Exhibit 10.1

 

Execution Copy

 

STOCK PURCHASE AGREEMENT (this “Agreement”), dated as of May 13, 2004, by and
among PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware corporation
(“Purchaser”), ARCH CAPITAL HOLDINGS LTD., a Bermuda company (“Seller”), and
ARCH CAPITAL GROUP LTD., a Bermuda company (“Arch Parent”).

 

WHEREAS, on the date hereof, Seller is the owner of 3,318.72 shares of common
stock (the “AIIHC Common Shares”) of American Independent Insurance Holding
Company, Inc., a Pennsylvania corporation (“AIIHC”), representing all of the
issued and outstanding shares of common stock of AIIHC, and Arch Reinsurance
Company, a Nebraska corporation and an indirect, wholly owned subsidiary of Arch
Parent (“ARC”), is the owner of 3,500 shares of Series A Preferred stock (the
“AIIHC Preferred Shares”) of AIIHC, representing all of the issued and
outstanding shares of preferred stock of AIIHC;

 

WHEREAS, on the date hereof, AIIHC is the owner of all of the issued and
outstanding common stock of (i) American Independent Services Company, Inc., a
Pennsylvania corporation (“American Independent Services”), and (ii) American
Independent Insurance Company, a Pennsylvania corporation (“American Independent
Insurance”);

 

WHEREAS, on the date hereof, Arch Reinsurance Ltd., a Bermuda company and an
indirect, wholly owned subsidiary of Arch Parent (“ARL”), is the owner of all of
the issued and outstanding shares of capital stock of (i) The Personal Service
Insurance Co., an Ohio corporation (“PSIC”), and (ii) Anson B. Smith & Co., an
Ohio corporation (“Anson”);

 

WHEREAS, immediately prior to the Closing (as hereinafter defined), (i) Arch
Parent will cause ARL to contribute all of the outstanding capital stock of PSIC
and Anson and $3,500,000 to Seller and, in turn, Seller will contribute all of
such capital stock of PSIC and Anson and $3,500,000 to AIIHC, on the terms and
subject to the conditions set forth in this Agreement (collectively, the
“Contributions”); and (ii) Seller will cause AIIHC to redeem the AIIHC Preferred
Shares for a redemption price equal to $3,500,000 as provided in the applicable
Statement with Respect to Shares as to Designations, Powers, Preferences and
Rights of the Series A Preferred Stock of AIIHC (the “Redemption”); and

 

WHEREAS, at Closing, the parties desire that Seller will sell the AIIHC Common
Shares, representing all of the outstanding capital stock of AIIHC, to Purchaser
for a purchase price of $46,000,000, on the terms and subject to the conditions
set forth in this Agreement.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties, intending to be legally bound, hereby agree as
follows:

 

ARTICLE I

PURCHASE AND SALE OF AIIHC COMMON SHARES

 

SECTION 1.01                    SALE OF AIIHC COMMON SHARES.  ON THE TERMS AND
SUBJECT TO THE CONDITIONS SET FORTH IN THIS AGREEMENT, AT THE CLOSING, SELLER
SHALL SELL TO PURCHASER ALL OF THE

 

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AIIHC COMMON SHARES, AND PURCHASER SHALL PURCHASE FROM SELLER ALL OF THE AIIHC
COMMON SHARES, FOR THE PURCHASE PRICE (AS HEREINAFTER DEFINED) SPECIFIED IN
SECTION 1.02.

 

SECTION 1.02                    PURCHASE PRICE.  THE PURCHASE PRICE FOR THE
AIIHC COMMON SHARES (THE “PURCHASE PRICE”) SHALL CONSIST OF $46,000,000 IN CASH
TO SELLER.

 

SECTION 1.03                    PAYMENT OF THE PURCHASE PRICE.  AT THE CLOSING,
PURCHASER SHALL PAY THE PURCHASE PRICE TO SELLER BY WIRE TRANSFER OF IMMEDIATELY
AVAILABLE FUNDS PURSUANT TO WRITTEN INSTRUCTIONS PROVIDED BY SELLER TO PURCHASER
AT LEAST TWO (2) BUSINESS DAYS PRIOR TO THE CLOSING DATE.

 

SECTION 1.04                    DELIVERY OF THE SHARES.  SELLER SHALL DELIVER TO
PURCHASER AT THE CLOSING CERTIFICATES REPRESENTING THE AIIHC COMMON SHARES, EACH
DULY ENDORSED OR ACCOMPANIED BY A DULY EXECUTED STOCK POWER, IN APPROPRIATE FORM
AND SUFFICIENT TO TRANSFER THE AIIHC COMMON SHARES TO PURCHASER (WITH, IF
APPLICABLE, ALL APPROPRIATE STOCK TRANSFER TAX STAMPS AFFIXED), FREE AND CLEAR
OF ALL LIENS, CLAIMS, OPTIONS, ENCUMBRANCES OR RESTRICTIONS WHATSOEVER
(COLLECTIVELY, “LIENS”), OTHER THAN LIENS ARISING PURSUANT TO APPLICABLE FEDERAL
AND STATE SECURITIES LAWS.

 

SECTION 1.05                    CLOSING.  ON THE TERMS AND SUBJECT TO THE
CONDITIONS SET FORTH IN THIS AGREEMENT, THE CLOSING OF THE PURCHASE AND SALE OF
THE AIIHC COMMON SHARES (THE “CLOSING”) SHALL TAKE PLACE AT THE OFFICES OF ARCH
CAPITAL SERVICES INC., 20 HORSENECK LANE, GREENWICH, CONNECTICUT  06830, ON THE
DATE WHICH IS TWELVE (12) BUSINESS DAYS AFTER THE DATE OF THE SATISFACTION OR
WAIVER OF THE LAST OF THE CONDITIONS TO CLOSING SET FORTH IN ARTICLE VIII AND
ARTICLE IX HEREOF, OR AT SUCH OTHER LOCATION AND ON SUCH OTHER DATE AS THE
PARTIES MAY MUTUALLY AGREE.  THE DATE ON WHICH THE CLOSING SHALL OCCUR IS
SOMETIMES REFERRED TO HEREIN AS THE “CLOSING DATE.”

 

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF ARCH PARENT AND SELLER

 

Each of Arch Parent and Seller hereby jointly and severally represents and
warrants to Purchaser as follows:

 

SECTION 2.01                    CORPORATE ORGANIZATION; SUBSIDIARIES.

 

(A)                                  EACH OF ARCH PARENT AND SELLER IS A
CORPORATION DULY ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS
OF BERMUDA.  COPIES OF THE ORGANIZATIONAL DOCUMENTS OF EACH OF ARCH PARENT AND
SELLER, WITH ALL AMENDMENTS THERETO TO THE DATE SUCH DOCUMENTS ARE DELIVERED
HEREBY, WILL BE DELIVERED TO PURCHASER OR ITS REPRESENTATIVES PRIOR TO THE DUE
DILIGENCE END DATE, AND SUCH COPIES WILL BE ACCURATE AND COMPLETE AS OF THE DATE
THEREOF.

 

(B)                                 AIIHC AND EACH SUBSIDIARY (AS DEFINED BELOW)
IS A CORPORATION DULY ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE
LAWS OF ITS STATE OF INCORPORATION.  COPIES OF THE CERTIFICATE OF INCORPORATION
OR ARTICLES OF INCORPORATION, AS APPLICABLE, AND BY-LAWS OF AIIHC AND EACH
SUBSIDIARY, WITH ALL AMENDMENTS THERETO TO THE DATE SUCH DOCUMENTS ARE FURNISHED
HEREBY, WILL BE FURNISHED TO PURCHASER OR ITS REPRESENTATIVES PRIOR TO THE DUE
DILIGENCE END DATE, AND SUCH COPIES WILL BE ACCURATE AND COMPLETE AS OF THE DATE
THEREOF.

 

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SECTION 2.02                    QUALIFICATION TO DO BUSINESS.  AIIHC AND EACH
SUBSIDIARY HAS THE REQUISITE CORPORATE POWER AND AUTHORITY AND ALL NECESSARY
GOVERNMENTAL AUTHORITY TO OWN, OPERATE OR LEASE THE PROPERTIES THAT IT PURPORTS
TO OWN, OPERATE OR LEASE AND TO CARRY ON ITS BUSINESS AS IT IS NOW BEING
CONDUCTED, AND IS DULY QUALIFIED TO DO BUSINESS AS A FOREIGN CORPORATION, AND IS
IN GOOD STANDING, IN EACH JURISDICTION WHERE THE CHARACTER OF ITS PROPERTIES
OWNED, OPERATED OR LEASED OR THE NATURE OF ITS ACTIVITIES MAKES SUCH
QUALIFICATION NECESSARY, EXCEPT ANY SUCH JURISDICTION WHERE THE FAILURE TO BE SO
QUALIFIED AND IN GOOD STANDING WOULD NOT, INDIVIDUALLY OR IN THE AGGREGATE,
REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE EFFECT (AS DEFINED IN
SECTION 10.02(A) BELOW).

