, the fact of insanity in this situation is the physical hazard, which may be required to be disclosed in the proposal. Or in a motor policy the motor car itself is the subject matter. If the motor car has a serious defect in its body, such a defect in this case is the physical hazard. The proposers in the above situations are under a duty to disclose the physical hazard of the subject matter so that, the operator may be able to make his own decision whether to accept the proposal or not. Physical hazard is material and the participant is under a duty to disclose it before the conclusion of each policy. This is therefore justified by the following Prophetic sanction: Narrated by Hakim bin Hizam The Prophet (s.a.w.) said: the buyer and the seller have the option to conceal or to confirm the deal, so long as they have not parted or till they part, and if they spoke the truth and told each other the defects of the things, then blessings would be in their deal, and if they hide something and told lies, the blessing of the deal will be blotted out. 48 Naturally, there may be multiple physical hazards existing in a subject matter. The proposer should not be under a duty to disclose every hazard existing in the subject matter but to disclose only the facts or the matter which is so relevant to the policy that if it is not disclosed the operator may be misled in making a fair decision to accept the proposal. Physical hazards which are material to the policy and required to be disclosed before the conclusion of each policy are itemized as follows: Nationality, Residence, Occupation, and Hobbies In a life policy the proposer (participant) may be required to disclose before the proposal is made, his present nationality, residence, occupation and hobbies. The reason why this information is material to a policy is to enable the operator to ascertain that, the participant may not create any default in the transaction in the future, or for the record purpose so that the operator may not face any difficulties in making necessary correspondence with the participant and of course it may make it easy for the operator to pay the indemnity or no claim benefit (NCB) to the participant. Everyone has a fundamental right to find the easy way and reduce difficulties in their dealings. This is because Allah (s.w.t.) does not want any difficulty for His creatures, but an easy life for them. Allah (s.w.t.) says: Allah (s.w.t.) intends every facility for you, He does not want to put you to difficulties." 49 Insurance History Insurance history here means whether the subject matter of the proposed policy (which is at risk and proposed to be covered by a policy if in case the risk runs over it) has been affected by: - refusal to issue a policy by an operator; 48 Sahih Bukhari, Kitab al- Buyu, (Trans.), op. cit, Vol. III, No. 296, p. 167. 49 al-quran, Surah al-baqarah, 2: 185. 13

- refusal to renew the policy by an operator; - cancellation on a legal ground; - imposition of higher rate of contributions for a specific reason; and also - whether on the same subject matter there exists another policy. The reason why this information may be material to the policy is to enable the operator to have accurate knowledge about the actual conditions of the subject matter, i.e.; whether the subject matter is clean or free from any unlawful substance (such as stolen property, etc.). Under Islamic law, it is an obligation upon the parties concerned that they should carry on their transactions which mutual consent and good will among themselves. If, however, they obtain consent with false information, the transaction will be held Batil (void). This has been enshrined in the Holy Qur an: O you who believe! Eat not up your property among yourselves in vanities; but let there be amongst you traffic and trade by mutual good will. 50 Relying on this Qur anic sanction it may be fair and justified for the operator to require every proposer before the issuance of the policy to disclose the insurance history of the subject matter so that the operator may not be misled. Existing Condition of the Subject Matter The existing conditions of the subject matter of the policy, for example, whether it (subject matter) is free from any physical defect or not, or whether it has legal title or is unlawfully possessed (obtained by way of smuggling, stealing or by way of misappropriation, etc.) which are material to the policy should be required to be disclosed before the conclusion of each policy. This is because it is unlawful in the sight of Shari ah principles not to disclose the existing defects of the subject matter in any form of commercial contract. Uqaba bin amir is reported to have said: Uqba bin Amir (r.a.) said: It is illegal for one to sell a thing if one knows that it has a defect, unless one informs the buyer of that defect 51 Therefore, it is an obligation of the owner of a subject matter to disclose the material defects (be they in the physical or in title of the subject matter) before the formation of the transaction. The Holy Prophet (s.a.w.) advised the ummah: Narrated by Hakim bin Hizam Rasullullah (s.a.w.) said: The seller and the buyer have the right to keep or return the goods so long as they have not parted or till they part; and if both the parties spoke the truth and described the defects and qualities (of the goods), then they would be blessed in their transaction, and if they told lies or hid something, then the blessings of their transaction would be blotted out. 52 50 al-quran, Surah al-nisa, 4: 29. 51 Sahih al-bukhari, Kitab al- Buyu, (Trans. ), op. cit, Vol. III. No. 292, p. 166. 52 Sahih al-bukhari, Kitab al- Buyu (Trans.) op. cit, Vol. III. No. 293, p. 166. 14

