An auto insurance contract is considered as a service-based contract of employment (ajīr khāṣṣ). The insurance company provides repair services up to an extent of damage, as well as various other services depending on one’s coverage, such as towing, flat tire repair, lockout service, battery assistance, and fuel delivery. These services are permissible within the framework of the Sharia, as long as one does not accept any form of cash compensation.^[1]

However, in the event where the car is beyond repair and classified as totaled, auto insurance companies place a clause in the service-based contract stipulating that, subject to the approval of the insured, they will make an offer to purchase the car in exchange for its value prior to such an incident. This process is not immediate. The insured must file a claim, after which the vehicle is inspected and appraised. The insurance company then makes a settlement offer, minus the deductible amount. If the insured does not accept the settlement amount, a counteroffer can be made. That said, upon acceptance of either offer, the title of the car is transferred to the company, and the insured receives the settlement check.^[2]

Thus, the Sharia does permit such a clause, however, not as a contingency for a service-based contract of employment, rather as a promise made from the insurance company to engage in a transaction if such an incident occurs.^[3] This is applicable in the aforementioned situation for the following reasons:

1. The insured has the option not to make a claim;
2. The clause does not come into effect immediately;
3. An initiation of the claim is required;
4. The settlement amount is optional and not binding;
5. A counteroffer can be made; and
6. The transfer of the title is necessary.

Consequently, this clause in the contract, which is independent of the binding service-based agreements, meets the conditions to be regarded as merely a promise. Thus, the transfer of the title of the car and the reimbursement check from the insurance company will be treated as a new transaction, rather than the fulfillment of prior contingency. Therefore, accepting this settlement will be permissible.

It is important to note that there is one additional scenario in which it is impermissible to accept the settlement. This occurs when the insured accepts the reimbursement money and decides to also keep the car. In this case, the insurance company deducts the value of the salvaged car from the total settlement and offers the remainder to the insured. As a result, the insured will receive compensation while providing nothing in return. Hence, this will be equivalent to ribā, thus impermissible.

And Allah knows best.

Ml. Yousuf Rashid
Student, Darul Iftaa Chicago

Checked and Approved:

Mf. Abrar Mirza
Head Mufti, Darul Iftaa Chicago