 

SECTION 2.03                    AUTHORIZATION AND VALIDITY OF AGREEMENT.  EACH
OF ARCH PARENT AND SELLER HAS ALL REQUISITE CORPORATE POWER AND AUTHORITY TO
ENTER INTO THIS AGREEMENT, TO CARRY OUT ITS OBLIGATIONS HEREUNDER AND TO
CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY.  THE EXECUTION AND DELIVERY OF
THIS AGREEMENT AND THE PERFORMANCE OF ARCH PARENT’S AND SELLER’S OBLIGATIONS
HEREUNDER HAVE BEEN DULY AUTHORIZED AND APPROVED BY ALL NECESSARY CORPORATE
ACTION OF ARCH PARENT AND SELLER, EXCEPT FOR THE APPROVAL, IF NECESSARY, OF THE
BOARDS OF DIRECTORS OF SELLER AND ARCH PARENT AS DESCRIBED IN SECTION 7.01(G),
AND SUBJECT TO THE RECEIPT OF REGULATORY APPROVALS DESCRIBED ON SCHEDULE 2.06,
NO OTHER PROCEEDINGS ON THE PART OR IN RESPECT OF ARCH PARENT OR SELLER IS
NECESSARY TO AUTHORIZE SUCH EXECUTION, DELIVERY AND PERFORMANCE OR THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY.  EXCEPT FOR THE NEED TO
OBTAIN APPROVAL, IF NECESSARY, OF THE BOARDS OF DIRECTORS OF SELLER AND ARCH
PARENT AS DESCRIBED ABOVE, THIS AGREEMENT HAS BEEN DULY EXECUTED BY ARCH PARENT
AND SELLER AND CONSTITUTES A VALID AND BINDING OBLIGATION OF EACH OF ARCH PARENT
AND SELLER, ENFORCEABLE AGAINST EACH OF THEM IN ACCORDANCE WITH ITS TERMS,
EXCEPT AS MAY BE LIMITED BY APPLICABLE BANKRUPTCY, INSOLVENCY, MORATORIUM OR
SIMILAR LAWS OF GENERAL APPLICATION RELATING TO OR AFFECTING CREDITORS’ RIGHTS
GENERALLY AND EXCEPT FOR THE LIMITATIONS IMPOSED BY GENERAL PRINCIPLES OF
EQUITY.  AT THE CLOSING, NO FURTHER APPROVAL OR AUTHORITY OF THE SHAREHOLDERS OR
OF THE BOARDS OF DIRECTORS OF ARCH PARENT OR SELLER WILL BE REQUIRED FOR THE
CONSUMMATION BY SELLER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

 

SECTION 2.04                    CAPITALIZATION.

 

(a)                                  The capitalization of AIIHC and the
Subsidiaries is as follows:

 

(I)   THE AUTHORIZED CAPITAL STOCK OF AIIHC CONSISTS OF 20,000,000 SHARES OF
COMMON STOCK OF AIIHC AND 5,000,000 SHARES OF PREFERRED STOCK OF AIIHC.  THE
AIIHC COMMON SHARES ARE OUTSTANDING, ALL OF WHICH ARE VALIDLY ISSUED, FULLY
PAID, NONASSESSABLE AND FREE OF ANY PREEMPTIVE RIGHTS, AND OWNED, BENEFICIALLY
AND OF RECORD, BY SELLER, FREE AND CLEAR OF ALL LIENS, EXCEPT FOR SUCH LIENS
ARISING PURSUANT TO APPLICABLE FEDERAL AND STATE SECURITIES LAWS.  THE AIIHC
PREFERRED SHARES ARE OUTSTANDING, ALL OF WHICH ARE VALIDLY ISSUED, FULLY PAID,
NONASSESSABLE AND FREE OF ANY PREEMPTIVE RIGHTS, AND OWNED, BENEFICIALLY AND OF
RECORD, BY ARC, FREE AND CLEAR OF ALL LIENS, EXCEPT FOR SUCH LIENS ARISING
PURSUANT TO APPLICABLE FEDERAL AND STATE SECURITIES LAWS.  THE AIIHC COMMON
SHARES AND AIIHC PREFERRED SHARES CONSTITUTE, AND AS OF THE CLOSING THE AIIHC
COMMON SHARES WILL CONSTITUTE, ALL OF THE ISSUED AND OUTSTANDING CAPITAL STOCK
OR OTHER EQUITY INTERESTS OR EQUITY SECURITIES OF AIIHC.

 

(II)  THE AUTHORIZED CAPITAL STOCK OF PSIC CONSISTS OF 20,000 SHARES OF COMMON
STOCK OF PSIC.  THERE ARE 20,000 SHARES OF PSIC COMMON STOCK (THE “PSIC SHARES”)

 

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OUTSTANDING, ALL OF WHICH ARE VALIDLY ISSUED, FULLY PAID, NONASSESSABLE AND FREE
OF ANY PREEMPTIVE RIGHTS, AND OWNED, BENEFICIALLY AND OF RECORD, BY ARL, FREE
AND CLEAR OF ALL LIENS, EXCEPT FOR SUCH LIENS ARISING PURSUANT TO APPLICABLE
FEDERAL AND STATE SECURITIES LAWS.  AFTER THE CONTRIBUTIONS, ALL OF THE PSIC
SHARES WILL BE OWNED, BENEFICIALLY AND OF RECORD, BY AIIHC, FREE AND CLEAR OF
ALL LIENS, EXCEPT FOR SUCH LIENS ARISING PURSUANT TO APPLICABLE FEDERAL AND
STATE SECURITIES LAWS.  THE PSIC SHARES CONSTITUTE ALL OF THE ISSUED AND
OUTSTANDING CAPITAL STOCK OR OTHER EQUITY INTERESTS OR EQUITY SECURITIES OF
PSIC.

 

(III)  THE AUTHORIZED CAPITAL STOCK OF ANSON CONSISTS OF 10,000 SHARES OF COMMON
STOCK OF ANSON.  THERE ARE 4,344 SHARES (THE “ANSON SHARES”) OF ANSON COMMON
STOCK OUTSTANDING, ALL OF WHICH ARE VALIDLY ISSUED, FULLY PAID, NONASSESSABLE
AND FREE OF ANY PREEMPTIVE RIGHTS, AND OWNED, BENEFICIALLY AND OF RECORD, BY
ARL, FREE AND CLEAR OF ALL LIENS, EXCEPT FOR SUCH LIENS ARISING PURSUANT TO
APPLICABLE FEDERAL AND STATE SECURITIES LAWS.  AFTER THE CONTRIBUTIONS, ALL OF
THE ANSON SHARES WILL BE OWNED, BENEFICIALLY AND OF RECORD, BY AIIHC, FREE AND
CLEAR OF ALL LIENS, EXCEPT FOR SUCH LIENS ARISING PURSUANT TO APPLICABLE FEDERAL
AND STATE SECURITIES LAWS.  THE ANSON SHARES CONSTITUTE ALL OF THE ISSUED AND
OUTSTANDING CAPITAL STOCK OR OTHER EQUITY INTERESTS OR EQUITY SECURITIES OF
ANSON.

 

(IV)  THE AUTHORIZED CAPITAL STOCK OF AMERICAN INDEPENDENT SERVICES CONSISTS OF
1,000 SHARES OF COMMON STOCK.  THERE ARE 100 SHARES OF AMERICAN INDEPENDENT
SERVICES COMMON STOCK  (THE “AMERICAN INDEPENDENT SERVICES SHARES”) OUTSTANDING,
ALL OF WHICH ARE VALIDLY ISSUED, FULLY PAID, NONASSESSABLE AND FREE OF ANY
PREEMPTIVE RIGHTS, AND OWNED, BENEFICIALLY AND OF RECORD, BY AIIHC, FREE AND
CLEAR OF ALL LIENS, EXCEPT FOR SUCH LIENS ARISING PURSUANT TO APPLICABLE FEDERAL
AND STATE SECURITIES LAWS.  THE AMERICAN INDEPENDENT SERVICES SHARES CONSTITUTE
ALL OF THE ISSUED AND OUTSTANDING SHARES OF CAPITAL STOCK OR OTHER EQUITY
INTERESTS OR EQUITY SECURITIES OF AMERICAN INDEPENDENT SERVICES.

 

(V)  THE AUTHORIZED CAPITAL STOCK OF AMERICAN INDEPENDENT INSURANCE CONSISTS OF
20,000 SHARES OF COMMON STOCK.  THERE ARE 12,144 SHARES OF AMERICAN INDEPENDENT
INSURANCE COMMON STOCK OUTSTANDING  (THE “AMERICAN INDEPENDENT INSURANCE
SHARES”), ALL OF WHICH ARE VALIDLY ISSUED, FULLY PAID, NONASSESSABLE AND FREE OF
ANY PREEMPTIVE RIGHTS, AND OWNED, BENEFICIALLY AND OF RECORD, BY AIIHC, FREE AND
CLEAR OF ALL LIENS, EXCEPT FOR SUCH LIENS ARISING PURSUANT TO APPLICABLE FEDERAL
AND STATE SECURITIES LAWS.  THE AMERICAN INDEPENDENT INSURANCE SHARES CONSTITUTE
ALL OF THE ISSUED AND OUTSTANDING SHARES OF CAPITAL STOCK OR OTHER EQUITY
INTERESTS OR EQUITY SECURITIES OF AMERICAN INDEPENDENT INSURANCE.

