I've obtained a Madness Helmet but at full durability it has only 3 armour. My imperial dragon helmet (which many say is mediocre) has 3 armour. I've heard that Madness armor is better daedric but my helmet certainly is not. My character is level 9 ( according to online sources, a madness helmet should have higher armour rating than 3 at level 1). So why is this happening to me? Is madness better than daedric? Do you use Madness Armour or Daedric (or glass)?

Madness armor comes in leveled groups. At 20+ it is better than daedric, until then its the equivalent of whatever leveled armor you can find.

It should also be mentioned that the Armor Rating is based on your characters Skill level and that the Imperial Dragon armor can be classified as either Light or Heavy, depending on your skill values when you get the quest update.

I have Imperial Dragon Armor as heavy armor myself, my heavy armor skill now at 65.

Wiki says armor rating is

ArmorRating = ( 0.35 + 0.0065 * Skill ) * BaseArmorRating

so that's 0,77 of the Base rating at skill level 65. The base rating is 4.25 at your character level, so 3 would be the rounded-down value shown. Heavy armor doesn't have a perk to give you more than 1.00 times the base rating (unlike Light Armor) so you only reach full rating at level 100.

As you level up, your skill will go up, but the BaseArmorRating available on the Madness armor also goes up, so both effects combine.

Edit: clarified different meanings of level.