Contents:

 


                              EMPLOYMENT AGREEMENT


                  This employment agreement (the "Agreement") is effective as of
June 3, 1999, between Insurance Auto Auctions, Inc., an Illinois corporation
(the "Company"), and Christopher G. Knowles ("Executive").

                  WHEREAS, the Company desires to employ Executive and Executive
desires to be employed by the Company upon the terms and conditions set forth
below.

                  NOW, THEREFORE, Company and Executive agree as follows:

                  1. EMPLOYMENT AS CHIEF EXECUTIVE OFFICER. The Company agrees
to employ Executive as its Chief Executive Officer commencing June 3, 1999, and
Executive accepts employment by the Company upon the terms and conditions herein
set forth. During the term of his employment, Executive shall devote his full
time and attention to the business and affairs of the Company. The Company
agrees to take all action necessary to continue Executive's position as a
director of the Company during the term of his employment.

                  2. TERM. The term of the Agreement shall commence as of June
3, 1999, and expire on December 31, 2000.

                  3. COMPENSATION AND BENEFITS.

                  (a) Compensation. The Company shall pay to Executive for
services to be performed by Executive during the term of his employment a base
salary at an annual rate of $310,000, payable biweekly.

                  (b) Performance Incentive. As additional compensation for
performance of the services rendered by Executive during his employment,
Executive shall participate in the Company's incentive program for officers of
the Company. Executive's "Target" incentive shall be an amount equal to 40% of
Executive's annual salary. Executive shall be entitled to receive the Target
incentive to the extent Target performance goals are met, and Executive shall be
entitled to receive additional incentive amounts to the extent Target
performance goals are exceeded, all in accordance with the provisions of the
Company's incentive program for officers then in effect. Amounts paid to
Executive pursuant to this Paragraph 3(b) are hereinafter referred to as
"Incentive Compensation."

                    (c) Benefits. During the term of his employment or for such
time as otherwise provided in this Agreement, Executive shall be entitled to
participate in such vacation, auto allowance, benefit plans, fringe benefits,
life insurance, medical and dental plans, retirement plans and other programs as
are offered from time to time by the Company; provided however, that Executive
shall not be entitled to participate in, or receive benefits under, the
Insurance Auto Auctions, Inc. Severance Plan. Executive shall be entitled to
four weeks of paid vacation each calendar year, subject to any limitations on
carryover of unused vacation generally applicable to employees. For the term of
Executive's employment, the Company will pay for a membership in and reimburse
reasonable dues for a golf club membership in a golf club to be mutually agreed
upon by the Company and Executive. The club membership shall remain an asset of
the



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Company. Upon termination of Executive's employment, Executive may purchase the
club membership from the Company at the then fair market value of the
membership. Executive shall be authorized to incur necessary and reasonable
travel, entertainment and other business expenses in connection with his duties
hereunder. In connection with expenses pursuant to this subparagraph (c), the
Company shall reimburse Executive for such expenses upon presentation of an
itemized account and appropriate supporting documentation, all in accordance
with the Company's generally applicable policies.

                  (d) Options. The Company shall grant to Executive an option to
purchase 100,000 shares of the Company's common stock at 100% of the fair market
value of the common stock on the close of business on the business day before
the effective date of this Agreement. Such option shall be granted under the
Company's 1991 Stock Option Plan. The option granted pursuant to this
subparagraph (d) shall vest in six (6) quarterly installments with the first
such installment to become exercisable on the last business day of the third
fiscal quarter of 1999, and as to an additional 1/6 of the option on the last
business day of each of the next five (5) fiscal quarters thereafter. If
Executive's employment hereunder is terminated prior to December 31, 2000, such
option shall immediately vest (unless Executive voluntarily terminates
Executive's employment for any reason or unless Executive's employment was
terminated for Cause, in which case the portion of the option that is not yet
vested and exercisable as of such date will expire) and will continue to be
exercisable until the expiration of the term of the option. Such option shall be
subject to the usual terms and conditions of options issued pursuant to and in
accordance with the Company's 1991 Stock Option Plan.