 

(VI)  THE AUTHORIZED CAPITAL STOCK OF C&L INSURANCE AGENCY, INC., A PENNSYLVANIA
CORPORATION (“C&L”), CONSISTS OF 1,000 SHARES OF COMMON STOCK.  THERE ARE 100
SHARES OF C&L COMMON STOCK (THE “C&L SHARES”) OUTSTANDING, ALL OF WHICH ARE
VALIDLY ISSUED, FULLY PAID, NONASSESSABLE AND FREE OF ANY PREEMPTIVE RIGHTS, AND
OWNED, BENEFICIALLY AND OF RECORD, BY AMERICAN INDEPENDENT SERVICES, FREE AND
CLEAR OF ALL LIENS, EXCEPT FOR SUCH LIENS ARISING PURSUANT TO APPLICABLE FEDERAL
AND STATE SECURITIES LAWS.  THE C&L SHARES CONSTITUTE ALL OF THE ISSUED AND
OUTSTANDING SHARES OF CAPITAL STOCK OR OTHER EQUITY INTERESTS OR EQUITY
SECURITIES OF C&L.

 

(VII)  PSIC, ANSON, AMERICAN INDEPENDENT SERVICES, AMERICAN INDEPENDENT
INSURANCE AND C&L ARE SOMETIMES REFERRED TO HEREIN COLLECTIVELY AS THE

 

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“SUBSIDIARIES”, AND EACH INDIVIDUALLY AS A “SUBSIDIARY”.  THE PSIC SHARES, ANSON
SHARES, AMERICAN INDEPENDENT SERVICES SHARES, AMERICAN INDEPENDENT INSURANCE
SHARES AND C&L SHARES ARE SOMETIMES REFERRED TO HEREIN COLLECTIVELY AS THE
“SUBSIDIARY SHARES.”

 

(b)                                 Neither AIIHC nor any Subsidiary has any
outstanding subscriptions, warrants, convertible securities, obligations,
options or rights entitling any person to acquire shares of capital stock or
other equity interests or equity securities of AIIHC or any such Subsidiary, or
any outstanding securities, options, warrants, rights or other instruments
convertible into shares of capital stock or other equity interests or equity
securities of AIIHC or any such Subsidiary.

 

(c)                                  Except as disclosed on Schedule 2.04(c)
hereto, and except for the equity interests in the Subsidiaries, neither AIIHC
nor any of the Subsidiaries, directly or indirectly, owns an equity interest in
any other entity, or has any contractual or other commitment to make any
investment in any entity, except for investments made in the ordinary course of
business and in accordance with the respective investment policies of AIIHC and
the Subsidiaries in effect on the date hereof.

 

SECTION 2.05                    NON-CONTRAVENTION.  EXCEPT AS DISCLOSED ON
SCHEDULE 2.05 HERETO, THE EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT
AND CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY WILL NOT (I) RESULT IN
A BREACH OF ANY OF THE TERMS OF, OR CONSTITUTE A VIOLATION OF OR DEFAULT UNDER,
THE ORGANIZATIONAL DOCUMENTS OF ARCH PARENT OR SELLER, (II) RESULT IN A BREACH
OF ANY OF THE TERMS OF, OR CONSTITUTE A VIOLATION OF OR DEFAULT UNDER, RESULT IN
ANY MODIFICATION OF, ACCELERATE OR PERMIT THE ACCELERATION OF THE PERFORMANCE
REQUIRED BY, OR OTHERWISE GIVE ANY OTHER CONTRACTING PARTY THE RIGHT TO
TERMINATE ANY CONTRACT, INDENTURE OR OTHER INSTRUMENT OR AGREEMENT BY WHICH ARCH
PARENT, SELLER, AIIHC OR ANY OF THE SUBSIDIARIES, OR ANY OF THEIR RESPECTIVE
ASSETS ARE SUBJECT OR BOUND, (III) RESULT IN THE CREATION OF A LIEN ON THE AIIHC
COMMON SHARES, THE AIIHC PREFERRED SHARES OR THE SUBSIDIARY SHARES, EXCEPT FOR
SUCH LIENS ARISING PURSUANT TO APPLICABLE FEDERAL AND STATE SECURITIES LAWS,
(IV) RESULT IN THE CREATION OF A LIEN ON ANY OF THE ASSETS OF AIIHC OR ANY OF
THE SUBSIDIARIES, (V) RESULT IN THE BREACH OF THE TERMS AND CONDITIONS OR CAUSE
AN IMPAIRMENT OF ANY LICENSE OR GOVERNMENT AUTHORIZATION OF AIIHC OR ANY
SUBSIDIARY OR (VI) VIOLATE ANY STATUTE, LAW OR REGULATION OF ANY JURISDICTION OR
ORDER, JUDGMENT, INJUNCTION, AWARD OR DECREE OF ANY COURT OR GOVERNMENT OF
COMPETENT JURISDICTION BY WHICH ARCH PARENT, SELLER, AIIHC OR ANY OF THE
SUBSIDIARIES ARE BOUND; EXCEPT IN THE CASE OF CLAUSE (II) THROUGH (VI) ABOVE FOR
SUCH BREACHES, VIOLATIONS, DEFAULTS OR CREATION OF LIENS WHICH WOULD NOT,
INDIVIDUALLY OR IN THE AGGREGATE, REASONABLY BE EXPECTED TO HAVE A MATERIAL
ADVERSE EFFECT.

 

SECTION 2.06                    CONSENTS.  EXCEPT FOR THE FILINGS WITH THE
INSURANCE DEPARTMENTS IN DELAWARE, INDIANA, MARYLAND, OHIO AND PENNSYLVANIA AND
AS DISCLOSED ON SCHEDULE 2.06 HERETO, NO CONSENT, WAIVER, AUTHORIZATION,
APPROVAL, ORDER, LICENSE, CERTIFICATE OR PERMIT OF OR FROM, OR REGISTRATION,
DECLARATION OR FILING WITH, OR NOTICE TO ANY COURT OR OTHER TRIBUNAL,
GOVERNMENTAL AGENCY OR ANY OTHER PERSON, NOR UNDER ANY CONTRACT, INDENTURE,
MORTGAGE, LEASE, LICENSE OR OTHER AGREEMENT OR INSTRUMENT TO WHICH ARCH PARENT
OR SELLER OR ANY OF THEIR RESPECTIVE SUBSIDIARIES IS A PARTY OR BY WHICH ARCH
PARENT OR SELLER OR ANY OF THEIR RESPECTIVE SUBSIDIARIES, OR ANY OF THEIR
RESPECTIVE ASSETS, IS SUBJECT OR BOUND, IS REQUIRED BY OR WITH RESPECT TO ARCH
PARENT, SELLER, AIIHC OR ANY OF THE SUBSIDIARIES IN CONNECTION WITH THE
EXECUTION, DELIVERY OR PERFORMANCE OF THIS AGREEMENT AND THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREBY.

 

 

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SECTION 2.07                    FINANCIAL STATEMENTS.

 

(a)                                  Seller will deliver to Purchaser prior to
the Due Diligence End Date (i) the financial statements of (A) AIIHC and its
Subsidiaries on the date hereof (consisting of American Independent Insurance,
American Independent Services and C&L) on a consolidated basis, (B) American
Independent Insurance and (C) PSIC and Anson, on a combined basis and (D) PSIC,
and, in the case of American Independent Insurance and PSIC, related schedules
and notes for the fiscal years ended December 31, 2003 (the “2003 Annual
Financial Statements”) and December 31, 2002 (the “2002 Annual Financial
Statements”) (except financial statements for the year ended December 31, 2002
for Anson, which are not available) (the 2002 Annual Financial Statements
together with the 2003 Annual Financial Statements are referred to as the
“Annual Financial Statements”), and (ii) the financial statements of (A) AIIHC
and such Subsidiaries on a consolidated basis, (B) PSIC and Anson, on a combined
basis, (C) American Independent Insurance and (D) PSIC and, in the case of
American Independent Insurance and PSIC, related schedules and notes for the
period ended March 31, 2004 (collectively, the “Quarterly Financial
Statements”).  The Annual Financial Statements and the Quarterly Financial
Statements are hereinafter referred to collectively as the “Financial
Statements.”

