9/28/22, 5:30 PM Article:[1995] 3 CLJ cii (Sept)

[1995] 3 CLJ cii (Sept)  

"Knock-For-Knock" Agreements
by
the late Dato' S. Sivasubramanian
Malaysia

A "knock-for-knock" agreement is one between two motor insurers the purpose of which is that each insurance company pays its own assured, without
question, that which the assured is entitled to receive under the particular policy and that both of them do their utmost to discourage either of their own
assureds from making claims against the other, or putting it in another way, the insurance companies amongst themselves do not insist upon their assured
bringing such action as he may be entitled to bring against the party insured by the other insurance company.
In Morley v. Moore[1] the plaintiff in a running-down action had in respect of damage to his own motor car a claim for GBP 33 2s. 8d. He was insured on the
terms that he himself was his own insurer for the first GBP 5 of the risk and was paid the balance of GBP 28 2s. 8d. by his insurance company. The plaintiff
then brought an action against the defendant for the full sum of GBP 33 2s. 8d.
The defendant was also insured and the Judge was informed that there was between these two insurance companies a "knock-for-knock" agreement.
It was argued for the defendant that once the plaintiff had been paid by his insurance company under his insurance policy, and that insurance company had
disclaimed any desire that he shall attempt to recover the money from the other, the amount ceases to be recoverable as a matter of law. In this case, the
plaintiff had been directed by his insurance company not to sue for that particular loss.
The Court of Appeal held that the plaintiff had the contractual right to recover GBP 28 2s. 8d. under his insurance policy. He also had the right to recover
damages at common law, including this sum of GBP 28 2s. 8d. against the wrongdoer.[2]
As regards the insurance company's direction to the plaintiff not to sue the wrongdoer, Sir Boyd Merriman P. could not "see that they had the slightest right to
give".[3]
As to the contention that as the result of the direction by the insurance company that the assured was not to sue the wrongdoer, is that if, nevertheless, he
does sue the wrongdoer and recovers GBP 28 2s. 8d. he recovers it on what is called a resulting trust in favour of the wrongdoer and has to hand it back to
him. Sir Boyd Merriman P. continued:

That is a conception which seems to me to be very like nonsense. It is true that if called upon to do so, the assured is obliged to sue or to allow
the insurance company to sue in respect of a particular loss that they have paid: and if the assured recovers that sum he is obliged to hand it over
to them because it is impressed with a trust on their behalf. But, putting that trust at its highest, I am unable to understand how it can be said that
the cestui que trust, that is the insurance company by taking a particular course which is not warranted by any independent contract and by
disclaiming their own right as a cestui que trust, can impose upon the assured another cestui que trust from whom at common law he is entitled to
recover as damages what is said to be the subject of the trust. I do not think there is any such things as a cestui que trust imposing, against the
will of the trustee, some other cestui que trust as a substitute for himself, and I am quite sure that there is no such thing as a cestui qui trust not
merely being able to substitute somebody else against the will of the trustee, but being able to substitute such a person on the terms of a different
trust. The thing seems to me to be fantastic.[4]

The Court of Appeal held that:

If the insurance company insist upon their rights, their rights are perfectly plain. They can have this GBP 28 which has been recovered, and the
plaintiff has never attempted to say that they may not have it. They alone are the people who have said that they do not intend to take it; they
alone have said that they do not want to have it and that the plaintiff is not entitled to recover it for them; but as far as I can see at this very
moment, they have never bound themselves, by any obligation not to take that money, if and when the plaintiff offers it to them.
Assuming that the plaintiff still has his two rights; first, to recover the GBP 28 from the insurance company on his policy, and secondly, to recover
that same GBP 28 as damages from the wrongdoer, the simple solution of this matter is for the insurance company to do that which they are
entitled to do - namely, to ask him to hand them the GBP 28. That is a perfectly simple solution and rests with the insurance company. I cannot
see, however, that the fact that they choose to forgo their right to receive this sum from their assured imposes any obligation upon him. The
insurance company may choose to make the assured a present of the GBP 28, but that does not affect his legal right.[5]

Sir Boyd Merriman concluded his judgment with:

I only want to add one other thing. I hope that the result of this judgment will be that the plaintiffs will realise that they still have whatever may be
their full rights accompanied by whatever duties result from the exercise of those rights, notwithstanding arrangements made behind the scenes
between the insurance companies. If, contrary to the opinion that I have been expressing, the combined effect of the arrangement whereby the
assured is regarded as his own insurer for a certain portion of the loss, and of this agreement colloquially known as a "knock-for-knock"
agreement, were used seriously to prejudice insured persons when insisting upon the whole of their legal rights, I should wish to consider whether
the agreement were contrary to public policy. It is unnecessary to say more for the moment ...[6]