                  (e) Indemnification. The Company shall indemnify Executive in
accordance with the terms of the Company's standard form of Indemnification
Agreement.

                  (f) Withholding. Compensation and benefits paid to Executive
shall be subject to such deductions required by law, government regulation or
order, or by agreement with or consent of Executive.


                  4. TERMINATION.

                  (a) At Will Nature of Employment. This Agreement shall
terminate by reason of Executive's death or Disability (as defined in Section
22(e)(3) of the Internal Revenue Code). In addition, Executive's employment with
the Company can be terminated by Executive or by the Company at any time for any
reason, with or without cause or prior notice. Any contrary representations that
may have been made or that may be made to Executive are superseded by this
Agreement.

                  (b) Benefits Upon Termination of Employment and Consulting
Services. Upon the termination of Executive's employment by the Company, the
Company shall pay or provide to Executive (unless Executive voluntarily
terminates his employment for any reason or unless Executive's employment was
terminated for Cause, in which case the Company shall not be obligated to pay
Executive any amount after the date of termination other than to pay his salary
earned through the date of termination plus that portion of his Incentive
Compensation earned through the date of termination) each of the following:


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                  (i) An amount equal to sixty percent (60%) of Executive's
         monthly salary at the rate in effect at the time of such termination
         through December 31, 2000. From and after the date of Executive's
         termination of employment through December 31, 2000, the Company may,
         in its sole discretion, request that Executive perform consulting
         services on behalf of the Company, and Executive agrees to perform such
         consulting services as reasonably requested by the Company; provided
         however, that Executive shall not be required to provide more than
         twenty-four (24) hours of consulting services per forty (40) hour work
         week. Executive shall perform all consulting services as an independent
         contractor of the Company and not as an employee of the Company.

                  (ii) Continued coverage of Executive and Executive's
         beneficiaries under the Company's health and dental plan through
         December 31, 2000, provided that Executive will be charged for such
         coverage in an amount equal to the amount that he would have been
         charged had he remained employed by the Company. From and after
         December 31, 2000, Executive may elect to continue such health and
         dental benefits pursuant to Title I, Part 6 of the Employee Retirement
         Income Security Act of 1974, as amended ("COBRA"). For such purposes,
         Executive's termination of employment will be considered the date of
         the "qualifying event" as such term is defined by COBRA and the cost of
         continued coverage during the COBRA period will be determined pursuant
         to COBRA and paid entirely by Executive.

                  For purposes of this Agreement, "Cause" shall mean Executive's
unauthorized use or disclosure of the confidential information or trade secrets
of the Company, which use causes material harm to the Company, Executive's
conviction of a felony under the laws of the United States or any state thereof,
Executive's gross negligence or Executive's continued failure to perform
assigned duties for 45 days after receiving written notification from the Board.
The termination of this Agreement and Executive's employment hereunder for Cause
shall not affect the continuing enforceability of Section 6 or Executive's
continuing obligations under Sections 6, 7, and 8.

                  5. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER
CONTRACTUAL RIGHTS.

                  (a) Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by Executive as a result of
employment by another employer after the date of termination, or otherwise.

                  (b) The provisions of this Agreement, and any payment provided
for hereunder, shall not reduce any amount otherwise payable, or supersede,
affect or in any way diminish Executive's existing rights, or rights which
accrue in the future, under any applicable law or any pension benefit or welfare
benefit plan, or other contract, plan or arrangement, including, without
limitation, participation in stock incentive plans and deferred compensation
plans. The compensation and benefits set forth in this Agreement shall in no way
be construed to limit or prevent Executive from receiving or participating in
other additional plans, programs, or benefits which may be made available by the
Company in the future, including, without



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limitation, participation in stock incentive plans, retirement plans, deferred
compensation plans, etc.