 

(b)                                 Each of the Financial Statements presents
fairly in all material respects the financial position of (i) AIIHC and such
Subsidiaries, (ii) PSIC and Anson, (iii) American Independent Insurance and (iv)
PSIC, as applicable, as of its respective date and the results of the operations
of AIIHC and such Subsidiaries, on a consolidated basis, PSIC and Anson, on a
combined basis, American Independent Insurance and PSIC, as applicable, as of
the respective dates and for the periods indicated therein.  The Financial
Statements for (i) AIIHC and such Subsidiaries, on a consolidated basis, and
(ii) PSIC and Anson, on a combined basis, have been prepared in accordance with
generally accepting accounting principles as in effect in the United States
(“GAAP”), consistently applied (and with respect to the Quarterly Financial
Statements, subject to the lack of year-end adjustments which are not material
in the aggregate and, with respect to all Financial Statements, the absence of
footnotes thereto).  The Financial Statements for PSIC and American Independent
Insurance, as applicable, have been prepared in accordance with statutory
accounting practices as prescribed or permitted by the National Association of
Insurance Commissioners (“SAP”), consistently applied throughout the periods
involved.  The Financial Statements of PSIC and American Independent Insurance
have been prepared in conformity with accounting principles and practices
prescribed or permitted by the Insurance Department of the State of Ohio or the
Insurance Department of the Commonwealth of Pennsylvania, as applicable,
consistently applied throughout all periods.  Except as disclosed in
Schedule 2.07, no material deficiency has been asserted with respect to the
Financial Statements of PSIC or American Independent Insurance by the applicable
insurance regulatory body.  The statutory balance sheets and income statements
included in the 2002 Annual Financial Statements prepared in accordance with SAP
have been audited by PricewaterhouseCoopers LLP, and the Seller will make
available to the Purchaser true and complete copies of all audit opinions
related thereto prior to the Due Diligence End Date.

 

(c)                                  Except for regular periodic assessments in
the ordinary course of business or assessments based on developments which are
publicly known within the insurance industry, to the knowledge of Seller, AIIHC
or the Subsidiaries, no claim or assessment is pending or threatened against
PSIC or American Independent Insurance by any state insurance guaranty

 

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association in connection with such association’s fund relating to insolvent
insurers which if determined adversely, would, individually or in the aggregate,
be reasonably likely to have a Material Adverse Effect.

 

SECTION 2.08                    CONTRACTS AND CONTRACT PARTIES.  SCHEDULE 2.08
SETS FORTH A LIST OF:  (A) ALL EMPLOYMENT, SEVERANCE, CHANGE-IN-CONTROL, AGENCY
(OTHER THAN INSURANCE AGENCY), CONSULTATION, OR REPRESENTATION CONTRACT OR
CONTRACTS OF ANY TYPE (INCLUDING, WITHOUT LIMITATION, LOANS OR ADVANCES) WITH
ANY PRESENT MEMBER OF SENIOR MANAGEMENT, OFFICER, DIRECTOR, TRUSTEE, AGENT
(OTHER THAN AN INSURANCE AGENT), CONSULTANT OR OTHER SIMILAR REPRESENTATIVE OF
AIIHC OR ANY OF THE SUBSIDIARIES; (B) ALL CONTRACTS WITH ANY PERSON OR ENTITY
CONTAINING ANY PROVISION OR COVENANT (I) LIMITING THE ABILITY OF AIIHC OR ANY OF
THE SUBSIDIARIES TO (X) SELL ANY PRODUCTS OR SERVICES, (Y) ENGAGE IN ANY LINE OF
BUSINESS OR (Z) COMPETE WITH OR OBTAIN PRODUCTS OR SERVICES FROM ANY PERSON OR
ENTITY OR (II) LIMITING THE ABILITY OF ANY PERSON OR ENTITY TO COMPETE WITH OR
TO PROVIDE PRODUCTS OR SERVICES TO AIIHC OR ANY OF THE SUBSIDIARIES; (C)  ALL
LICENSES OR OTHER CONTRACTS INCLUDED IN THE INTELLECTUAL PROPERTY (AS
HEREINAFTER DEFINED); (D) EACH LEASE, SUBLEASE OR CAPITAL LEASE OF REAL
PROPERTY, EQUIPMENT OR AUTOMOBILES TO WHICH AIIHC OR ANY OF THE SUBSIDIARIES IS
A PARTY OR BY WHICH AIIHC OR ANY OF THE SUBSIDIARIES IS BOUND; (E) EACH CONTRACT
OR ARRANGEMENT RELATING TO INDEBTEDNESS OR OTHERWISE RELATED TO THE BORROWING OF
MONEY BY OR EXTENSION OF CREDIT TO AIIHC OR ANY OF THE SUBSIDIARIES OR THE
IMPOSITION OF ANY LIENS ON ANY OF THE ASSETS OF AIIHC OR ANY OF THE
SUBSIDIARIES, TO WHICH AIIHC OR ANY OF THE SUBSIDIARIES IS A PARTY, OR RELATING
TO THE DIRECT OR INDIRECT GUARANTEE BY AIIHC OR ANY OF THE SUBSIDIARIES OF ANY
LIABILITY; (F) ALL CONTRACTS (OTHER THAN CONTRACTS (AS HEREINAFTER DEFINED) OF
INSURANCE ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS) PURSUANT TO WHICH
AIIHC OR ANY OF THE SUBSIDIARIES HAS AGREED TO INDEMNIFY OR HOLD HARMLESS ANY
PERSON OR ENTITY (OTHER THAN INDEMNIFICATIONS OR HOLD HARMLESS COVENANTS IN THE
ORDINARY COURSE OF BUSINESS CONSISTENT WITH PAST PRACTICE); (G) ALL CONTRACTS OR
ARRANGEMENTS (INCLUDING, WITHOUT LIMITATION, THOSE RELATING TO ALLOCATIONS OF
EXPENSES, PERSONNEL, SERVICES OR FACILITIES) BETWEEN SELLER OR ANY OF ITS
AFFILIATES, ON THE ONE HAND, AND AIIHC OR ANY OF THE SUBSIDIARIES, ON THE OTHER
HAND; (H) ALL SERVICE CONTRACTS RELATING TO INSURANCE-RELATED ACTIVITIES OF
AIIHC OR ANY OF THE SUBSIDIARIES; (I) THE SPECIMEN FORM INSURANCE AGENT CONTRACT
OF ANY SUBSIDIARY AND ANY INSURANCE AGENT CONTRACT HAVING TERMS DIFFERENT IN ANY
MATERIAL RESPECT THAN THE TERMS CONTAINED IN SUCH SPECIMEN FORM AGENT CONTRACT;
(J) EACH OTHER CONTRACT TO WHICH AIIHC OR ANY OF THE SUBSIDIARIES IS A PARTY
UNDER WHICH AIIHC OR ANY OF THE SUBSIDIARIES’ AGGREGATE REVENUES OR AGGREGATE
EXPENSES EXCEEDED $250,000 FOR THE PERIOD FROM JANUARY 1, 2003 THROUGH
DECEMBER 31, 2003; (K) ALL CONTRACTS RELATING TO FUTURE DISPOSITION (INCLUDING,
BUT NOT LIMITED TO, RESTRICTIONS ON TRANSFER OR RIGHTS OF FIRST REFUSAL) OR
ACQUISITION OF ANY INTEREST IN ANY BUSINESS ENTERPRISE, AND ALL CONTRACTS
RELATING TO FUTURE DISPOSITION OF A MATERIAL PORTION OF THE ASSETS OF AIIHC OR
ANY SUBSIDIARY OTHER THAN, IN EACH CASE, ANY ASSETS TO BE ACQUIRED OR DISPOSED
OF IN THE ORDINARY COURSE OF BUSINESS; (L) ALL OUTSTANDING PROXIES (OTHER THAN
ROUTINE PROXIES IN CONNECTION WITH ANNUAL MEETINGS), POWERS OF ATTORNEY OR
SIMILAR DELEGATIONS OF AUTHORITY OF AIIHC OR ANY SUBSIDIARY, OTHER THAN IN THE
ORDINARY COURSE OF BUSINESS AND (M) ANY COMMITMENTS OR OBLIGATIONS TO ENTER INTO
ANY OF THE FOREGOING (SUCH CONTRACTS AND ARRANGEMENTS BEING HEREINAFTER REFERRED
TO COLLECTIVELY AS THE “CONTRACTS”).  EXCEPT FOR THE THIRD PARTY AGREEMENT (AS
DEFINED IN SECTION 2.29 HEREOF), TRUE AND COMPLETE COPIES OF THE CONTRACTS WHICH
ARE IN WRITING, AND WRITTEN SUMMARIES OF ORAL CONTRACTS, SHALL BE MADE AVAILABLE
TO PURCHASER PRIOR TO THE DUE DILIGENCE END DATE (AS HEREINAFTER DEFINED). 
EXCEPT AS SET FORTH IN SCHEDULE 2.08, ALL CONTRACTS ARE IN FULL FORCE AND EFFECT
AND CONSTITUTE THE LEGAL, VALID AND BINDING OBLIGATIONS OF AIIHC OR ANY OF THE
SUBSIDIARIES,

 

