EX-10.14 EIGHTH AMENDED LOAN AGREEMENT

EX-10.14 13 g83038s1exv10w14.txt EX-10.14 EIGHTH AMENDED LOAN AGREEMENT Exhibit 10.14 QUOTA SHARE REINSURANCE AGREEMENT NUMBER DIRECT-03-001 TABLE OF CONTENTS Article 1 Recitals Article 2 Definitions Article 3 Business Reinsured Article 4 Obligatory Agreement Article 5 Term and Cancellation Article 6 Consideration Article 7 Loss and Loss Adjustment Expense Article 8 Reports and Remittances Article 9 Ceding Commission, Fronting Fees and Premium Taxes Article 10 Errors and Omissions Article 11 Inspection of Records Article 12 Offset Clause Article 13 Arbitration Article 14 Honorable Undertaking Article 15 Assessments and Assignments Article 16 Conservation, Liquidation or Insolvency Article 17 Hold Harmless Article 18 Regulatory Matters Article 19 Loss in Excess of Policy Limits/Extra Contractual Obligations Article 20 Savings Clause Article 21 Unauthorized (Non-Admitted) Reinsurance Article 22 Program Review Article 23 Miscellaneous 1 QUOTA SHARE REINSURANCE AGREEMENT NUMBER DIRECT-03-001 This Agreement is made and entered into by and between OLD AMERICAN COUNTY MUTUAL FIRE INSURANCE COMPANY (hereinafter referred to as the "Company") and DIRECT GENERAL INSURANCE COMPANY (hereinafter referred to as the "Reinsurer"). THE COMPANY AND REINSURER HEREBY AGREE AS FOLLOWS: ARTICLE 1 - RECITALS 1.1 The Company and Reinsurer hereby wish to enter into a reinsurance arrangement through which the Company is to bear no business, credit or insurance risk whatsoever (save the risk of the Reinsurer's insolvency). The Reinsurer shall hold the Company fully harmless and indemnify it for these and all risks arising pursuant to this Agreement. 1.2 The Company and Reinsurer hereby agree that the full consideration provided by the Company in exchange for the fees set forth herein, is to permit the Policies as defined herein to be issued in the name of the Company and which are reinsured one hundred percent (100%) under this Agreement. 1.3 It is understood and agreed that neither the Company nor the Reinsurer is obligated by any representations or warranties made by any of the parties involved in this transaction unless such representations and warranties are formally included in this Agreement. 1.4 All business reinsured hereunder shall be produced by DIRECT GENERAL INSURANCE AGENCY, INC. (Managing General Agent), in accordance with the terms and conditions of the Managing General Agency Agreement effective January 1, 2003, (Managing General Agency Agreement) between the Managing General Agent and the Company, a copy of said Agreement is attached hereto and fully incorporated herein. 1.5 This Agreement sets forth all of the duties and obligations between the Company and the Reinsurer and supersedes any and all prior or contemporaneous or written agreements with respect to matters referred to in this Agreement. This Agreement may not be modified, amended or changed except by an agreement in writing signed by both parties. ARTICLE 2 - DEFINITIONS 2.1 "Policies" is defined as all policies, endorsements, certificates, contracts, agreements and binders of insurance issued or renewed on or after the effective date of this Agreement on behalf of the Company by Managing General Agent. 2.2 "Net Premium" is defined as the gross premium (total written premium) on all original and renewal Policies written by the Company, less return premium and cancellations. 2.3 "Loss in Excess of Policy Limits" (XPL) is defined as any amount which the Company pays or would have been contractually held liable to pay had it not been for the limit of the original Policy. 2 2.4 "Extra Contractual Obligation" (ECO) is defined as those liabilities not covered under any other provision of this Agreement which arise from the handling of any claim on business covered hereunder, because of, but not limited to, failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any ECO is incurred by the Company shall be deemed, in all circumstances, to be the date of the original disaster and/or casualty. 2.5 "Loss Adjustment Expense" shall mean expenditures by or on behalf of the Company that are not part of the indemnity under the original policy (i.e. which do not contribute to exhaustion of the original policy limit), made in connection with the disposition of a claim, loss or legal proceeding (including investigation, negotiation, cost of bonds, court costs, statutory penalties, prejudgment interest or delayed damages, and interest on any judgment or award and legal expenses of litigation) and the Company's defense costs and legal expenses incurred in direct connection with legal actions (including, but not limited to, Declaratory Judgment actions) brought to determine the Company's defense and/or indemnification obligations that are allocable only to Policies and claims under Policies subject to this Contract. Any Declaratory Judgment action expenses shall be deemed to have been fully incurred on the same date as the original loss (if any) giving rise to the action. 