On another occasion the Holy Prophet (s.a.w.) declared severe consequences against those contracting parties who do not disclose to the other partner the defective conditions which exist in the subject matter. The Holy Prophet (s.a.w.) said: Narrated by Waselah bin Asqa a (r.a.) : I heard the Messenger (s.a.w.) saying : whoso sells a defective thing without disclosing it continues to be in the wrath of Allah (s.w.t.) and angels continue to curse him 53 It is submitted that the condition of the subject matter or its legal position (and title) are material facts to an insurance policy. A proposer should be under a duty, relaying on the aforementioned Prophetic sanctions, to disclose the existing defective conditions or the legal position of the subject matter to the operator before the policy is issued, so that both the operator an participant may be able to carry out the mutual transaction for the noble cause of sharing the responsibilities against unexpected risks to the subject matter. Medical History The medical history of the proposer for the purpose of determining the life expectancy of the participant, especially in a life policy, may not be a material fact. This is because the life and death of creatures cannot be determined by the creatures relying on one s mere medical history, but they can only be determined by Allah (s.w.t.) as indicated in the holy Qur an. Allah (s.w.t.) states: Verily the knowledge of the hours is with Allah (alone). It is He who sends down rain, and He who knows what is in the wombs. Nor does anyone knows what he will earn on the morrow; Nor does anyone knows in what land he is to die. Verily with Allah is full knowledge and He is acquainted (with all things). 54 It may be that in a family, for example, the father is seriously ill while the son is very healthy. The son accidentally dies earlier than the father despite the fact that the son was healthy. Is it be pragmatic, in this example, for the father to be refused a policy upon looking in his medical history, but the son is allowed to buy a policy because he is healthy? Can life and death be determined by looking at a medical history? It is therefore, baseless to determine one s life expectancy merely relaying on his/her medical history. This is because one s death does not depend on illness but it is fixed by Allah (s.w.t.) regardless whether one is healthy or ill. Allah (s.w.t.) clarified: Nor can a soul die except by Allah s leave, the term being fixed as by writing. 55 There are however, two reasons why the proposer s medical history may be material to the policy and required to be disclosed before the conclusion of the policy. Those reasons are: (i) for the purpose of ensuring the ability of the proposer to settle the agreed contribution (premium). An insurance policy is a financial transaction of 53 Mishkatul Masabih, Kitab al- Buyu,Karim op. (trans) cit, No. 55, p. 284. 54 al-quran, Surah Luqman, 31: 34. 55 al-quran, Surah al-imran, 3: 145. 15

mutual co-operation in which both the operator and the participant share responsibility. In such a transaction the responsibility from the participant s part is the payment of the agreed-contribution to the operator, while the responsibility of the operator is to provide material security against the risk on the subject matter. The proposer may be suffering from a kind of dangerous disease (i.e. AIDS, be permanently paralysed, insane or the like), which may compel the proposer to depend on others for surviving in this world, while not enabling him to manage or maintain his own financial affairs. If this is so, how can this category of proposer contribute by payment of the agreed contribution to the policy? Therefore, it would be a duty on the proposer to disclose the medical history to the operator before the policy is concluded. (ii) For a health policy, the medical history of the proposer may also be material to be disclosed to the operator. This is because, in a health policy the coverage is normally against disease. Therefore, the proposer in such a policy should be under a duty to disclose his own medical history to the operator so that the operator may be able to make a fair decision to determine a reasonable rate of contributions and also to provide for the coverage of the participant against the designated disease. Any other fact which is deemed to be material to the policy Before the proposal is accepted for any kind of policy, both the operator and the participant may have a right to make an inquiry from each other about the relevant facts or matters (which are material to the policy) to be disclosed so that both parties may not be deceived or misleading or by a lack of information. In that way they may be able to carry on with a clear conscience and share the responsibility not in a wrongful manner but in a righteousness way. It is also the chief objective of an insurance policy to maintain a fair co-operation against unexpected risk. It is therefore, justified by the Qur'anic sanction: And help you one another in righteousness and piety but help you not one another in sin and rancour. 56 Facts Which May Not Be Material There are facts or matters attached to a subject matter of an insurance policy which may not be material to the policy. Such immaterial information need not be disclosed by the proposer in the policy. These immaterial matters or information are as follows: (i) (ii) (iii) (iv) (v) (vi) the facts unknown to the proposer; the facts which have already been waived by the operator; the facts which are already known by the public in general; the facts which may diminish the risk against the subject matter; the facts which are already known by the operator; the facts which the parties believe are immaterial to the policy; and, 56 al-quran, Surah al-maidah, 5: 2. 16