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WHICH IS A PARTY THERETO, ENFORCEABLE IN ACCORDANCE WITH THEIR RESPECTIVE TERMS,
EXCEPT TO THE EXTENT THAT SUCH ENFORCEABILITY MAY BE LIMITED BY BANKRUPTCY,
RECEIVERSHIP, MORATORIUM, CONSERVATORSHIP, REORGANIZATION OR OTHER LAWS OF
GENERAL APPLICATION AFFECTING THE RIGHTS OF CREDITORS GENERALLY OR BY GENERAL
PRINCIPLES OF EQUITY.  NEITHER AIIHC, NOR ANY OF THE SUBSIDIARIES HAS RECEIVED
FROM ANY OTHER PARTY TO SUCH CONTRACT ANY WRITTEN NOTICE OF TERMINATION OR
INTENTION TO TERMINATE OR NOT TO HONOR THE TERMS OF SUCH CONTRACT, OR TO THE
KNOWLEDGE OF THE SELLER, AIIHC OR THE SUBSIDIARIES, ANY ORAL NOTICE OF
TERMINATION OR INTENTION TO TERMINATE OR NOT TO HONOR THE TERMS OF SUCH
CONTRACT.  NEITHER AIIHC NOR ANY OF THE SUBSIDIARIES, NOR, TO THE KNOWLEDGE OF
SELLER, AIIHC OR THE SUBSIDIARIES, ANY OTHER PARTY TO ANY CONTRACT, IS IN
VIOLATION OR BREACH OF OR DEFAULT IN ANY MATERIAL RESPECT UNDER ANY SUCH
CONTRACT.

 

SECTION 2.09                    EMPLOYEE BENEFIT PLANS.

 

(a)                                  Schedule 2.09(a) sets forth a complete and
correct list of each collective bargaining agreement and each employment,
severance or termination pay, hospitalization or other medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension, or
retirement, bonus or other incentive compensation, deferred compensation, salary
continuation, disability, stock award, stock option, stock purchase or other
employee benefit policy, plan, program, agreement or arrangement, including
without limitation all “employee benefit plans” as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended (“ERISA”),
maintained by AIIHC or any of the Subsidiaries or maintained by any other person
or entity which is deemed a single employer with AIIHC or any of the
Subsidiaries pursuant to Section 4001(b) of ERISA for the benefit of current or
former employees of AIIHC or any of the Subsidiaries (collectively referred to
as the “Company Plans”).

 

(b)                                 The Company Plans have been maintained, in
all material respects, in accordance with their terms and with all provisions of
ERISA and the Internal Revenue Code of 1986, as amended (including rules and
regulations thereunder) (the “Code”), and other applicable laws and regulations.

 

(c)                                  True, correct and complete copies of the
following documents, with respect to each of the Company Plans, shall be
delivered or made available to Purchaser by Seller prior to the Due Diligence
End Date, if applicable: (i) all plans and related trust documents, and
amendments thereto; (ii) the two most recent Forms 5500, actuarial reports and
financial statements; (iii) the most recent Internal Revenue Service (“IRS”)
determination letter; (iv) summary plan descriptions; and (v) material written
communications of general application to employees or other participants
relating to the Company Plans.

 

(d)                                 No Company Plan is subject to Title IV of
ERISA or Section 412 of the Code.  AIIHC and each Subsidiary do not have and
have not had any obligation or liability, contingent or otherwise, under Title
IV of ERISA or Section 412 of the Code.  No Company Plan is a “multiemployer
plan,” as defined in Section 3(37) or 4001(a)(3) of ERISA (a “Multiemployer
Plan”), and neither AIIHC nor any Subsidiaries have incurred any liability
resulting from a complete or partial withdrawal from any Multiemployer Plan, nor
has any of them incurred any liability due to the termination or reorganization
of a Multiemployer Plan which has not been satisfied in full.

 

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(e)                                  Each Company Plan intended to qualify under
Section 401(a) of the Code has received a favorable determination letter from
the IRS regarding such qualification and, to the knowledge of Seller, AIIHC and
the Subsidiaries, nothing has occurred with respect to the operation of any such
Company Plan that would cause the revocation of such determination letter.

 

(f)                                    Except as disclosed in Schedule 2.09(g)
hereto, no Company Plan provides benefits, including without limitation death or
medical benefits (whether or not insured) beyond retirement or other termination
of service, except as may be required by Section 4980B of the Code or at the
sole expense of the participant or the participant’s beneficiary.  With respect
to each of the Company Plans, the provisions of Section 4980B(f) of the Code,
Sections 601-609 of ERISA and the provisions of any other similar local law have
been complied with in all material respects.

 

(g)                                 Except as disclosed in Schedule 2.09(g)
hereto, the consummation of the transactions contemplated by this Agreement will
not (i) entitle any current or former employee, officer or director of AIIHC or
the Subsidiaries to severance pay, unemployment compensation or any other
payment, (ii) accelerate the time of payment or vesting, or increase the amount
of compensation or benefits due any such employee, officer or director, or (iii)
cause any change in benefits provided under any Company Plan.

 

(h)                                 With respect to each Company Plan that is
funded wholly or partially through an insurance policy, neither AIIHC nor the
Subsidiaries have any liability under any such insurance policy in the nature of
a retroactive rate adjustment, loss sharing arrangement or other actual or
contingent liability arising wholly or partially out of events occurring prior
to the Closing.

 

(i)                                     There are no pending or, to the
knowledge of the Seller, AIIHC or the Subsidiaries, threatened claims by or on
behalf of any of the Company Plans, by any participant or beneficiary covered
under any such Company Plan or otherwise involving any such Company Plan (other
than routine claims for benefits).

 

(j)                                     No representations or communications,
oral or written, with respect to the participation, eligibility for benefits,
vesting, benefit accrual or coverage under any Company Plan have been made to
employees, officers, directors or agents (or any of their representatives or
beneficiaries) of AIIHC or the Subsidiaries which are not in accordance with the
terms and conditions of the Company Plans.

 

(k)                                  No leased employee (within the meaning of
Section 414(n) of the Code) performs (or during the preceding three (3) years
performed) services for AIIHC or any Subsidiary.  AIIHC and the Subsidiaries
have at all times been in compliance in all material respects with applicable
laws regarding the classification of employees and independent contractors.

 

SECTION 2.10                    TAXES.  EXCEPT AS SET FORTH IN SCHEDULE 2.10:

 

(a)                                  All Tax Returns (as hereinafter defined)
required to be filed on or before the Closing Date by or with respect to AIIHC
and each Subsidiary, including any consolidated,

 

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unitary, affiliated or combined Tax Return of which AIIHC or any Subsidiary is
or was a member, have been or will be timely filed (taking into account
permitted extensions) with the appropriate taxing authorities, and such Tax
Returns are or will be true, correct and complete in all material respects.

 

(b)                                 All Taxes (hereinafter defined), whether or
not reflected in Tax Returns as filed, due and payable by AIIHC or any
Subsidiary on or prior to the Closing Date have been timely and fully paid.  All
Taxes that AIIHC or any Subsidiary is or was required by applicable law to
withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper governmental authority, or other person. 
There is no waiver or tolling of any statute of limitations in effect with
respect to the payment of any Taxes, or the filing of any Tax Returns.  Neither
AIIHC nor any Subsidiary has agreed to, nor has there been agreed to on behalf
of AIIHC or any Subsidiary, any extension of time within which to file any Tax
Return which has not since been filed.

 

(c)                                  There are no Liens for Taxes upon any
assets of AIIHC or any Subsidiary, except liens for Taxes not yet due and
payable.

 

(d)                                 None of AIIHC or any of the Subsidiaries is
or ever has been a member of an “affiliated group” within the meaning of
Section 1504 of the Code or of any group that has filed a combined, consolidated
or unitary Tax Return.  Neither AIIHC nor any Subsidiary has any liability for
Taxes of any person (i) under Treasury Regulation section 1.1502-6 (or any
similar provision under state, local or foreign law), (ii) as a transferee or
successor, (iii) by contract or (iv) otherwise.

 

(e)                                  None of AIIHC or any of the Subsidiaries is
a party to or bound by any affiliated group consolidated return tax allocation
agreement, tax sharing agreement, tax indemnification agreement or any similar
arrangement or agreement.

 

(f)                                    Prior to the respective acquisitions of
AIIHC and the Subsidiaries by Arch Parent (or its Affiliates), to the knowledge
of Arch Parent, Seller, AIIHC or the Subsidiaries, no written claim has been
made by an authority in a jurisdiction where AIIHC or any Subsidiary does not
file Tax Returns that it is or may be subject to taxation by, or is required to
file a Tax Return in, that jurisdiction; subsequent to such respective
acquisitions, no written claim has been made by an authority in a jurisdiction
where AIIHC or any Subsidiary does not file Tax Returns that it is or may be
subject to taxation by, or is required to file a Tax Return in, that
jurisdiction.

 

(g)                                 AIIHC and each Subsidiary have made adequate
provisions on their financial statements for the payment of all Taxes not yet
due and payable.