Scott L.J. in agreeing with the President of the Court of Appeal added:

But I do wish to observe this: that one of the grounds of appeal put forward by the defendant upon which the argument before us arises, is a
ground that I have never seen before. It says this:

The learned Judge should in law have held that the sum of GBP 28 2s. 8d. was recoverable in law: in that a payment of this sum had
been made by the plaintiff's insurers to the repairers of the plaintiff's motor vehicle pursuant to a "knock-for-knock" agreement made
between them and the defendant's insurers, and that they have intimated to the said plaintiff before the action brought that they
waived or abandoned any claim for the return of such sum from the defendant's insurers and directed him not to include the claim for
such sum in the action, and that the plaintiff in fact abandoned his claim for the said sum of GBP 28 2s. 8d. on the hearing of the said
action.

I will deal with the last point first. The fact that the plaintiff pressed his claim and got judgment for it shows he did not abandon it. With regard to
the rest of the plea, I cannot see any reason in law or in equity why it should constitute a defence for the defendant in the action that the plaintiff
brought against him for damages for tort .... Be that as it may, I entirely agree with the terms of the County Court Judge. I think he was right in
saying that, even although the plaintiff's insurers may have told the plaintiff that they did not want to have handed over to them any part of what
he may recover from the defendant to the extent of the GBP 28 in which they were interested; although they may have told him not to sue for it;
and although there was a "knock-for-knock" agreement between them and the defendant's insurers, nevertheless in my view none of those facts
give rise to any defence known to the law or the principles of equity, so far as I know them. My view is that there is no right whatever in an insurer
to dictate to his assured whether he shall or shall not abstain from enforcing against a third party remedies which go in diminution of the loss
against which the policy is issued. They have an absolute right to require him to enforce his remedies, but in my opinion they have no right to
prevent him enforcing them.[7]

That decision was approved forty-one years later by the House of Lords in Hobbs v. Marlowe.[8]
Lord Elwyn-Jones L.C. was:

satisfied for the reasons given by Lord Diplock that Morley v. Moore was rightly decided and that the plaintiff was not precluded from suing for the
full amount of his damages by reason of the fact that he had already received a large part of that sum from his insurers ...[9]

Lord Diplock in his speech said that:

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Your Lordships, however are not bound by Morley v. Moore and before this House a valiant effort has been made on behalf of the defendant to
convince your Lordships that its ratio decidendi was wrong.[10]
[1995] 3 CLJ cii (Sept)  

Mr. Hobbs and Mr. Marlowe were involved in a motor accident in which the only damage caused was to the vehicles involved.
Mr. Marlowe was solely to blame. Before the civil litigation was started he had already been successfully prosecuted for the offence of careless driving.
Both the vehicles had been insured by their owners under comprehensive policies, subject to an excess of GBP 10.
Mr. Hobbs was insured with United Standard Insurance Co. Ltd. ('United Standard') and Mr. Marlowe with Guardian Royal Exchange Insurance Ltd. ('GRE').
The cost of repairing Mr. Hobbs's car was GBP 237.59 of which GBP 227.59 had been paid by United Standard under his policy of insurance and the GBP 10
paid by Mr. Hobbs himself. In addition, Mr. Hobbs incurred expenses in hiring another car while his own was being repaired. These amounted to GBP 63.53
and were not in dispute. The total amount that Mr. Hobbs himself was out of pocket was GBP 73.53.
United Standard and GRE were parties to a "knock-for-knock" agreement of which the relevant provisions were:

IN THE EVENT OF (1) Damage being caused to any of the vehicles in connection with which indemnity is granted ... by the parties hereto
resulting from a collision... each party shall bear its own loss (if any) in respect of such damage irrespective of legal liability. PROVIDED ALWAYS
... (E) The absence of a claim or of notice of accident by a policyholder or other person indemnified ... shall not prevent the operation of this
agreement between the parties hereto. Where this agreement provides that the loss or part thereof shall be borne by a party hereto, and the loss
is paid by the other party hereto, the purposes of this agreement shall be effected by reimbursement between such parties subject to the limits of
the policies issued by such parties.[11]