(vii) the facts which if disclosed may bring unwanted danger or additional risk to either the subject matter itself or the participant. Duration for Disclosure The general principle of Islamic law of contract is that the intended contracting parties are required to disclose all the material facts of both the subject matter and the terms and conditions of the bargain itself before the conclusion of the contract so that the promisor from both sides (that is the contracting parties) may obtain their rights accordingly. That is why Allah (s.w.t.) commanded mankind to fulfill their promises. Allah (s.w.t.) says: O you who believe! fulfil (all)obligations. 57 The intending contracting parties are also required before the actual conclusion of the contract, to state by their own admission to each other that the transaction is clean. This is indicated by Holy Prophet (s.a.w.): Narrated by Abdullah bin Umar : A person came to the Prophet (s.a.w.) and told him that he was always betrayed in purchasing. The Prophet (s.a.w.) told him to say at the time of buying: No cheating. 58 In addition to this general principle there are also exceptions, which enable the contracting parties to exercise their rights of option in making a fair disclosure regarding the subject matter even after the conclusion of the bargain. This exceptional principle of option is known in commercial terminology as al-khiyar. There are basically two categories of option (al-khiyar) namely: (i) (ii) an option created by the contracting parties in which the duration of option for the disclosure of the material facts of the subject matter depends on the mutual agreement or stipulation between the parties concerned; and the options which are created by the operation of law, which includes options for misrepresentation, defects, or inspection. 59 In all cases the option should not be open beyond a reasonable time. There is Prophetic guideline, which indicates that the right of option in the transaction should not exceed three days. Malik (r.a.) explained: The defects of a slave or slave-girl is found to have from the time they are bought until the end of the three days are the responsibility of the seller. The year agreement is to cover insanity, leprosy, and loss of limbs due to disease. After a year, the seller is free from any liability. 60 57 al-quran, Surah al-maidah, 5: 1. 58 Sahih al-bukhari, Kitab al- Buyu, (Trans.) op. cit, Vol III. No. 328, p. 186. 59 See Kourides, The Influence of Islamic Law in Contemporary Middle East Legal System, The Formation and Binding Force of Contracts, in Columbia Journal of Transnational Law, 9:2, (1970), p. 407. and passim. 60 Anas, Imam Malik bin, al-mawatta, Kitab al- Buyu, (Trans.) op. cit., No. 31-3, p. 248. 17

In another tradition the right of option for disclosure is extended up to three times. The Holy Prophet (s.a.w.) said to the effect: Narrated by Hakim bin Hizam (r), the Prophet (s.a.w.) said: Both the buyer and the seller have the option of canceling or confirming the bargain unless they separate. The sub narrator, Hammam said: I found this in my book: Both the buyer and the seller are given the option of either confirming or canceling the bargain three times, and if they speak the truth and mention the defects, then their bargains will be blessed, and if they tell lies and conceal the defects, they might gain some financial gain but they will deprive their sale of Allah s blessings. 61 The majority of the Fuqaha (jurists) including Imams Abu Hanifa, Shafii, and Malik, and Abu Yusuf share the same view that, an option for disclosure of the material fact of the subject matter in a contract may be extended up to three days from the conclusion of the contract. If however, the parties fail to disclose until the expiry of three days the innocent party shall have right of choice whether to cancel the contract or to it with necessary compensation (if any). 62 To sum up, in any form of commercial transaction under Islamic law, the parties generally are required to make a fair disclosure about the material information affecting the subject matter or the bargain itself to each other (parties) before the actual conclusion of the bargain. But if the parties fail to disclose the material facts before the conclusion of the contract, they still have the right of option to disclose them even after the conclusion of the contract, up to three days or three times. Relying on the aforementioned authorities it is concluded that, both the proposer and operator in a policy would be under an obligation to make fair disclosure to each other on the material facts of the subject matter or the terms and conditions of the policy itself before the conclusion of the policy. But for some legitimate reasons they fail to disclose material facts before the conclusion of the policy, they will still be given a chance to exercise their rights of option up to three days after the conclusion of the policy, so that both parties may be able to carry on their shared responsibilities and mutual co-operation with a clear provision against unexpected risk. Legal Consequences for Breach Of Utmost Good Faith In an insurance policy, if either the operator or the participant believes after the conclusion of the policy or the expiry of the option period for disclosure that the other party has failed to disclose the material facts on either the subject matter or the policy itself, and the complainant is able to prove it, then it is suggested that, the other party and also the policy may face the following three legal consequences: 61 Sahih al-bukhari, Kitab al- Buyu, (Trans.), op. cit, Vol. III, No. 327, p. 184. 62 See: Liaquat Ali Khan Niazi, Islamic Law of Contract, Research Cell, Dyal Sing Trust Library, Lahore, 1990, p. 188; and also Rayner, SE., The Theory of Contracts in Islamic Law, op. cit, pp. 310, 313, 322.; see also Ibn Hammam, Fathul Qadir, Vol. V, p. 132, and also Shafii, Kitab al- Umm, Vol. VII, pp. 87-150. 18