 

(h)                                 No deficiencies for Taxes of AIIHC or any of
the Subsidiaries have been claimed, proposed or assessed in writing by any
taxing or governmental authority.  There are no pending or, to the knowledge of
Seller, AIIHC or the Subsidiaries, threatened audits, examinations,
investigations or proceedings in respect of Taxes or Tax Returns of AIIHC or any
of the Subsidiaries.  Seller will deliver or make available to Purchaser correct
and complete copies of all U.S. federal income Tax Returns and examination
reports to the extent they pertain to AIIHC and the Subsidiaries for open Tax
years or periods prior to the Due Diligence End

 

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Date.  Schedule 2.10(h) lists all state and foreign Tax Returns filed with
respect to AIIHC and any of the Subsidiaries for taxable periods ended after
December 31, 2001.

 

(i)                                     None of AIIHC or any Subsidiary is
required to include in income any adjustment pursuant to Section 481(a) of the
Code  (or any comparable provision of state, local or foreign law) by reason of
a voluntary change in method of accounting, and no taxing authority has proposed
in writing any such adjustment or change in method of accounting.

 

(j)                                     Neither AIIHC nor any Subsidiary is a
party to any agreement, contract or arrangement that would result in the payment
of any “excess parachute payments” within the meaning of Section 280G of the
Code (or any comparable provision of state, local or foreign law).

 

(k)                                  Each of AIIHC and any Subsidiary taxed
pursuant to Sections 831 through 848 of the Code has complied, in all material
respects, with the rules and regulations promulgated thereunder in computing its
Taxes and preparing its Tax Returns, including, for the years applicable,
Treasury Regulation Section 1.832-4, and to the extent compliance with such
authority required AIIHC or any Subsidiary to change its method of determining
premiums earned, such company followed the automatic change in accounting
provisions of Revenue Procedure 99-49 in the first taxable year beginning after
December 31, 1999.

 

(l)                                     Neither AIIHC nor any of the
Subsidiaries is a “United States real property holding corporation” (a “USRPHC”)
within the meaning of Section 897 of the Code nor has been a USRPHC at any time
during the 5-year period ending on the Closing Date.

 

(m)                               As used in this Agreement, “Taxes” (or “Tax”
as the context may require) means all taxes, charges, fees, levies, or other
like assessments, including, without limitation, income, gross receipts, surplus
lines, ad valorem, value added, premium, excise, real property, personal
property, windfall profit, sales, use, transfer, license, withholding,
employment, payroll, unemployment insurance, social security, and franchise
taxes imposed by any governmental authority; and shall include any interest,
fines, penalties, assessments or additions to tax thereon.

 

(n)                                 As used in this Agreement, “Tax Returns”
means any return, declaration, report, claim for refund, or information return
or statement relating to Taxes, including any schedule or attachment thereto,
and including any amendment thereof.

 

SECTION 2.11                    LITIGATION; THIRD PARTY CLAIMS.  EXCEPT AS
DISCLOSED IN SCHEDULE 2.11(A), THERE IS NO LITIGATION, INVESTIGATION, PROCEEDING
OR OTHER CLAIM PENDING OR, TO THE KNOWLEDGE OF SELLER, AIIHC OR THE
SUBSIDIARIES, THREATENED INVOLVING AIIHC OR ANY OF ITS ASSETS OR ANY SUBSIDIARY
OR ANY OF ITS ASSETS OTHER THAN ORDINARY COURSE COVERAGE DISPUTES UNDER THE
INSURANCE POLICIES OF AMERICAN INDEPENDENT INSURANCE AND PSIC.  EXCEPT AS
DISCLOSED IN SCHEDULE 2.11(B), NONE OF AIIHC OR ANY OF THE SUBSIDIARIES IS
SUBJECT TO ANY OUTSTANDING ORDERS, WRITS, INJUNCTIONS OR DECREES OF ANY COURT,
GOVERNMENTAL AGENCY OR ARBITRATION TRIBUNAL.  THERE IS NO LITIGATION,
INVESTIGATION OR PROCEEDING PENDING OR, TO THE KNOWLEDGE OF ARCH PARENT, SELLER,
AIIHC OR THE SUBSIDIARIES, THREATENED INVOLVING ARCH PARENT, SELLER, AIIHC OR
ANY SUBSIDIARY THAT WOULD REASONABLY BE EXPECTED TO PREVENT THE CONSUMMATION OF
THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

 

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SECTION 2.12                    CONDUCT OF BUSINESS AND ABSENCE OF CHANGES. 
EXCEPT AS DISCLOSED IN SCHEDULE 2.12, SINCE DECEMBER 31, 2003, AIIHC AND EACH
SUBSIDIARY HAS CONDUCTED THE BUSINESS IN WHICH IT IS ENGAGED (COLLECTIVELY, THE
“BUSINESS”) ONLY IN THE REGULAR AND ORDINARY COURSE AND HAS NOT (A) UNDERGONE,
AND NO EVENT OR EVENTS HAVE OCCURRED WHICH, INDIVIDUALLY OR IN THE AGGREGATE,
ARE REASONABLY LIKELY TO RESULT IN, A MATERIAL ADVERSE CHANGE (AS HEREINAFTER
DEFINED) IN ITS CONDITION (FINANCIAL OR OTHERWISE), ASSETS, LIABILITIES,
BUSINESS OR OPERATIONS, (B) INCURRED ANY INDEBTEDNESS FOR BORROWED MONEY OTHER
THAN TRADE PAYABLES IN THE ORDINARY COURSE OF BUSINESS OR ISSUED OR SOLD ANY
DEBT SECURITIES, (C) INSTITUTED ANY INCREASE IN THE COMPENSATION OR BONUSES
PAYABLE OR TO BECOME PAYABLE TO ANY OF ITS OFFICERS OR EMPLOYEES, OTHER THAN
REGULARLY SCHEDULED INCREASES IN COMPENSATION IN THE ORDINARY COURSE OF
BUSINESS, OR ANY CHANGES IN ITS PERSONNEL POLICIES OR EMPLOYEE BENEFITS, (D)
CHANGED ANY METHOD OF ACCOUNTING OR ACCOUNTING PRACTICE OR POLICY (INCLUDING ANY
RESERVING METHOD, PRACTICE OR POLICY) OR (E) PAID ANY DIVIDENDS, RETURNS OF
CAPITAL OR MADE ANY OTHER DISTRIBUTIONS TO SELLER OR ARC.

 

SECTION 2.13                    COMPLIANCE WITH LAWS.

 

(a)                                  AIIHC and the Subsidiaries have complied
with all statutes, laws, ordinances, rules, regulations, judgments, orders,
decrees, pronouncements, bulletins, market conduct recommendations, writs,
injunctions, directives, judgments, settlement agreements, principles of common
law, constitutions and treaties enacted, promulgated, issued, enforced or
entered by any court, tribunal or governmental agency applicable to AIIHC or any
of the Subsidiaries or any of their respective assets or the Business
(collectively, the “Applicable Laws”), and all governmental licenses (including,
without limitation, licenses to transact the businesses of insurance,
reinsurance, third party administration, and insurance agency), permits,
authorizations, approvals and non-disapprovals, registrations, authorizations,
qualifications and filings with and under all federal, state, local or foreign
laws and governmental agencies necessary for the conduct of the Business
(collectively, the “Permits”) have been duly and lawfully obtained and are in
full force and effect, except where the failure to comply with the Applicable
Laws or obtain the Permits would not, individually or in the aggregate, have a
Material Adverse Effect.  All the Permits are set forth on Schedule 2.13.  The
Business has been and is being conducted in compliance, in all material
respects, with all Permits.  There is no proceeding or investigation pending or,
to the knowledge of the Seller, AIIHC or the Subsidiaries, threatened which
would reasonably be expected to lead to the revocation, amendment, failure to
renew, limitation, modification, suspension or restriction of any Permit.  None
of AIIHC or any Subsidiary is operating under any agreement or understanding
with any governmental agency which in any way restricts its authority to conduct
its business or requires any of AIIHC or any Subsidiary to take, or refrain from
taking, any action relating to the conduct of its business otherwise permitted
by the Applicable Laws.  There is no pending or, to the knowledge of the Seller,
AIIHC or the Subsidiaries, threatened charge by any governmental agency that any
Subsidiary has violated, nor any pending or, to the knowledge of the Seller,
AIIHC or the Subsidiaries, threatened investigation by any governmental agency
with respect to possible violations of, any Applicable Laws where such
violations are, individually or in the aggregate, reasonably likely to have a
material adverse effect on any Subsidiary.  Each Subsidiary has filed and will
file all notices and reports required to be filed with any governmental agency,
except for such notices and reports as to which the failure to file would not be
reasonably likely to have a material adverse effect on such company in the
jurisdiction in which such notice or report was required to be filed.