                  6. NON-COMPETITION. During the term of this Agreement and for
one year thereafter, Executive will not, directly or indirectly, whether as a
partner, officer, stockholder, advisor, employee or otherwise, promote,
participate, become employed by, or engage in any activity or other business
similar to the Company's business or any entity engaged in a business
competitive with the Company's business. If Executive fails to comply with the
provisions of this Paragraph 6, the Company may, in addition to pursuing all
other remedies available to the Company under law or in equity as a result of
such breach, cease payment of all benefits under Paragraph 4.

                  7. NON-INTERFERENCE. During the term of this Agreement and for
one year thereafter, Executive will not disrupt, damage, impair or interfere
with the business of the Company, whether by way of interfering with or
soliciting its employees, disrupting its relationships with customers, agents,
vendors, distributors or representatives, or otherwise. Furthermore, Executive
will not during this period encourage or solicit any employee of the Company to
leave the Company for any reason or to devote less than all of any such
employee's efforts to the affairs of the Company, provided that the foregoing
shall not affect any responsibility Executive has with respect to the bona fide
hiring and firing of company personnel.

                  8. PROTECTION OF CONFIDENTIAL INFORMATION. Executive agrees
and acknowledges that the Confidential Information (as defined below) of the
Company and its subsidiaries and affiliates is valuable, special and unique to
the Company's business, that such business depends on the Confidential
Information, that if such Confidential Information was known to competitors or
other third parties that substantial damage to the Company's business would
likely occur, that the Company in entering into this Agreement is relying upon
Executive's agreement not to disclose any Confidential Information and that the
Company wishes to protect such Confidential Information by keeping it
confidential for the use and benefit of the Company. Accordingly, Executive
agrees (1) to keep any and all Confidential Information in trust for the sole
use and benefit of the Company, (2) except as required by Executive's duties
hereunder, as required by law or as necessary in conjunction with legal
proceedings (and in preparation thereof with counsel), he will not at any time
during, or for five (5) years following the term of this Agreement, disclose or
use, directly or indirectly, any Confidential Information and (3) upon
termination of his employment by the Company, he will promptly deliver to or
leave with the Company all materials constituting Confidential Information
(including all copies thereof) that are in the possession of, under the control
of, or accessible to Executive to undertake the following obligations with
respect to the Confidential Information. For purposes of this Agreement,
"Confidential Information" means any and all information developed by Executive
during the term and used by the Company or any of its subsidiaries or affiliates
or developed by or for the Company, or any of its subsidiaries or affiliates of
which Executive gained knowledge by reason of his employment with the Company
that is not readily available in the industry in which the Company is or becomes
engaged during the term; provided, however, that "Confidential Information"
shall not include information that (i) is in the public domain at the time of
disclosure or which thereafter enters the public domain through no improper
action or inaction by Executive or any affiliate, agent or employee related
thereto, or (ii) was rightfully disclosed to Executive without restriction by a
third party.

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                  9. RESOLUTION OF DISPUTES; ARBITRATION. Should a dispute arise
concerning this Agreement, its interpretation or termination, or Executive's
employment with the Company, either party may request a conference with the
other party to this Agreement and the parties shall meet to attempt to resolve
the dispute. Failing such resolution within thirty (30) days of either party's
request for a conference, the Company and Executive shall endeavor to select an
arbitrator who shall hear the dispute. In the event the parties are unable to
agree on an arbitrator, Executive and the Company shall request the American
Arbitration Association to submit a list of nine (9) names of persons who could
serve as an arbitrator. The Company and Executive shall alternately remove names
from this list (beginning with the party which wins a flip of a coin) until one
person remains and this person shall serve as the impartial arbitrator. The
decision of the arbitrator shall be final and binding on both parties.
Each party shall bear equally all costs of the arbitrator.

                  The arbitrator shall only have authority to interpret, apply
or determine compliance with the provisions set forth in this Agreement, but
shall not have the authority to add to, detract from or otherwise alter the
language of this Agreement.

                  10. NOTICES. Any notice to be given hereunder shall be in
writing and effective (i) when delivered personally, or by confirmed telex or
facsimile transmission or (ii) when received if sent by overnight express or
mailed by certified, registered or regular mail, postage prepaid, addressed to a
party at its address stated below, or to such other address as such party may
designate by written notice in accordance with the provisions of this Section
10.