2.6 "Prejudgment Interest" or "Delayed Damages" shall mean interest or damages added to a settlement, verdict, award or judgment based on the amount of time prior to the settlement, verdict, award or judgment whether or not made part of the settlement, verdict, award or judgment. ARTICLE 3 - BUSINESS REINSURED 3.1 The Reinsurer hereby reinsures the Company for a one hundred percent (100%) quota share in respect of all liability, including, but not limited to, losses and loss adjustment expenses, under Policies issued or renewed on or after the effective date hereon on behalf of the Company by the Managing General Agent or its designated representative as classified by the Company in the attached Schedule of Business. 3.2 It is understood that the classes of business reinsured under this Agreement are deemed to include coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company's policies when they include or are deemed to include so-called "Out of State Insurance" provisions. 3.3 All insurance under this Agreement shall be subject to the same rates, terms, conditions and waivers, and to the same modifications and alterations as the respective Policies of the Company. ARTICLE 4 - OBLIGATORY AGREEMENT 4.1 The Company agrees to cede to the Reinsurer, and the Reinsurer agrees to accept from the Company, a one hundred percent (100%) quota share reinsurance participation under all 3 Policies effective on or after the effective date hereof by the Company covering risks situated in Texas. The liability of the Reinsurer shall commence obligatorily and simultaneously with that of the Company subject to the terms, conditions and limitations set forth in this Agreement. 4.2 Business ceded hereunder shall include every original policy, rewrite, renewal or extension (whether before or after the termination of this Agreement) required by statute or by rule or regulation of the Texas Department of Insurance, or other authority having competent jurisdiction, of any policy of insurance originally ceded hereunder by the Company to the Reinsurer. 4.3 The parties understand and intend that the Reinsurer shall follow the fortunes of the Company in every respect to activities engaged in hereunder. ARTICLE 5 - TERM AND CANCELLATION 5.1 This Agreement shall become effective 12:00:01 a.m. (Central Standard Time) on the first day of January 2003, as respects losses arising under Policies effective on or after such date, and shall remain continuously in force unless terminated by either party. 5.2 This Agreement may be terminated by either party at any calendar quarter end giving the other party written notice at least thirty (30) days prior to such date. 5.3 When the Agreement terminates for any reason, reinsurance hereunder shall continue to apply to the business in force at the time and date of termination until expiration or cancellation of such business. The parties understand and agree that any Policies with effective dates prior to the termination date, but issued after the termination date, are covered under this Agreement. Additionally, the reinsurance hereunder shall continue to apply as to Policies which must be issued or renewed, as a matter of state law or regulation or because an agent (appointed by the Company at the request of the Reinsurer) has not been timely canceled, until the expiration dates on said Policies. 5.4 Upon termination of this Agreement, the Reinsurer and the Company shall not be relieved or released from any obligation which relate to outstanding insurance business created by or under this Agreement. The parties hereto expressly covenant and agree that they will cooperate with each other in the handling of all such run-off insurance business until all Policies have expired and all outstanding losses and loss adjustment expenses have been settled. While by law and regulations, the Company recognizes its primary obligations to its Policyholders, the Reinsurer recognizes that there shall be no cost or involvement by the Company, unless specifically agreed, in servicing this run-off. The Reinsurer shall bear all costs and expenses associated with handling of such run-off business following the cancellation or termination of this Agreement. If for any reason the Managing General Agent or any sub-agent appointed by the Managing General Agent fails to service any such run-off business (or any business while the Agreement is still in effect), including the payment of claims, then consistent with this Agreement, the Reinsurer's obligation with respect to such run-off business shall continue and the Reinsurer shall either service such run-off business directly or appoint, at the Reinsurer's expense, a successor to such managing general agent and/or agent, subject to the approval of the Company, which approval shall not be unreasonably withheld. Such successor shall perform all of the duties and obligations of the managing general agent and/or agent with respect to servicing such run-off business. 