Under the "knock-for-knock" agreement if Mr. Marlowe were compelled by legal process to pay to Mr. Hobbs the sum of GBP 227.59 as damages for
negligence and GRE were to indemnify Mr. Marlowe in this amount as they were bound to do so under their policy with them, GRE would be entitled to be
reimbursed the sum of GBP 227.59 by United Standard. United Standard in their turn as they had already paid the GBP 227.59 to Mr. Hobbs would be entitled
under their right of subrogation to recover it from Mr. Hobbs. So neither Mr. Hobbs nor United Standard had anything to gain from Mr. Hobbs suing Mr.
Marlowe for the GBP 227.59.
Mr. Hobbs sued Mr. Marlowe for GBP 301.12 for damages.
Lord Diplock expressed in no uncertain terms:

My Lords, I take it to be clear beyond all argument that an assured under a policy insuring him against loss or damage to a chattel, on being
indemnified by his insurers for a loss he has sustained, does not thereby lose his right of action against the wrongdoer who caused the loss.
Under the doctrine of subrogation he must bring an action against the wrongdoer if he is called on by his insurers to do so and is indemnified
against the costs; but it is his own cause of action, not that of his insurer, that he sues on; as against the wrongdoer the insurer has no cause of
action of his own.[12]

The learned Judge then summarised the arguments:

I hope that I do no injustice to the argument if I summarise it thus. (1) On payment to Mr. Hobbs of the sum of GBP 227.59 United Standard
became subrogated as from the time of the accident to all the rights and remedies of Mr. Hobbs in respect of the damage to his car for which he
had been indemnified by them. (2) Such subrogation operated as an equitable assignment by Mr. Hobbs to United Standard of his rights of action
against Mr. Marlowe in respect of that damage. (3) Under the "knock-for-knock" agreement United Standard were under a contingent liability to
pay over to GRE any proceeds they might recover by enforcing against Mr. Marlowe Mr. Hobbs's right of action of which they had become the
equitable assignees, if he or they should decide to enforce them. (4) The existence of this contingent contractual obligation operated in equity as
an assignment by United Standard to GRE of United Standard's equitable interest in Mr. Hobbs' rights of action against Mr. Marlowe. (5) Under
their policy of insurance with Mr. Marlowe, GRE were under a contingent liability to indemnify him for any sum recovered from him by them if they
should decide to enforce Mr. Hobbs's rights of action against Mr. Marlowe of which they had in their turn become the equitable assignees. (6) The
existence of this contingent contractual obligation operated in equity as an assignment by GRE to Mr. Marlowe of GRE's equitable interest in Mr.
Hobbs's rights of action against Mr. Marlowe himself. (7) The equitable interest in Mr. Hobbs's rights of action in respect of the damage to his car
amounting to GBP 227.59 for which he had been indemnified by United Standard had thus become vested before action brought in the very
person against whom the rights of action were enforceable. (8) Prior to the Judicature Acts a Court of equity would have restrained Mr. Hobbs at
the suit of Mr. Marlowe from enforcing pro tanto his rights of action at law against Mr. Marlowe. Since the Judicature Acts this can be relied on by
way of defence.[13]

Lord Diplock analysed the arguments:

My Lords, I have ventured to analyse in rather more detail than Counsel did in the course of the submission the successive steps which are
necessarily involved in the contention that by the time of action brought the equitable interest in Mr. Hobbs's rights of action as plaintiff against Mr.
Marlowe as defendant had vested in the defendant himself. Step (1) is right enough. In expressing I have followed the language of s. 79(2) of the
Marine Insurance Act 1906, which states the common law on the doctrine of subrogation as applicable to contracts of insurance. For my part I
prefer to regard the doctrine of subrogation in relation to contracts of insurance as having its origin at common law in the implied terms of the
contract and calling for the aid of a Court of equity only where its auxiliary jurisdiction was needed to compel the assured to lend his name to his
insurer for the enforcement of rights and remedies to which his insurer was subrogated: see Yorkshire Insurance Co. Ltd. v. Nisbett Shipping Co.
Ltd.[14] But the practical effects of the doctrine of subrogation on the rights and remedies of insurer and assured are similar in many respects to
the effects of an equitable assignment of a chose in action: so I would not have boggled at step (2), if the submission had stopped there. For the
propositions involved in the remaining steps, (4) to (8), it was conceded that no direct authority can be found. For my part I think that analysis
reveals them as unarguable; so I would dismiss the appeal.[15]

This principle of law surfaced in Malaysia in the case of Tan Hock Seng v. Ruslan bin Arshad & Anor.[16] In that case, the plaintiff, whose insurer had paid for
the repairs to his Mercedes Benz car, claimed special damages of RM18,606.80 as follows from the defendants:

[1] Cost of repairs to car RM10,377.80

[2] Cooling condenser fan RM119.00
[3] Used compressor fan filter RM250.00
[4] Tinting with light paint RM120.00
[5] Depreciation in market value RM5,000.00
[6] Loss of use of car from 1 April 1983 till 15 August 1983 (137 days at RM20 per day) RM2,740.00

The Sessions Judge allowed all items of special damages except that for depreciation in market value of the car as no evidence was adduced therefor and
the cost of repairs to the car. On liability, the Sessions Judge found the defendants wholly negligent.
The Sessions Judge disallowed the claim for cost of repairs to the car on the basis that the plaintiff had been indemnified by his insurer and it had not called
upon him to sue for the amount. She in doing so relied upon the decision in Teo Kim Kien & Ors. v. Lai Sen & Anor.[17]
In that case, the appellants were operators of a service station and service cars as well as wash them. As part of the services they provide they are prepared
when required by their customers to send the cars back to their houses or other addresses given by them.
The first respondent was a customer of the appellants and he used to get his car sent back to him. This saved him from having to wait. The second
respondent was in the employ of the appellants and used to perform the additional service of returning the vehicles.
On the day in question, the first respondent sent his car for a wash and in the absence of the first appellant whom he usually asked, he directed the second
respondent to send the car to a certain address and if he was not there to return to the service station where he would pick up the car later. After the wash,
the second respondent drove to this address but not finding the first respondent there, he returned to the service station as instructed.
On the way back, at the entrance to the service station, he knocked down an oncoming motor-cyclist in circumstances that left no doubt of his entire
negligence.

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The motor-cyclist sustained injuries to his person and his vehicle was also damaged. He sued the first respondent as owner and the second respondent as
the driver. The suit was settled for RM4,000 for both special and general damages and RM300 costs. This sum was paid by the first respondent's insurers.
[1995] 3 CLJ cii (Sept)  
The first respondent also sustained damages of RM383.35 to his car which his insurers paid less the excess
of the first RM250

to be borne by the first

respondent.
Certain expenses were also incurred: RM168.55 for investigation fees, RM676 for legal expenses (presumably in settling the claim by the motor-cyclist) and
RM25 for inspection fees. These expenses were incurred by the insurers, who were RM5,552.90 out of pocket. This sum would include the RM250 excess not
paid to the insured.
The first respondent sued the appellant to recover this sum of RM5,552.90, interest and costs.
The appellant argued that the first respondent had suffered no loss as the claims of the motor-cyclist and his own claims were settled by his insurers.
Chang Min Tat F.J. in delivering the judgment of the Court said:

This case clearly is concerned with the doctrine of subrogation under which an insured must bring an action against the wrongdoer if he is called
upon by his insurer to do so and he is indemnified against the costs, but it is his own cause of action, not that of his insurer that he sues on; as
against the wrongdoer the insurer has no cause of action of his own: see Lord Diplock in Hobbs v. Marlowe[18] at p. 37. If the damages suffered
by the insured himself either to his person or to his car had been settled and paid to him by the insurer under the policy of comprehensive
insurance, the doctrine of subrogation still applies and the insurer may require the insured to take an action against the wrongdoer for the
recovery of all the damages flowing from the latter's negligence. The insured's own interest in the action may be limited to the first part of the
damage claim which he had to pay under the excess clause or to the excess of his personal injury claims over what he had been paid by the
insurer. If the action succeeds and he recovers a sum in settlement of his claims, he is bound to refund to the insurer what his insurer has paid to
him under the policy of insurance. If the wrongdoer was himself covered by a policy of insurance, the existence of a knock-for-knock agreement
between the insurers of the plaintiff and the wrongdoer did not deprive the plaintiff of his right of action against the defendant for the full amount of
the damages that he had sustained, though he would also be under a duty to hand over to his insurer that part of the total damages recovered for
which he had already been indemnified by it: Morely v. Moore[19] approved in Hobbs v. Marlowe[20].

