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2007/03/09

REQUIREMENTS IN TAKAFUL CONTRACT


The basic formalities in a commercial ‘Aqd (contract) is that, there must be al-Ma’qud ’alaih (a subject matter) upon which the intended parties called al-Muta’aqidayn (contracting parties) mutually agree by Ijab ( an offer) and qabul (an acceptance) for an exchange of a valuable consideration al-‘Iwad al-Mutaqawwim upon which parties are bound to perform the contract according to the terms and shurut (conditions) agreed upon. The Majalle provides that, the basic formalities required in a contract are that, two parties undertake upon themselves to do something upon Ijab (an offer) and Qabul (an acceptance). Dr. Hussain Hamid Hassan opines that, as regard to the formalities of a contract under Islamic law, there is a legal relationship created by a promise of one of the contracting parties (offeror) with the promise of the other (offeree) as the result of which follow consequences in respect of the subject matter of the bargain.
A Takaful policy is a kind of financial transaction, which is based on the general principles of contract. Since a Takaful is a kind of contract, the formalities for the formation of a valid policy are based on the formalities required in other form of commercial contracts. The formalities before the conclusion of a policy required by the Takaful companies of the contemporary world are based on general principles of al-‘Aqd (contract). Under Islamic Law, to form a Takaful policy, there must be a subject matter at risk, upon which (subject matter) two parties (operator and participant) mutually agree by Ijab (a proposal) and Qabul (an accpetance) in which both parties undertake to share the responsibility, to provide a reasonable material security against unexpected but defined risk on the subject matter. In other words, the formalities in a Takaful policy are Ijab (the proposal) and Qabul (an acceptance), issuance of a cover note (a temporary document for a policy provided by the operator to the participant) and payment of Takaful contribution (al-Musamahah) which are further analyzed as follows:
Al-Ijab) (Proposal)
In a Takaful policy, the person whose subject matter is at risk is the one who should approach the operator to undertake a responsibility (in consideration of contribution) for the material securing against an unexpected but defined risk on the subject matter. Therefore, in a Takaful policy the owner of the subject matter (which is at risk) is the one who makes a proposal for the policy.
The owner of the subject matter according to his own wish may make a proposal to his wish. But for the purpose of a better dealing between the operator and the participant, the proposal form may be provided (with necessary questions for information) by the operator, and the proposer will complete the form with the correct and necessary information, which are material to the policy. In making a proposal, the proposer is under an obligation to disclose any defect in the subject matter likely to affect policy. Such an obligation can be justified by the following Prophetic sanction:
"Narrated by Hakim bin Hizam (r.a.), the Holy Prophet (saw) said: If they speak truth and mention defects, then their bargain will be blessed, if they tell lies and conceal the defects, they might make some financial gain but they will deprive their sale of Allah’s blessing."
'Uqba bin Amir (r.a.) also illustrated to the same effect that:
"'Uqba bin ‘Amir (r.a.) said: "It is illegal for one to sell a thing if one knows that is has a defect, unless one informs the buyer of the defect."
In the proposal form there should not be any declaration or information given by the proposer with evil purpose to deceive the operator while hoping for a gain something wrongfully. This is also indicated in the saying of the Holy Prophet (saw):
"Narrated by Abdullah bin Umar (r.a ), A person came to the Prophet (saw) and told him that he was always betrayed in purchasing. The Prophet (saw) told him to say at the time of buying, "No cheating."
In a commercial contract a proposal needs not to be made through writing or printing but an oral proposal through telephone or telex may also be held valid. Can the same method be applied in making a proposal for a Takaful policy? In other words, can a proposal be made other than in writing (i.e. verbal, telephone or telex)? It is submitted that, despite the fact that a Takaful is a kind of commercial contract its nature is different from other commercial contracts. It deals only with finance in which if a proposal is allowed to be made other than in writing or printing the terms, conditions, declarations or information contained in the proposal may be altered at any time during the policy period which may create a dispute between the participant and the operator and may also give an opportunity to the participant to seek for a co-operation in the policy with an evil cause or to the operator to escape the liability. There is no room for the one who seeks cooperation with an evil cause nor for the one who escapes an undertaken liability as Allah (swt) commanded in the following verses respectively:
"But help you not one another in sin and rancour."