4 5.5 In addition to the provisions set forth in Article 5.2 herein, this Agreement may be terminated at any time in accordance with the following terms and conditions: a. After thirty (30) days written notice by the Company in the event the Reinsurer: (i) is acquired and/or merged by or in any manner becomes under the control of any other company or corporation; (ii) changes a majority of its officers or board of directors; or (iii) is the subject of a filing or petition or initiation of any proceeding for supervision, rehabilitation, conservation or liquidation, or any other proceedings for the protection of a creditor. b. After thirty (30) days written notice by the Reinsurer in the event Company: (i) is acquired and/or merged by or in any manner becomes under the control of any other company or corporation; (ii) changes a majority of its officers or board of directors; or (iii) is the subject of a filing or petition or initiation of any proceeding for supervision, rehabilitation, conservation or liquidation, or any other proceedings for the protection of a creditor. c. By the Company immediately and automatically without prior written notice should the Texas Department of Insurance require cancellation or disallow credit for this reinsurance; provided, however, that the Reinsurer shall have first been given the opportunity to implement mutually acceptable changes that would result in the Department's allowing credit for such reinsurance. d. In the event of a breach of conditions, fraud or default by either party under the terms and conditions of the Agreement that remains uncured after fifteen (15) days from receipt of a written notice of default. 5.6 Notices hereunder shall be provided in accordance with Article 23.2, hereof. ARTICLE 6 - CONSIDERATION 6.1 In consideration of the acceptance by the Reinsurer of one hundred percent (100%) of the Company's liability on insurance business reinsured hereunder, the Reinsurer is entitled to one hundred percent (100%) of the Net Premiums written by the Managing General Agent and/or agent or the Reinsurer on Policies reinsured less the claims handling fee and ceding commission allowed to the Company, which includes premium taxes and fronting fees on Policies subject to reinsurance hereunder. ARTICLE 7 - LOSS AND LOSS ADJUSTMENT EXPENSE 7.1 All loss settlements, judgments and all interest on said judgments, including losses in excess of policy limits (XPL) and extra contractual obligations (ECO) made by the Company or the Company's designee under the terms of this Agreement, whether under strict policy conditions or by way of compromise, shall be unconditionally binding upon the Reinsurer. The Reinsurer shall also be liable for one hundred percent (100%) of and pay on behalf of the Company all loss adjustment expenses as defined in Article 2.5. The Reinsurer shall be credited with all salvage or recoveries by the Company on business reinsured hereunder. 5 7.2 Claims handling shall be accomplished by the Managing General Agent or its designated representative ("Claims Agent") pursuant to the Managing General Agency Agreement and whose designation is subject to the Company's continuing approval and shall not be inconsistent with the terms and conditions of this Agreement. 7.3 The Reinsurer's share of losses, loss adjustment expenses and loss recoveries shall be carried into the monthly account for which provision is hereinafter made; however, when the amount of loss paid by the Company under insurance subject to this Agreement exceeds the balance due the Reinsurer pursuant to Article 8, the Reinsurer will, at the option and the demand of the Company, be immediately reimbursed by special remittance. The Reinsurer shall retain the right to deduct from any such special remittance any overdue balance due the Reinsurer by the Company. ARTICLE 8 - REPORTS AND REMITTANCES 8.1 Within forty-five (45) days after the end of each calendar month, the Company shall report to the Reinsurer the following: a. Ceded net written and collected premium for the month; b. Ceding commission on such ceded net written and collected premium as provided in Article 9.1; c. Ceded losses and loss adjustment expenses paid during the month; d. Ceded unearned premium at the end of the month; and e. Ceded outstanding losses and loss adjustment expenses at the end of the month. 8.2 Upon receipt from the Managing General Agent, the Company shall immediately pay any and all sums due directly to the Reinsurer pursuant to this Agreement. 8.3 The Reinsurer shall remit balances due directly to the Company via wire transfer within 48 hours, or as soon as commercially feasible: a. If the net monthly account results in an amount due to the Company, or b. If, during the month, there are no funds to pay losses, and the Company submits additional reports reflecting an amount due to the Company. ARTICLE 9 - CEDING COMMISSION, CLAIM HANDLING FEE, FRONTING FEES AND PREMIUM TAXES 9.1 The Reinsurer will pay to the Company a ceding commission of twenty-two percent (22%) and a claim handling fee of six percent (6%), which shall be calculated on the basis of all net written premium and policy fees charged on policies reinsured hereunder. 9.2 The Company will be liable for remitting state premium taxes based on net written premium and net policy fees charged. Should service fees be charged on any policy covered by this Agreement, and such fees be deemed taxable for premium tax purposes, then such service fees are to be added to the net written premium and net policy fees charged to determine the amount subject to Fronting Fees payable under the Managing General Agent Agreement. Since premium taxes are required to be paid semiannually on March 1st and August 1st, the Company 6 may bill the Reinsurers for their proportionate share of the prepayment and shall allow credit for premium taxes on the monthly accounts. 