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Responding to the question, Dr. Monzer Kahf, Scholar in Islamic Economics & Financial Expert, states the following:
"Insurance service and contracts were invented and developed over the last four centuries in Europe, then extended to the Americas. They reached the Muslim World in the Nineteen century. Obviously, they were not known at the time of revelation of the Shari'ah nor at the time of the great scholars who founded the known Fiqhi Schools.
Over the last more than a hundred years, Muslim scholars considered insurance as a new service that accompanies new risks intrinsic to technological applications, and as a contract. Thus, in addressing it, two points of view have been developed: one that studies insurance within the context of its environment, i.e., the presence of a large number of people exposed to similar risks that call for the application of the theory of probability and what is called the laws of large numbers; the other regards insurance as only a specific relationship between two parties regardless of its environment.
The first trend was led by the late Sheikh Mustafa Al-Zarqa. He argued that, as a new service and contract, insurance companies gather together the risks of a large number of people and redistribute them in a manner that makes them bearable. This is a form of lawful cooperation that is compatible with the general objectives of the Shari'ah and hence the theory of probability is taken into consideration, the insurance contract does not contain any unbearable amount of ambiguity or undue uncertainty.
According to this view all kinds of insurance contracts (cars, hazards, accidents, transportation, life, etc.) are all permissible provided two conditions are fulfilled:
1. The contract must not contain any Riba element.
2. The object of insurance must be permissible in the Shari'ah i.e., insuring a shipment of liquor is not permissible. It doesn't matter whether this cooperation is founded by a group of concerned persons in the form of cooperatives or by a venture person or a company that takes charge of offering the service of pooling together the risks of a large number of persons.
Consequently, car insurance is permissible for the obligatory liability as well as for the value of the car and the hazards to driver and passengers and every other insurance coverage related to cars and driving them.
According to the second view, any conventional insurance contract between two persons contains elements of Riba, ambiguity, and gharar. It entails Riba because you pay small premium and get back a large sum should a risk occur. It also involves gharar because you don't know whether you will get the large sum or not since you don't know whether a hazard will happen, and ambiguity because you don't know the exact amount you get (though you know the maximum only) nor when it is going to be given to you since you don't know when an accident will happen.
This group of scholars argue that these objections may be overridden when the service of insurance is offered on donation basis through cooperatives, because if you give the premium as a donation, it doesn’t involve Riba, ambiguity and gharar because donations are not exchange contracts, and it doesn't hurt if such donations are given to a cooperative whose system is to cover these risks even with the fact that you really know this coverage in advance and you give the donation with the condition that such a coverage exists.
According to this view, only mutual cooperative insurance is permitted, the same two conditions mentioned in the first opinion apply here too. Hence, any insurance outside cooperatives is not permitted, and when you are required by law to take it you only take the part you don't have any choice about it.
In my opinion, there are too artificialities in the second view and I go with the first one, that all insurance is permissible provided that the two conditions are observed."
Moreover, we'd like to add that there is an old argument from the 1950s, even by those who oppose insurance, that whenever insurance is forced by law, one must do it and one is excused, from the Shari'ah point of view. This include car insurance, social security, workman compensation, and employer's imposed insurance if it is not optional for the employee in addition to the case if the insurance provided by the employer is paid completely from the employer, i.e., given as a fringe benefit without deducting any part of the premium from the pay checks, then it is a kind of grant from the employer and if a hazard happens the paid policy amount is halal because the it is an outcome of the grant."
If you have any further questions, please don't hesitate to write back!
May Allah guide you to the straight path, and guide you to that which pleases Him, Amen.
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