"O you who believe! Fulfil your (undertaken) obligations."
In another verse, Allah (swt) ruled out that, there is no recognition for those who create destruction. Allah (swt) said:
"But they (ever) strive to do mischief on earth. And Allah (swt) loveth not those who do mischief."
It is concluded in the light of the above analysis that, a proposal for a Takaful needs to be made in writing and printing (in order to avoid any kind of mischief or dispute between the operator and the participant). Can the proposal be made through electronic media (fax, e-mail, telegram or any other printed methods) or by post which may be fall within the ambit of a written proposal? Certainly, these media used by one for making a proposal may also be regarded as written. This is because, a written proposal means any kind of visible document. The purpose of the requirement of such a written proposal is to have a document for the future proof if necessary. Hence, a proposal may be accepted if it is in writing or of a similar in nature (i.e. fax, e-mail, post, printed form, telegram, Internet, etc.). But there may not be any justification to accept an oral proposal for the sake of avoiding any dispute that may happen between the operator and the participant.
Once a proposal form is completed with appropriate information and declaration or clauses, the proposer has to sign and return it to the authorized person of the operator for further evaluation and make decision whether to accept or reject the proposal with the given terms and conditions, declarations, and information. A proposal made by the proposer does not bind him unless it is a Qabul formally (accepted) by the operator. Therefore, a proposer has an option to revoke the proposal not only until it is received by the operator but it may be extended until the moment it is formally accepted by the operator. Once therefore, it is accepted the proposer should be bound by it and may not have any right of revocation (unless the question of Khiyar (options)) arises. This is because the commandment of Allah (swt) to fulfil the obligation arises only when a promise is concluded by an offer and an acceptance. Allah (swt) commanded to the effect:
"O you who believe fulfil (all obligations)."
Qabul (Acceptance)
In a Takaful policy, the operator generally makes an acceptance. But in some situations an acceptance may be made by the intended policy holder if the operator does not agree to the earlier proposal made by the proposer and he adds some additional terms and conditions will be regarded as a counter offer to the intended policy holder. The mode of acceptance of a proposal may be inferred by any of the following conducts of the operator:
i) Issuance of the certificate;
ii) Issuance of a temporary cover note;
iii) Issuance of a receipt for the first payment of contribution; or
iv) Any kind of acceptance through (fax, letter, telex, telegram, e-mail and Internet) to the proposal of the intended policyholder.
Once an acceptance is formally made, it cannot later be revoked. This is because a contract is final once a proposal and an acceptance concluded it. Once the contract is final the parties concerned are bound by it for its Ada’ (performance). This is justified by the Qur'anic sanction:
"O you who believe fulfil (all) obligations."
The acceptance may be cancelled even after the acceptance is made if the operator is able to prove a breach of utmost good faith exists in the proposal made by the policy holder. In this case the operator shall have a right of option whether to cancel the certificate or to retain it with a reasonable remedies if any. This is justified by the following Prophetic injunction:
"Narrated by Hakim bin Hizam, the Holy Prophet (saw)) said: If they speak truth and mention defects, then their bargain will be blessed, if they tell lies and conceal the defects, they might gain some financial gain but they will deprive their sale of Allah’s blessing."
Aqd Ta’min al-Mu'aqqat (Issuance of Cover Note)
In a takaful policy, the issuance of the cover note does not give rise to a permanent enforcement. It is a mere receipt issued by the operator or his authorized agent which may act as a temporary document for a valid policy in force. A cover note is generally issued for the general policies (property, motor, business, etc.)