 

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(b)                                 Each Subsidiary and, to the knowledge of the
Seller, AIIHC or the Subsidiaries, its agents have marketed, sold and issued
insurance products in compliance, in all material respects, with Applicable Laws
applicable to the business of such Subsidiary, respectively, and in the
respective jurisdictions in which such products have been sold, including,
without limitation, in compliance in all material respects with all applicable
prohibitions against “redlining” or withdrawal of business lines and all
applicable requirements relating to disclosures to customers and insureds.

 

(c)                                  Except as set forth in Schedule 2.13(c),
all deficiencies or violations in all reports (including, but not limited to,
draft reports) of examinations of the affairs of each of PSIC and American
Independent Insurance with respect to its business (including, but not limited
to, market conduct examinations) issued by any governmental agency have been
resolved in all material respects.

 

(d)                                 Except as disclosed in Schedule 2.13(d),
neither PSIC nor American Independent Insurance is a party to any contract with
or other undertaking to, or subject to any order by, or the recipient of any
supervisory letter or other written communication of any kind from, any
governmental agency which relates to its reserve adequacy or its claims,
marketing, sales, trade, or underwriting practices or policies in respect of its
business, nor has either been notified by any governmental agency that it is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, contract, undertaking, letter or other
written communication.

 

(e)                                  No Subsidiary conducts any insurance
business in any jurisdiction other than the jurisdiction or jurisdictions in
which it is licensed to engage in such activity.

 

SECTION 2.14                    ABSENCE OF UNDISCLOSED LIABILITIES.  EXCEPT (A)
AS DISCLOSED ON SCHEDULE 2.14, (B) AS AND TO THE EXTENT DISCLOSED ON ANY BALANCE
SHEET DATED AS OF DECEMBER 31, 2003 INCLUDED IN THE FINANCIAL STATEMENTS, OR (C)
AS INCURRED IN THE ORDINARY COURSE OF THE CONDUCT OF THE BUSINESS SINCE THE DATE
OF ANY SUCH BALANCE SHEET, THERE EXIST NO MATERIAL LIABILITIES OR MATERIAL
OBLIGATIONS (WHETHER ABSOLUTE, CONTINGENT OR OTHERWISE) IN RESPECT OF THE
BUSINESS OR THE ASSETS OF AIIHC OR ANY SUBSIDIARY.

 

SECTION 2.15                    TITLE TO ASSETS.  EACH OF AIIHC AND THE
SUBSIDIARIES HAS VALID AND LEGAL TITLE TO ALL OF THE ASSETS AND PROPERTIES WHICH
SUCH PARTY PURPORTS TO OWN (INCLUDING, WITHOUT LIMITATION, THOSE REFLECTED IN
THE 2003 ANNUAL FINANCIAL STATEMENTS, BUT EXCLUDING ANY SUCH ASSETS AND
PROPERTIES SOLD, CONSUMED, OR OTHERWISE DISPOSED OF SINCE THE DATE OF THE 2003
ANNUAL FINANCIAL STATEMENTS) FREE AND CLEAR OF ALL LIENS, EXCEPT (A) AS SET
FORTH ON SCHEDULE 2.15, (B) LIENS FOR TAXES NOT YET DUE AND PAYABLE OR WHICH ARE
BEING CONTESTED IN GOOD FAITH BY APPROPRIATE PROCEEDINGS AND (C) MINOR
IMPERFECTIONS OF TITLE, NONE OF WHICH, INDIVIDUALLY OR IN THE AGGREGATE,
MATERIALLY DETRACTS FROM THE VALUE OF THE AFFECTED PROPERTIES, OR MATERIALLY
IMPAIRS THE USE OF THE AFFECTED PROPERTIES IN THE MANNER SUCH PROPERTIES
CURRENTLY ARE BEING USED OR MATERIALLY IMPAIRS THE OPERATIONS OF SUCH PARTY. 
EXCEPT AS SET FORTH ON SCHEDULE 2.15, AIIHC AND THE SUBSIDIARIES HAVE GOOD AND
VALID TITLE OR LEGAL RIGHT TO ALL MATERIAL PROPERTIES AND ASSETS, AND A VALID
LEASEHOLD INTEREST IN ALL LEASED PROPERTY, NECESSARY OR USED IN THE OPERATION OF
THE BUSINESS, INCLUDING THOSE REFLECTED IN THE 2003 ANNUAL FINANCIAL STATEMENTS
(OTHER THAN ANY SUCH ASSETS AND PROPERTIES SOLD, CONSUMED, OR OTHERWISE DISPOSED
OF SINCE THE DATE OF THE 2003 ANNUAL

 

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FINANCIAL STATEMENTS), AND SUCH PROPERTIES, ASSETS AND LEASEHOLD INTERESTS ARE
ADEQUATE FOR THE PURPOSES FOR WHICH THEY ARE PRESENTLY USED IN THE CONDUCT OF
SUCH BUSINESS.

 

SECTION 2.16                    TRANSACTIONS WITH RELATED PARTIES.  EXCEPT AS
DISCLOSED ON SCHEDULE 2.16 HERETO:

 

(a)                                  Since (1) February 28, 2001, with respect
to AIIHC and its Subsidiaries on the date hereof, and (2) November 30, 2002,
with respect to PSIC and Anson, none of Seller or other Affiliate of Seller, has
or has had:

 

(I)  BORROWED MONEY FROM OR LOANED MONEY TO AIIHC OR ANY OF THE SUBSIDIARIES FOR
THE BENEFIT OF THEIR RESPECTIVE BUSINESSES;

 

(II)  ANY CONTRACTUAL OR OTHER CLAIMS, EXPRESS OR IMPLIED, OR OF ANY KIND
WHATSOEVER AGAINST AIIHC OR ANY OF THE SUBSIDIARIES;

 

(III)  ANY INTEREST IN ANY PROPERTY OR ASSETS USED BY AIIHC OR ANY OF THE
SUBSIDIARIES; OR

 

(IV)  ENGAGED IN ANY OTHER TRANSACTION WITH AIIHC OR ANY OF THE SUBSIDIARIES.

 

Each of the foregoing transactions has been timely reported to and approved by
any applicable state insurance departments as, and to the extent, required by
applicable law, except for any deficiencies as would not have a Material Adverse
Effect.

 

(b)                                 There are no amounts due or otherwise owed
by AIIHC or any of the Subsidiaries to Seller or any Affiliate of Seller (other
than AIIHC and the Subsidiaries).

 

(c)                                  There are no amounts due or otherwise owed
by Seller or any Affiliate of Seller (other than AIIHC or any of the
Subsidiaries) to AIIHC or any of the Subsidiaries.

 

(d)                                 American Independent Services has done no
business with any insurance company other than American Independent Insurance or
PSIC or any agency other than C&L or Anson.

 

SECTION 2.17                    INTELLECTUAL PROPERTY.

 

(a)                                  Except as disclosed on Schedule 2.17
hereto, AIIHC and the Subsidiaries own or have a right to use (which right to
use shall continue in the same manner after the Closing Date as prior to the
Closing Date) each trademark, trade name, patent, service mark, brand mark,
brand name, domain name, right of publicity or privacy, database, copyright and
other intellectual property owned or used in connection with the operation of
the Business, including any application or registrations thereof, and each
license or other contract relating thereto (collectively, the “Intellectual
Property”), free and clear of any and all Liens.  Schedule 2.17 sets forth a
complete list of (i) all applied-for and registered Intellectual Property owned
by AIIHC and the Subsidiaries (including for each such application or
registration the record owner, the jurisdiction and the registration and
application numbers) and (ii) all other material

 

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Intellectual Property and with regard to the foregoing (ii) further indicates
whether such Intellectual Property is owned by or licensed to AIIHC or any
Subsidiary, and with regard to the foregoing (i) and (ii) indicates whether such
Intellectual Property is shared with Seller, any Affiliate of Seller, or any
third party.  The use of the Intellectual Property by AIIHC and the Subsidiaries
does not conflict with, infringe upon, violate or interfere with or constitute a
misappropriation of any right, title, interest or goodwill, including, without
limitation, any intellectual property right, trademark, trade name, patent,
service mark, brand mark, brand name, database or copyright of any other person,
and, to the knowledge of the Seller, AIIHC and the Subsidiaries, no person is
challenging, infringing on or otherwise violating the right of AIIHC or any
Subsidiary with respect to any of its respective Intellectual Property.  Except
as disclosed on Schedule 2.17 hereto, AIIHC and the Subsidiaries own or have
valid and enforceable licenses or other rights to use, free and clear of any and
all Liens, all software used in connection with the operation of the Business,
the use of such software by AIIHC and the Subsidiaries does not infringe on or
otherwise violate the rights of any person, and, to the knowledge of Seller,
AIIHC and the Subsidiaries, no person is challenging, infringing on or otherwise
violating the right of AIIHC or any Subsidiary with respect to any such software
used by AIIHC and the Subsidiaries.