It is quite clear that the first respondent's claim against the appellants was not the concern of any insurers of the appellants and it is not easy to
see how Morely v. Moore[21] came to be considered in the High Court. But under the doctrine of subrogation the claim of the first respondent
against the appellants though brought by the insurer was to adopt the word used, maintainable.[22]

The case has often been cited to support the proposition that where the insured has been indemnified for the damage by his insurer, the insurer cannot sue
the wrongdoer for the same damage unless he has been instructed to do so by his insurer.
The Sessions Judge did not appreciate the fact that in Teo Kim Kien & Ors. v. Lai Sen & Anor.[23], the Federal Court in fact approved the principle of law as
enunciated in Morley v. Moore[24] and Hobbs v. Marlowe[25] even though the case was one dealing with the doctrine of subrogation.
The defendants appealed to the High Court[26] on the question of liability and the plaintiff cross-appealed on the disallowance of the cost of repairs to the car.
On 1 April 1991, Dato' Lamin bin Hj. Mohd. Yunus J (as he then was) allowed the defendants' appeal and found the plaintiff 30% negligent and the defendants
70% negligent. He dismissed cross-appeal of the plaintiff. No written grounds of judgment were delivered.
The plaintiff, with leave obtained from the High Court, appealed to the Supreme Court, namely, that in view of the provisions of s. 28(1) of the Courts of
Judicature Act, 1964[27], which provides that no appeal shall lie to the High Court from the decision of a subordinate Court in any civil cause or matter where
the amount in dispute or the value of the subject matter is ten thousand ringgit or less except on a question of law, the High Court should not have interfered
with the finding of the Sessions Judge on liability and also on the disallowance of the cost of repairs to the car.
The Supreme Court[28] on 9 March 1992 allowed the plaintiff's appeal on both grounds with costs. Again, there were no written grounds of judgment delivered.
However, Morley v. Moore[29] and Hobbs v. Marlowe[30] were cited before the Supreme Court.
For purposes of record, the terms of the order are reproduced below:

PERINTAH
RAYUAN INI dibawa ke hadapan untuk perbicaraan dengan kehadiran Puan Kong Yit Har, peguambela bagi pihak perayu/plaintif dan Encik Hon
Kai Ping, peguambela bagi pihak responden/defendan DAN SETELAH MEMBACA rekod rayuan yang difailkan ini DAN SETELAH MENDENGAR
peguambela-peguambela tersebut adalah diperintahkan bahawa rayuan ini dibenarkan dan bahawa pihak responden/defendan adalah 100%
cuai dalam kemalangan tersebut DAN JUGA DIPERINTAHKAN bahawa pihak responden/defendan membayar kepada perayu/plaintif jumlah
sebanyak RM10,377.50 dengan kadar faedah sebanyak 4% setahun ke atas jumlah tersebut dari 1 April 1983 sehingga ke 6 Mei 1989 dan
selepas itu atas kadar faedah 8% setahun sehingga pembayaran sepenuhnya dan ADALAH SELANJUTNYA DIPERINTAHKAN
responden/defendan untuk membayar kos rayuan ini dan di Mahkamah Tinggi DAN ADALAH PADA AKHIRNYA DIPERINTAHKAN bahawa wang
cagaran (deposit) sebanyak RM500 dipulangkan kepada pihak perayu/plaintif.[31]

Endnotes:
[1] [1936] 2 ALL ER 79

[2]ibid. p. 83

[3]ibid. p. 83

[4]ibid. p. 83

[5]ibid. p. 84

[6]ibid. p. 84

[7]ibid. p. 85

[8] [1977] 2 All ER 241

[9]ibid. p. 249

[10]ibid. p. 254

[11]ibid. p. 252

[12]ibid. p. 253

[13]ibid. p. 254

[14] [1961] 2 All ER 487

[15]ibid. p. 254

[16] Kuantan Sessions Court Summons No. HC 4 of 1984

[17][1980] 1 LNS 80; [1980] 2 MLJ 125, FC

[18] [1977] 2 All ER 241; [1978] AC 16

[19] [1936] 2 All ER 79

[20] [1937] 2 All ER 241; [1936] 2 KB 359

[21] [1936] 2 All ER 79

[22][1980] 1 LNS 80 [1980] 2 MLJ 125, FC 126

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[23][1980] 1 LNS 80[1980] 2 MLJ 125, FC

[24] [1936] 2 All ER 79 [1995] 3 CLJ cii (Sept)  

[25] [1977] 2 All ER 241

[26] Kuantan High Court Civil Appeal No. 12-5-89

[27] Laws of Malaysia, Act 91

[28] Supreme Court Civil Appeal No. 02-164-91. Tan Sri Dato' Harun Mahmud Hashim, Dato' Mohamed Yusof bin Mohamed and Dato' Peh Swee Chin SCJJ

[29] [1936] 2 ALL ER 79

[30] [1977] 2 ALL ER 241

[31] The author gratefully acknowledges the assistance given by Puan Kong Yit Har in editing this article.

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