9.3 The Reinsurer acknowledges that the Company is not responsible for any contingent commission adjustment, and such adjustment shall be settled directly between the Managing General Agent and the Reinsurer. The Reinsurer shall seek recovery for any contingent commission adjustment directly from the Managing General Agent. ARTICLE 10 - ERRORS AND OMISSIONS 10.1 Inadvertent delays, errors or omissions made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. ARTICLE 11 - INSPECTION OF RECORDS 11.1 All records pertaining to Policies issued on behalf of the Company through or by the Reinsurer or its designated representative subject to this Agreement, shall be deemed to be jointly owned records of the Company and the Reinsurer, and shall be made immediately available to the Company or the Reinsurer or their representative, upon reasonable request, or any duly appointed examiner for any State within the United States; and these records shall be kept in the State of Texas or such other jurisdiction as may be required or permitted by applicable state law or regulation. Notwithstanding the foregoing, the Reinsurer is authorized to maintain duplicate working files of all such records outside the State of Texas. The Company and the Reinsurer agree that neither will destroy any such records in their possession without the prior written approval of the other, except that neither party shall be required to retain files longer than required by the guidelines set by the Texas Department of Insurance. 11.2 Any or all policies and/or claim files or other records required to be maintained by Reinsurer pursuant to this Article 11 may be maintained in electronic data storage form accessible by computer and if so stored in this fashion, no physical copy of such items need be maintained, unless otherwise required by law. ARTICLE 12 - OFFSET CLAUSE 12.1 The Company or the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Agreement. The party asserting the right of offset may exercise such right at any time whether the balances due are on account of premiums or losses or otherwise. However, in the event of the insolvency of any party hereto, offsets on any amount due under this agreement shall be allowed in accordance with the statutes and/or regulations of the state having jurisdiction over the insolvency. ARTICLE 13 - ARBITRATION 13.1 Unless both parties mutually agree to waive arbitration with respect to a particular dispute, the parties to this Contract hereby agree that binding arbitration shall be the sole remedy for any and all dispute(s) arising between them with reference to any transactions, terms or conditions 7 under this Contract including its formation and validity. Arbitration proceedings brought hereunder shall be referred for final determination to the majority decision of a Panel of three disinterested arbitrators. Notice of demand for arbitration shall be made in writing and shall be served via certified or registered mail, return receipt requested, on the Respondent to the Arbitration at the Respondent's current address. The notice requesting arbitration shall identify the contract(s) involved in the dispute, the issues to be resolved in the view of the Petitioner, and the arbitrator selected by the Petitioner. The term "days" as used herein shall mean calendar days. 13.2 The Respondent shall appoint an arbitrator within 30 days of receiving a request by the Petitioner in writing and served via certified or registered mail, return receipt requested, to do so. At the same time as the appointment, the Respondent shall identify in writing any issues which in its view must be resolved in the arbitration proceeding and which were not identified by the Petitioner. If the Respondent fails to appoint its arbitrator within 30 days of being requested to do so, in writing, by the Petitioner, the Petitioner shall have the right to appoint the second arbitrator. Within 30 days after their appointment, the two arbitrators so chosen shall select a third arbitrator to act as umpire. If the two arbitrators do not agree as to the selection of a third arbitrator within 60 days after their appointment, the third arbitrator shall be selected from a list of six individuals (three named by each arbitrator) by a judge of the federal district court in Dallas County, Texas. 13.3 Each arbitrator shall be a disinterested, active or retired official or officer of an insurance or reinsurance company, not under the control or management of either party to this Contract, and shall have experience in the class and type of business subject to this dispute. 13.4 Within 30 days after notice of appointment of all arbitrators, the Petitioner and the Respondent shall each submit a statement of position to the Panel. 