                  To the Company:

                  Insurance Auto Auctions, Inc.
                  Attention:  General Counsel
                  850 E. Algonquin Road, Suite 100
                  Schaumburg, IL  60173-3855
                  Telephone:  (847) 839-3939
                  Facsimile:  (847) 839-3999

                  To the Executive:

                  Christopher G. Knowles
                  305 Ridge Road
                  Barrington Hills, IL  60010
                  Telephone:  (847) 381-3755
                  Facsimile:  (847) 381-3799


                  11. GENERAL.

                  (a) Severability. If any provision herein is held to be
invalid or unenforceable for any reason, such provision will, to the extent of
such invalidity or unenforceability be of no force or effect, but without in any
way affecting the remainder of such provision or any other provision contained
herein, all of which will continue in full force and effect.

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                  (b) Amendment. Any provision may be amended or the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively) only by written consent of (i) as to the
Company, only by a member of the Company's Board of Directors, and (ii) as to
Executive, only by Executive. Such amendment or waiver shall be binding upon the
Company and Executive and their successors and assigns.

                  (c) Assignment. This Agreement and the rights and obligations
of the parties hereunder shall inure to the benefit of, and be binding upon,
their respective successors, assigns and legal representatives.

                  (d) Governing Law. This Agreement and all disputes and suits
related thereto will be governed, construed, and interpreted in accordance with
the laws of the State of Illinois applicable to contracts entered into and to be
performed wholly within that state by residents of that state.

                  (e) No Waiver. No delay or failure by either party to exercise
or enforce at any time, any right or provision of this Agreement will be
considered a waiver thereof or of such party's right thereafter to exercise or
enforce each and every right and provision of this Agreement. Any waiver of any
right hereunder in a specific circumstance will not be deemed a waiver of that
right in any other circumstances or a waiver of any other right. A waiver to be
valid will be in writing but need not be supported by consideration.

                  (f) Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements, arrangements,
and communications, whether oral or written, between the parties, including all
prior employment agreements. No amendment to this Agreement may be made except
by a writing signed by the Company and Executive.



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                  (g) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

                  IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first set forth above.


                                              COMPANY:


                                              By: /s/ T. J. O'Malia
                                                 -------------------------------
                                              Title: Chairman
                                                    ----------------------------






                                              EXECUTIVE:


                                              /s/ C. G. Knowles
                                              ----------------------------------

              FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT EFFECTIVE
             JUNE 3, 1999 BETWEEN INSURANCE AUTO AUCTIONS, INC. AND
                             CHRISTOPHER G. KNOWLES

          WHEREAS, Insurance Auto Auctions, Inc. (the "Company") and Christopher
G. Knowles (the "Executive") have entered into an Employment Agreement effective
as of June 3, 1999 (the "Agreement");

         WHEREAS, the Company and Executive desire to amend the Agreement as set
forth herein (the "First Amendment");

         NOW, THEREFORE, Company and Executive agree as follows:

1.       The fourth, fifth and sixth sentences of Section 3(c) of the Agreement
         are deleted in their entirety and replaced with the following:

         The Company shall pay up to $42,000 on Executive's behalf for
         membership in a club as mutually agreed upon by Company and Executive.
         Such $42,000 payment shall represent the non-equity portion of the club
         membership initiation fee. Executive shall make all initiation fee
         payments representing the equity portion of the club membership. Upon
         termination of Executive's employment, the club membership shall remain
         an asset of Executive. For the term of Executive's employment, the
         Company will reimburse Executive for reasonable annual dues related to
         the club membership.

Except as expressly amended hereby, the Agreement shall remain in full force and
effect.

This First Amendment shall be effective as of the 27th day of July 1999.



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         IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment.


                                              COMPANY:


                                              By /s/ T. J. O'Malia
                                                --------------------------------

                                              Title: CHAIRMAN


                                              Executive:


                                              /s/ C. G. Knowles
                                              ----------------------------------