Sometimes, it may not be possible for the operator to issue a policy soon after the agreement is concluded between the operator and the participant. If the operator delays in issuing the policy and if the subject matter of the policy happens to face the risk before the issuance of the certificate then what would happen if the operator denies his liability to the policy holder because of non-existence of any document (issuance of certificate issued by the operator). In this situation, the policy holder may also be unable to make a claim against the risk on the subject matter because of the inability to prove a document (Takaful certificate) for the policy. In such a situation three negative consequences may arise:
i) it may give an opportunity for the operator to deceive the policy holder. In Islamic law, there is no room for the parties in the transaction to deceive each other. This is indicated in the saying of the Holy Prophet (saw):
"The Holy Prophet (saw) said: Deception would lead to the hell (fire) and whoever does a deed which is not in accordance with our tradition, then that deed will not be accepted."
ii) The policy holder may be deprived from a fair claim against the risk on the subject matter while giving an opportunity for the operator to gain which is unacceptable in the Islamic teaching as indicated in the Holy Qur'an. Allah (swt) says:
"O you who believe! Eat not up your property among yourselves in vanities, but let there be amongst you traffic and trade by mutual goodwill…"
iii) Mischief may take place between operator and policy holder which is also not appreciated in the eyes of Allah (swt). He says:
"And seek not (occasion for) mischief in the land. For Allah (swt) loves not those who do mischief."
To avoid the aforementioned evil, injustice and mischief, it is important for the operator to issue a temporary cover note for the period until the actual certificate is issued. This temporary cover note may act as a proof for the policy holder and enable him to stand on his own with a document (cover note) by which he may also make a fair claim against the risk (if any) occurring on the subject matter before the actual issuance of certificate. To hold a written document for the proof of a financial transaction (including a takaful policy as it is also a financial transactions) is justified by the repeated Qur'anic sanctions. Allah (swt) says:
"O you who believe! When you deal with each other in transaction involving future obligations in a fixed period of time, reduce them to writing, let a scribe write down faithfully as between the parties, let not the scribe refuse to write as Allah (swt) has taught him so let him write."
A written document plays a role for the most reliable proof is again justified by the Qur'anic sanction in which the offenders will be called in question relying on written record (evidence). Allah (swt) says:
"And they make into females angels who themselves serve Allah (swt). Did they witness their creation". Their evidence will be recorded and they will be called to account."
A cover note may be issued for a temporary period of time. The duration for a cover note in force could be determined by the operator and to be stated it in the cover note itself. However, the validity of a cover note could be continued until it expires. A cover note may cease its validity even before it expires that is when the operator issues the certificate before the expiry of the cover note. Therefore, with the existence of an issued certificate the temporary cover note may no longer have any legal effect.
Al-Musahamah (Contribution)
Contribution in a Takaful contract is a monetary consideration (al-‘Iwad) from the participant’s part which is an obligation arising from a contract between the participant and the operator. A takaful contract of mutual co-operation in which the consideration is required not only from one party but from both parties in which the operator is also equally bound by the contract and that in indemnity or benefit. The obligations of the settlement of the respective considerations in a transaction of a mutual cooperation is justified by the commandment of Allah (swt):
"Help you one another in righteousness and piety."
This verse of the Holy Qur’an renders a duty to mankind to provide their mutual cooperation on a bilateral basis. Furthermore, in takaful contract, once the policy is concluded the participant is regarded as a principal debtor and must settle the agreed contribution to the operator accordingly. In such a transaction the participant is under a duty to pay the contribution regularly according to the terms and conditions as stated in the certificate. This is justified by the repeated saying of the Holy Prophet (saw) in which the principal debtor is urged to settle his debt on time. The Holy Prophet (saw) said:
"Abu Rafa’ reported that: the Holy Prophet (saw) said: give it to him and verily the best of man is he who is best of them in payment of it."