13.5 Within 60 days after notice of appointment of all arbitrators, each party shall provide the other with its relevant books, records, and/or other papers not protected from disclosure by either the work-product or attorney client privilege. Other than the exchange of relevant documents, both parties shall refrain from engaging in any type of discovery including, but not limited to, depositions and interrogatories. 13.6 Within 30 days following the exchange of documents, the Petitioner and the Respondent shall submit re-hearing briefs to the Panel. 13.7 Unless some other location is mutually agreeable to the parties, arbitration proceedings shall take place within the municipality wherein the Home Office of the Company is located. Arbitration shall commence as soon as practicable but in no event longer than 120 days after selection of the third arbitrator with notice thereof to the parties. The specific time and site of arbitration shall be promptly agreed to by the parties, or if no Contract is reached, then determined by the Panel. 13.8 The Panel shall be relieved from applying the strict rules of evidence and/or procedure and shall make its decision based on the custom and practice of the insurance and reinsurance business with a view toward effecting this Contract in a reasonable manner. Should either party fail to appear at an arbitration and/or fail to furnish the Panel with any subpoenaed papers or information, the Panel is empowered to proceed ex parte. The Panel shall make its award within 60 days following the close of the hearing. The majority decision of the Panel shall be final and binding upon the parties and shall be reduced to a written award, which may include factual findings, and shall be signed by any two of the three arbitrators, dated and delivered overnight to the parties. The Panel may award pre-judgment and post-judgment interest, but in no case shall 8 the authority of the Panel extend to awarding punitive or exemplary damages. Judgment may be entered upon the award by any court having jurisdiction. 13.9 Each party shall bear the expense of its own arbitrator, and shall equally share with the other the expense of the third arbitrator. In the event that the two arbitrators are chosen by one party, as above provided, the expense of the two arbitrators, the third arbitrator and the arbitration shall be equally divided between the Petitioner and the Respondent. Unless mutually agreed other wise, a court reporter transcript shall be taken of the hearing with costs to be divided equally between the parties. The remaining costs of arbitration shall be allocated by the Panel. 13.10 The Arbitration proceeding brought hereunder, any or all provisions contained herein, and arbitration awards entered pursuant to this Article are specifically governed by, subject to and enforceable under the Federal Arbitration Act (Title 9, United States Code, Sections 1-14, as amended.) 13.11 Each party agrees that time is of the essence with respect to all terms and conditions referenced in this Article. All deadlines contained in this Article may be extended by mutual Contract of the parties, and if the Panel has been selected, the Panel's Contract must also be obtained. 13.12 Each party agrees that any arbitration award entered pursuant to and governed by this Article shall not have any precedential or collateral estoppel effect on future arbitrations, proceedings, or controversies, if any, between the parties. Any claim of res judicata or claim preclusion shall itself be subject to arbitration. 13.13 This Article shall survive the termination of this Contract. ARTICLE 14 - HONORABLE UNDERTAKING 14.1 The purposes of this Contract are not to be defeated by narrow or technical legal interpretations of its provisions. This Contract shall be construed as an honorable undertaking and should be interpreted for the purpose of giving effect to the intentions of the parties hereto. ARTICLE 15 - ASSESSMENTS AND ASSIGNMENTS 15.1 The Reinsurer hereby assumes liability for any and all costs, assessments or assignments imposed as a result of Policies reinsured hereunder (whether before or after the termination of this Agreement) levied or made by a guaranty fund, insolvency fund, plan, pool, association, or other arrangement created by statute or regulation including, but not limited to, assessments levied by the Texas Property & Casualty Insurance Guaranty Association. The Company shall account to the Reinsurer for any recovery or any credit allowed to the Company against its premium taxes, and return to the Reinsurer its share of any recovery or credit. ARTICLE 16 - CONSERVATION, LIQUIDATION OR INSOLVENCY 16.1 In the event of the insolvency of the Company, the Reinsurance afforded by this Agreement shall be payable directly by the Reinsurer to the Company or its liquidator, receiver or statutory successor on the basis of the liability of the Company under the Policies, without diminution because of the insolvency of the Company, in accordance with the provisions of any State Law which may be involved except: 9 a. where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company; or b. where the Reinsurer with the consent of the direct insured(s) has assumed such Policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to the payees. 