Time to knock off knock-for-knock!

When two motor vehicles collide, their respective insurers indemnify respective insured damages regardless of fault. This flows from what is called a ‘knock for knock agreement’ between insurers – a mutual indemnity agreement. In the current dispensation, all licensed general insurers in India are signatories to this.

While an insurer may be able to pursue a recovery from the party responsible for an accident or from its policy-holder, this can be a costly administrative procedure. The knock-for-knock agreement simplifies recovery claims among insurers and, over time, this arrangement supposedly attributes costs fairly among insurers. Is that the case and are there any other implications? 

Knock-for-knock agreements between insurers have been rightly criticised as unfair on the party not responsible for an accident. If, for the sake of administrative ease, an insurer pays out to repair damage done to its policy-holder’s own car instead of pursuing the party responsible for the accident for all relevant costs, an effective claim is recorded against that policy-holder’s insurance record. 

Thereby what hurts the wallet of a defensive driver, for no fault of his or her, is losing at least a part of no claim bonus (NCB) at the time of renewal. Mind you it is not a ‘no blame bonus’! This way, knock-for-knock agreements result in policy-holders paying higher premiums regardless of responsibility for an accident they were involved in.

Claims frequency of new cars has reportedly escalated to 26% but what is more revealing is the finding of a private insurer. 60 % of damage claims to their insured cars are not caused due to the fault of their insured but by third-party vehicles. Despite picking quality customers they end up paying a hefty price due the folly of others. Not only does a cautious insured loses out but so does an insurer.

During my first week of work in Thailand, back in the early nineties, one of the first files that ended up on my desk related to four auto accidents. All arising from collision between mine then company insured vehicles with those insured by another insurer. The traffic police investigation held my insured vehicle drivers significantly responsible for each accident. The other insurer thereby pressed for recovery of the losses to its insured cars. No knock-for-knock agreement was in place between us two.

An assignment to Hong Kong followed right till the time it was a British colony. While knock-for-knock operated there on lines of the then colonial master, any party responsible for the damage had to pick up the deductible for uninsured losses. A significant number of auto owners would only avail third-party insurance. Buying a car was never a problem but parking it always was. Car thefts fuelled by demand from mainland China, a country in a hurry to grow, was high. Rising labour costs made repairs in HK increasingly prohibitive. That made comprehensive insurance expensive. Resorting to higher deductibles was a way to lower premium. Needless to mention growing incidents of chain accidents, too. The traffic police was super-efficient and transparent. Investigation reports attributing proportional liabilities of any of the drivers was prompt. A breed of recovery agents took over from there-on. Judicial process – a last resort – rarely followed.

Following the demise of the knock-for-knock agreement in the UK, insurers found themselves disputing both liability and quantum with each other. The purpose of introducing the concept of ‘memorandum of understanding’ is to avoid disputes between insurers about the quantification of claims.

Issues of liability remain but the memorandum ensures that all insurers are operating on a level playing field in terms of quantum. Honesty and transparency are required when subscribing insurers subrogate against each other.

Nigel Richardson writing for the Independent back in 1996: “The demise of the knock-for-knock agreement has not dented insurers’ profits as much as they feared… Much has been said and written over many years about the motor insurers’ knock-for- knock agreement, much of it untrue, often by motorists who had little understanding of how it worked or how it applied to them. The one feature always common to any debate on the subject was the insistence by insurers that the agreement worked in the best interests of the majority of motorists in that it helped to keep their premiums low.”

Serious pitfalls in governance of road traffic culture

India is one of the fastest growing auto markets in the world. Road rage, internal combustion engine driven pollution, avoidance of wearing seat belts in cars and helmets on two wheelers, penchant for driving on wrong side, a serious lack of overall traffic discipline – not just on city streets but the highways as well – is nerve wrecking. Driving uninsured vehicles or unlicensed drivers are for sure on this long list. 

Late Justice VR Krishna Iyer, an eminent jurist, made a scathing observation in Concord of India Insurance Co. Ltd. V Nirmala Devi back in 1979: “An explosive escalation of automobile accidents, accounting for more deaths than the most deadly diseases, has become a lethal phenomenon on Indian roads everywhere…”

As a part of market evolution it is important that the insurance industry begins to segment the good, bad and ugly. That would also open up the process of switching no-claim bonus (NCB) entitlement from vehicle to the driver. In many developed markets insurers have played a proactive role in introduction of seat-belts and air-bags. That brought down frequency and severity of bodily injury claims. Ensuring that all vehicles plying on our roads ought to be insured is important. However, ensuring a safety culture calls for both carrot and stick.

Automobiles can be “unsafe at any speed’’ to quote American consumer activist Ralph Nader but only if you reign in the man behind the wheel .. Imagine what awaits us with the arrival of self-driving cars or what could be the implications of quack drivers ‘driving’ flying cars knowing very well they have the unhindered backing of their insurer?

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