The Holy Prophet (saw) also said:
"Abu Hurairah (r) reported.. that a man demanded of the Holy Prophet (saw) for a repayment of a debt…. And verily the best of you is he who is the best of your in repayment of loan."
A Takaful policy is a binding contract, and therefore, the performance of consideration from both parties (the participant and the operator) through the payment of contribution (by the participant) and the indemnification (by the operator) are obligations which must be fulfilled. This is justified by the Qur'anic sanction. Allah (swt) says:
"O you who believe fulfil (all) obligations."
Although a participant in a policy is treated as the debtor who is under a contractual obligation to settle the agreed contributions on time, it is not possible always to settle it debt on time due to some unexpected reasons. In such a situation what could be the legal position, of the participant and also the policy itself? Under Islamic law, if a debtor due to some logical reason is unable to settle the debt on time, the debtor should not be pressured by the creditor rather he is advised to extend a reasonable time for the settlement. To waive the debt with a kind heart. The Holy Prophet (saw) said:
"Abu Qatadah (r.a ) reported: I heard the holy Prophet (saw) have said: Who so gives respite to a debtor or grants him remission Allah (swt) will save him from the calamities of the resurrections day."
The Holy Prophet again said:
"Imran bin Hussein (r.a.) reported that the Messenger of Allah (swt) said: who so has his dues from a way and he gives time to him (for payment), he will get his reward of charity every day."


It is therefore, suggested that in a Takaful policy if the participant is sometimes unable to pay the agreed contribution on time the participant should neither be penalized nor the policy be forfeited with paid-contributions. But the participant should be given a reasonable time for the settlement of the unpaid contributions and the enforcement of the policy should be continued according to the terms and conditions contained in the certificate.


However, if the participant fails to settle the unpaid contributions within the given period, the policy may be discontinued. This is because it is a contract of mutual cooperation. If, therefore, one party is unable to provide his agreed cooperation then it is unfair to the other party to continue the transaction with unilateral cooperation. Thus, if the policy is terminated due to failure of the payment of the contributions by the participant, the paid contributions should not be forfeited rather it is suggested here that, the paid contributions should be returned to the participants with the share of profits made over the paid contributions after deduction of the charges due to the operator. The charges to the operator are the debt due on the participant which must be deducted from the paid contribution as justified by the saying of the Holy Prophet (saw):
"Abu Hurairah reported that the Messenger of Allah (swt) said: Who so becomes insolvent and afterwards a man (creditor) takes hold of his exact property, he is more entitled to it than others."
It is again suggested that, under Islamic law, there is no circumstance which may render a policy forfeited with paid-contributions even if the participant commits a breach of good faith or any other offences. This is because an insurance policy is a financial transaction in which the paid contributions are the legitimate property of the participant which cannot be forfeited just because of his disfavourable acts. The participant may be charged for the wrongful acts (if any) in different ways by different laws but not by forfeiting his paid-contributions or depriving him (participant) from his lawful right paid-contributions. The paid-contributions are al-Amanah (a trust) to the operator, and they, therefore, should be due to the participant. This is because, under Islamic law, there is no justification for the trustee to refuse to render the entrusted articles to their proprietor once the depositor rightfully demands from the trustee. This is justified by the Qur'anic injunctions:
"Verily Allah (swt) does command you to render back your trusts to those to whom they are due."
Also Allah (swt) warned against those who betray a trust. Allah (swt) says:
"Contend not on behalf of such as betray their own souls; for Allah (swt) loves not one given to prodigy and crime."It is therefore, submitted that under no circumstances in Islamic law can the paid-contributions of the participant be forfeited, but a deduction may be made out of the paid- contributions and the profit made from them so as to cover the charges due to the operator if any. It is thus concluded here that, the takaful (Islamic Insurance) practice in the contemporary economy does not base it’s operations only on al-Mudharabah technique but it also involves several other Shari’ah justified nominate 'Uqud ( contract).

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