16.2 In the event of the insolvency of the Company, the liquidator, receiver or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on a Policy within a reasonable time after such claim is filed in the insolvency proceedings. During the pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator, receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of the proportionate share of the benefits which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. 16.3 If two (2) or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. 16.4 As respects subject business assumed as reinsurance under this Agreement, the parties agree that if the Company has a conservator, liquidator, or receiver appointed for it, or becomes the subject of any conservation, liquidation or insolvency proceeding, and the Company is permitted to have all its liabilities under the Policies reinsured hereunder assumed by another licensed insurer, such assuming insurer shall be substituted for the Company as payee of any reinsurance recoverable hereunder in respect of losses under Policies subject hereto, and the Reinsurer shall make payments thereof directly to the substituted insurer. 16.5 In the event the foregoing provisions apply, all the other provisions of this Agreement shall apply to the substituted insurer in the same manner as if said insurer were substituted for the Company as the reinsured party hereunder, and to the extent this Agreement reinsures such substituted insurer, coverage hereunder shall be excluded as respects the Company. ARTICLE 17 - HOLD HARMLESS 17.1 In consideration of these presents and the reciprocal benefits derived by the Company and the Reinsurer, the Reinsurer assumes liability for any and all uncollected balances, unsettled finance agreements, claims, commission adjustments, losses, loss corridors, demands, causes of action (including, but not limited to, violations of the Texas Deceptive Trade Practices Act or insurance laws or regulations), damages (including, but not limited to, any and all extra contractual or liability in excess of policy limits), judgments and expenses (including, but not limited to, attorney's fees and costs of court) which may be made against the Company and which are incurred, either directly or indirectly, in connection with this Agreement or contracts related to this Agreement or any actions or failure to take action by the Managing General Agent or any agent or by the Company in successfully asserting its rights hereunder in connection with or with respect to this Agreement. Notwithstanding anything to the contrary, this provision shall not apply to: 10 a. fraud, dishonesty, theft or collusion on the part of any Director, Officer or employee of the Company; or b. policies not reinsured hereunder; or c. the Company's failure to perform its duties and obligations under this Agreement due to the Company's gross negligence. 17.2 If, for any reason, the Managing General Agent or agent fails, or is unable, to administer the Policies reinsured hereunder (whether the Agreement is still in effect or the business is being run-off), the Reinsurer shall appoint, a third party, subject to the Company's approval, to administer the business in accordance with the terms and conditions of this Agreement and the agreement with the Managing General Agent. The Reinsurer shall be responsible for the cost of such administration. The Company agrees to cooperate with the Reinsurer and the third party administrator in the run-off of the business. If return premiums or other funds need to be returned or paid to premium finance companies, policyholders, sub-agents or any other party, the Reinsurer shall pay these amounts if the Managing General Agent or agent does not. 17.3 In furtherance of the protections afforded to the Company under this Agreement, the Reinsurer expressly acknowledges that certain circumstances may come to exist with respect to the Policies reinsured hereunder that require adjustment to the timing of Reinsurer remittances. If, in the sole discretion of the Company, an advance payment or payments of the Reinsurer's obligations under this Agreement is necessary to avoid irreparable harm to the Company (as, for example, in the circumstance where the funds available in the premium escrow account established pursuant to Article 7 of the Managing General Agent Agreement are insufficient to provide for timely payment of claims), the Reinsurer shall make such payment or payments promptly upon the Reinsurer's receipt of the Company's good faith estimate or calculation of the necessity thereof. 17.4 The Reinsurer's indemnification obligations to the Company under this Agreement shall occur when the Company incurs or becomes liable for any indemnifiable damage, liability or expense hereunder and not upon the actual payment by the Company of such damage, liability or expense. 17.5 This indemnification provision shall not apply with respect to actions, causes of actions, suits, arbitrations, or proceedings of any kind, liabilities, losses, claims, damages, costs, or expenses that result from the gross negligence or willful misconduct of the Company. ARTICLE 18 - REGULATORY MATTERS 18.1 It is the parties' understanding that the Texas Department of Insurance views current premium due over ninety (90) days past due (aged by item and effective date) from insureds or their designated representative to the Company as non-admitted assets. In confirmation of the liabilities assumed by the Reinsurer under this Agreement, the Reinsurer hereby assumes its share of all liability and responsibility for all premium in the course of collection. 