Takaful - Mandatory Insurance

In some situations, insurance is required by law rather than being optional. Governments may make certain types of insurance compulsory because particular activities can create serious financial risks for other people. Mandatory insurance therefore helps ensure that compensation is available when a person suffers injury, loss, or damage caused by another party.

One common example is motor insurance. Vehicle owners are generally required to maintain at least the minimum level of insurance required by law before using their vehicles on public roads. The purpose is mainly to protect third parties who may suffer bodily injury, death, or property damage because of an accident involving the insured vehicle.

Another example is insurance relating to employees who suffer injury during the course of their employment. Depending on the legal system, employers may be required to provide workers’ compensation, employment injury protection, or another form of legally required coverage. This helps ensure that an employee who suffers a work-related injury can receive appropriate financial assistance.

Mandatory insurance is particularly important for third-party liability. Liability arises when a person or organisation becomes legally responsible for injury, death, or damage suffered by another person. If the insured party is negligent and causes an accident, the insurance may provide compensation to the injured third party according to the terms of the policy and applicable law.

In Islamic finance, takaful may be used to provide the required protection where an appropriate Shari’ah-compliant takaful product is available. The takaful arrangement provides financial protection through mutual contributions and shared responsibility among participants while meeting the relevant legal requirements.

Example 1 – Motor Third-Party Liability

A driver is travelling on a public road and negligently causes an accident that seriously injures another road user.

Who is covered or protected?

The vehicle owner or driver has the motor insurance or takaful protection, while the injured third party is the person who may receive compensation for the loss or injury caused by the insured driver.

What is covered?

Depending on the policy, takaful certificate, and applicable law, the protection may cover the insured person’s legal liability for bodily injury, death, or property damage caused to third parties.

Practical Example:

If a driver loses control of the vehicle and injures a pedestrian, the pedestrian may be entitled to compensation for covered losses arising from the accident. The insurer or takaful fund may pay the eligible claim on behalf of the driver, subject to the applicable terms and legal requirements.

Example 2 – Employee Injury at Work

An employee working at a construction site suffers an injury while performing his employment duties.

Who is covered or protected?

The employee is protected against certain financial consequences of a work-related injury, while the employer may also be protected against certain liabilities or compensation obligations arising from the incident.

What is covered?

Depending on the applicable legal scheme, the protection may include compensation for work-related bodily injury, disability, medical expenses, loss of income, or death benefits.

Practical Example:

If a worker falls from scaffolding while performing his job and suffers a serious injury, the relevant employment injury or workers’ compensation protection may provide financial benefits to the worker according to the applicable law and coverage arrangements.

Therefore, mandatory insurance exists mainly to protect members of the public, employees, and other third parties from financial loss caused by accidents or negligence. Takaful can serve the same protective purpose through a Shari’ah-compliant structure where permitted and available.

One small correction to your original wording: mandatory insurance is not always limited to negligence. Some compulsory schemes, especially employment-related compensation systems, may provide benefits based on statutory rules even without proving negligence.