18.2 The Reinsurer shall agree, at no cost to the Company, to take those actions (including, but not limited to, modifications in how funds are handled and how accounts are cleared and settled) and agree to those arrangements necessary to ensure that the Company suffers no adverse impact because of this reinsurance program and is in compliance with the laws of the State of Texas and regulations promulgated by any governmental entity thereof, including the Texas 11 Department of Insurance, insofar as this reinsurance program is concerned, subject to the provisions of Article 16. 18.3 The Reinsurer and the Company shall not offset obligations arising under this Agreement with obligations arising under any other agreement except to the extent permitted under state law and/or regulations. ARTICLE 19 - LOSS IN EXCESS OF POLICY LIMITS/EXTRA CONTRACTUAL OBLIGATIONS 19.1 This Agreement shall protect the Company for one hundred percent (100%) of any loss in excess of Policy limits (XPL) and/or one hundred percent (100%) of the extra contractual obligations (ECO) shall be deemed to be a loss under the Policy involved and shall be subject to this Agreement. 19.2 Notwithstanding anything stated herein, this Agreement shall not apply to any extra contractual obligation (ECO) incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. ARTICLE 20 - SAVINGS CLAUSE 20.1 If any law or regulation of any Federal, State or Local Government of the United States of America, or the ruling of officials having supervision over insurance companies, should prohibit or render illegal this Agreement or any portion thereof, as to risks or properties located in the jurisdiction of such authority and compliance with such law or regulation cannot be obtained by amendment or modification to the Agreement that is mutually agreeable between the parties, then, either the Company or the Reinsurer may, upon written notice to the other, suspend or abrogate this Agreement insofar as it relates to risks or properties located within such jurisdiction to such extent as may be necessary to comply with such law, regulation or ruling. Such illegality shall in no way affect any other portion thereof, provided, however, that the Reinsurer or the Company may terminate or suspend this Agreement insofar as it relates to the Business to which such law or regulation may apply. 20.2 Should any portion of this Agreement be held to be unenforceable by Arbitration or any court of competent jurisdiction, the remainder of such Agreement shall be construed as if originally written without the unenforceable portion thereof, giving effect to the extent possible of the original intent of the parties hereto as expressed in such Agreement as originally written. ARTICLE 21 - UNAUTHORIZED (NON-ADMITTED) REINSURANCE 21.1 The Reinsurer shall enter into a trust agreement and establish a trust account for the benefit of the Company in a bank that is a member of the Federal Reserve System, approved by the National Association of Insurance Commissioners and in accordance with the rules and regulations as set forth by the Texas Department of Insurance or any other regulatory authority having jurisdiction. Such amount shall be equal to the Reinsurer's share of the reserves for unearned premium and outstanding losses and loss expenses, including incurred but not reported losses. The Company agrees to furnish the Reinsurer with necessary accounting data to establish such amount. 12 21.2 The assets deposited in the trust account shall be valued, according to their current fair market value, and shall consist only of cash, certificates of deposit, and/or investments of the types permitted by the Texas Insurance Code, Article 5.75-1 (d), provided that such investments are issued by an institution that is not the parent, subsidiary, or affiliate of either the guarantor or the beneficiary. 21.3 The trust agreement shall further require that all settlements of account between the Company and the Reinsurer be made in cash or its equivalent. 21.4 The Reinsurer and the Company hereby agree that the assets in the trust account established pursuant to this Agreement may be withdrawn by the Company at any time, notwithstanding any other provisions in this Agreement. Such withdrawals shall be utilized and applied by the Company or its successors in interest by operation of law, including without limitation any liquidator, rehabilitator, receiver, or conservator of such Company, without diminution because of insolvency on the part of the Company or the Reinsurer, only for the following purposes: a. to reimburse the Company for the Reinsurer's share of premiums returned to the owners of Policies reinsured under this Agreement on account of cancellations of such Policies; or b. to reimburse the Company for the Reinsurer's share of surrenders and benefits or losses paid by the Company pursuant to the provisions of the Policies reinsured under this Agreement; or c. in the event of notice of termination of the trust, to fund an account with the Company in an amount at least equal to the reinsurers share of reserves described in Article 21.1 above; or d. to pay any other amounts due the Company under this Agreement. 21.5 The Trust Account Agreement shall include authority for the Reinsurer to terminate the Trust Account. upon the transfer of all Reinsurer obligations under this Agreement to an unaffiliated third party reinsurer with an A.M. Best rating A- or better; or the Reinsurer obtaining an A.M. Best rating of A- or better, licensed by the Texas Department of Insurance. 21.6 If the Reinsurer is not licensed to transact insurance or reinsurance in Texas, the Reinsurer hereby submits to the jurisdiction of the state courts of Texas, in particular the Dallas County District Court, and agrees to comply with all requirements necessary to give such courts jurisdiction, has designated Long, Burner, Parks, & Delargy, 515 Congress Street, Austin Texas as agent upon whom service of process may be effected and agrees to abide by the final decision of such courts or appellate courts to which such court's decision is appealed. This Contract shall be governed by and construed in accordance with the laws of the State of Texas. The principles of conflicts of law will be disregarded and only the laws of the State of Texas shall apply. ARTICLE 22 - PROGRAM REVIEW 22.1 The Reinsurer acknowledges that it has been afforded the opportunity to review the records of the Managing General Agent including but not limited to rate levels, rate filings, underwriting guidelines and claims handling. Although the Company may perform reviews as well, 13 it is understood that the participation of the Reinsurer on this contract is based upon its continuing due diligence and not based upon due diligence performed by the Company. ARTICLE 23 - MISCELLANEOUS 23.1 This Agreement has been made and entered into in the State of Texas. 23.2 All notices required to be given hereunder shall be deemed to have been duly given by personally delivering such notice in writing or by mailing it, Certified Mail, return receipt requested, with postage prepaid, or by electronic communication with proof of receipt by the other party. Any party may change the address to which notices and other communications hereunder are to be sent to such party by giving the other party written notice thereof in accordance with this provision. 23.3 This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, personal representatives, heirs and assigns. 23.4 This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 23.5 This Agreement may be amended, modified or supplemented only by a written instrument executed by all parties hereto. 23.6 This Agreement is the entire Agreement between the parties and supersedes one and all previous agreements, written or oral, and amendments thereto. 23.7 A waiver by the Company, the Reinsurer or its designated representative of any breach or default by the other party under this Agreement shall not constitute a continuing waiver or a waiver by the Company, the Reinsurer or its designated representative of any subsequent act in breach or of default hereunder. 23.8 Headings used in this agreement are for reference purposes only and shall not be deemed a part of this Agreement. OLD AMERICAN COUNTY MUTUAL DIRECT GENERAL INSURANCE COMPANY FIRE INSURANCE COMPANY By: /s/ Thomas A. McCall By: /s/ Barry D. Elkins Name: Thomas A. McCall Name: Barry D. Elkins Title: President Title: SVP & CFO Date: December 31, 2002 Date: December 31, 2002 14 SCHEDULE OF BUSINESS The Company, the Reinsurer and the Managing General Agent agree that the Managing General Agent has the authority to accept, on forms approved by the Company, any Policy, endorsement, binder, certificate, or proposal for insurance. The Managing General Agent's authority is limited by this Schedule of Business. Overall: Projected premium volume $40,000,000 Territory Texas only Maximum policy term Twelve months While business will be predominately minimum limits, the lines of business and the maximum limits of liability are as follows COVERAGE MAXIMUM LIMITS Bodily Injury Liability $100,002 each person $300,002 each accident Property Damage Liability $ 50,002 each accident Uninsured/Underinsured Motorists Bodily Injury $ 20,002 each person $ 40,002 each accident Property Damage $ 15,002 each accident Personal Injury Protection $ 2,502 each person Medical payments $ 502 each person Physical Damage $ 35,000 each automobile This Agreement does not apply to and specifically excludes the following: a. Any business not produced by DIRECT GENERAL INSURANCE AGENCY, INC, or b. Any business not classified as private passenger automobile liability or physical damage, or c. Exclusions specified within the Quota Share Reinsurance Agreement Number DIRECT-03-001. THE COMPANY: THE REINSURER: OLD AMERICAN COUNTY MUTUAL DIRECT GENERAL INSURANCE COMPANY FIRE INSURANCE COMPANY By: /s/ Thomas A. McCall By: /s/ Barry D. Elkins Name: Thomas A. McCall Name: Barry D. Elkins Title: President Title: SVP & CFO Date: December 31, 2002 Date: December 31, 2002 15