 

(b)                                 Except as disclosed on Schedule 2.17 hereto,
there are no actions that must be taken by the Seller, AIIHC or any Subsidiary
within 90 days from the date hereof, including the payment of any registration,
maintenance, or renewal fees or the filing with the United States Patent and
Trademark Office or such other appropriate U.S. or foreign office or similar
administrative agency, documents, applications or certificates for the purposes
of obtaining, maintaining, perfecting, preserving, or renewing any rights in the
registered or applied-for Intellectual Property.

 

(c)                                  No Intellectual Property is subject to any
outstanding decree, order, judgment, settlement agreement, or stipulation that
restricts in any manner the use, transfer or licensing thereof by the Seller,
AIIHC or any Subsidiary.

 

(d)                                 The Intellectual Property is sufficient for
the continued conduct of the Business after the Closing Date in the same manner
as such Business was conducted prior to the Closing Date.

 

(e)                                  Seller (with respect to the Business),
AIIHC and each Subsidiary has at all times (i) disclosed its personal data
collection and use policy on its websites (as applicable), and (ii) complied, in
all material respects, with such policy.  Neither this Agreement nor the
consummation of the transactions contemplated hereby will violate any such
personal data policy or any other applicable privacy or personal data laws.

 

SECTION 2.18                    INSURANCE.

 

(a)                                  The most recently completed reports of
examination of PSIC and American Independent Insurance conducted by any
governmental agency or authority was for the periods set forth in Schedule 2.18,
and each of PSIC and American Independent Insurance will furnish Purchaser with
a complete and correct copy of such reports prior to the Due Diligence End
Date.  Except as set forth on Schedule 2.18, since the date of such
examinations, neither PSIC, nor American Independent Insurance has been the
subject of further examination

 

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by any insurance governmental agency or authority, and neither PSIC, nor
American Independent Insurance is currently undergoing examination by any
insurance governmental agency or authority, and Seller shall notify Purchaser in
writing of any such examination that shall have commenced after the date hereof.

 

(b)                                 All outstanding insurance coverage issued by
each of PSIC and American Independent Insurance is, in all material respects, to
the extent required by applicable law, on forms and at rates approved by the
insurance regulatory authority of the jurisdiction where issued or has been
filed with and not objected to by such authority within the period provided for
objection.

 

(c)                                  Each of PSIC and American Independent
Insurance will provide to the Purchaser all forms of Insurance Contracts (as
hereinafter defined) used by it as of June 30, 2003 prior to the Due Diligence
End Date.  Since June 30, 2003, no forms of Insurance Contracts written by
either PSIC or American Independent Insurance have been amended and no sales of
any new forms of Insurance Contracts have been commenced, other than changes to
forms, which changes are not, in the aggregate, material.  “Insurance Contract”
shall mean any Contract of insurance including all applications, supplements,
binders, endorsements, riders and ancillary agreements in connection therewith
and including, without limitation, reinsurance contracts issued by PSIC or
American Independent Insurance.

 

(d)                                 To the knowledge of Seller, AIIHC and the
Subsidiaries, (i) each insurance agent or broker, at the time such agent or
broker wrote, sold or produced business for either PSIC or American Independent
Insurance, was duly licensed as an insurance agent or broker for the type of
business written, sold or produced by such insurance agent or broker in the
particular jurisdiction in which such agent or broker wrote, sold or produced
such business for either PSIC or American Independent Insurance, except for such
failures to be so licensed that would not, in the aggregate, have a material
adverse effect on either PSIC or American Independent Insurance and (ii) no such
insurance agent or broker has violated or has taken any action that, with notice
or lapse of time or both, would have violated any law except for such violations
as would not have a material adverse effect on either PSIC or American
Independent Insurance.

 

SECTION 2.19                    EMPLOYEE RELATIONS.  EXCEPT AS DISCLOSED ON
SCHEDULE 2.19 HERETO:

 

(a)                                  Neither AIIHC nor any of the Subsidiaries
is:  (i) a party to, or otherwise bound by, any labor agreement, collective
bargaining agreement, or any other labor-related agreement or arrangement with
any labor union, labor organization or works council; or (ii) a party to,
involved in or, to the knowledge of Seller, AIIHC or any of the Subsidiaries,
threatened by, any labor dispute, arbitration, grievance, or unfair labor
practice charge.  No employees of AIIHC or any of the Subsidiaries are
represented by any labor organization with respect to their employment with
AIIHC or any of the Subsidiaries.

 

(b)                                 No labor union, labor organization, works
council, or group of employees of AIIHC or any of the Subsidiaries has made a
pending demand for recognition or certification, and there are no representation
or certification proceedings or petitions seeking a representation

 

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proceeding presently pending or threatened in writing to be brought or filed
with the National Labor Relations Board or any other labor relations tribunal or
authority.  None of Seller, AIIHC or any of the Subsidiaries has (i) any
knowledge of any labor union organizing activities with respect to any employees
of AIIHC or any of the Subsidiaries; or (ii) experienced any labor disputes,
strikes or work stoppages during the last three (3) years.

 

(c)                                  AIIHC and each of the Subsidiaries are in
material compliance with all applicable laws respecting employment and
employment practices, including, without limitation, all laws respecting terms
and conditions of employment, health and safety, wages and hours, child labor,
immigration, employment discrimination, disability rights or benefits, equal
opportunity, affirmative action, workers’ compensation, labor relations,
employee leave issues and unemployment insurance.

 

(d)                                 Neither AIIHC nor any of the Subsidiaries is
delinquent in material payments to any employees or former employees for any
services or amounts required to be reimbursed or otherwise paid.

 

(e)                                  Neither AIIHC nor any of the Subsidiaries
has received (i) notice of any charge or complaint with respect to or relating
to them pending before the Equal Employment Opportunity Commission or any other
governmental authority responsible for the prevention of unlawful employment
practices, (ii) notice of the intent of any governmental authority responsible
for the enforcement of labor, employment, wages and hours of work, child labor,
immigration, or occupational safety and health laws to conduct an investigation
with respect to or relating to them or notice that such investigation is in
progress, or (iii) notice of any charge, complaint, lawsuit or other proceeding
pending or threatened in any forum by or on behalf of any present or former
employee of AIIHG or any of the Subsidiaries, or job applicant for employment or
classes of the foregoing, or by any governmental authority, alleging breach of
any express or implied contract of employment, any applicable law governing
employment or the termination thereof or other discriminatory or tortuous
conduct in connection with the employment relationship, including, without
limitation, allegations on account of or for (a) overtime pay (b) wages or
salary (c) any amount of vacation pay or pay in lieu of vacation time off, other
than vacation time off or pay in lieu thereof earned in or in respect of the
current fiscal year, (d) any amount of severance pay or similar benefits, (e)
unemployment insurance benefits, (f) workers’ compensation or disability
benefits, (g) any violation of any statute, ordinance, order, rule or regulation
relating to plant closings, employment terminations or layoffs, including but
not limited to the Workers Adjustment and Retraining Act (the “WARN Act”), (h)
any violation of any material statute, ordinance, order, rule or regulation
relating to employee “whistleblower” or “right-to-know” rights and protections,
(i) any violation of any material regulation relating to minimum wages or
maximum hours of work, or (j) occupational safety and health.

 

(f)                                    AIIHC and each of the Subsidiaries are
and have been in compliance with all notice and other requirements under the
WARN Act and any similar foreign, state or local law relating to plant closings
and layoffs.

 

(g)                                 The execution of this Agreement and the
consummation of the transactions contemplated by this Agreement will not result
in any breach or other violation of

 

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any collective bargaining agreement, employment agreement, consulting agreement
or any other labor-related agreement to which AIIHC or any of the Subsidiaries
is a party.

 

SECTION 2.20                    COMPENSATION ARRANGEMENTS; BANK ACCOUNTS;
OFFICERS AND DIRECTORS.  SCHEDULE 2.20 SETS FORTH (A) THE NAMES, TITLES AND
CURRENT ANNUAL SALARY, INCLUDING ANY BONUS, IF APPLICABLE, OF ALL PRESENT
DIRECTORS, OFFICERS, EMPLOYEES, CONSULTANTS AND AGENTS OF AIIHC AND EACH
SUBSIDIARY WHOSE RATE OF ANNUAL COMPENSATION, INCLUDING ANY PROMISED OR
CUSTOMARY BONUS, EQUALS OR EXCEEDS $150,000, TOGETHER WITH A STATEMENT OF THE
FULL AMOUNT OF ALL REMUNERATION PAID BY SELLER, AIIHC OR ANY SUCH SUBSIDIARY TO
EACH SUCH PERSON AND TO ANY DIRECTOR OF AIIHC OR ANY OF THE SUBSIDIARIES, DURING
THE TWELVE (12)-MONTH PERIOD PRECEDING THE DATE HEREOF, (B) THE NAME OF EACH
BANK IN WHICH AIIHC AND EACH SUBSIDIARY HAS AN ACCOUNT OR SAFE DEPOSIT BOX, THE
IDENTIFYING NUMBERS OR SYMBOLS THEREOF AND THE NAMES OF ALL PERSONS AUTHORIZED
TO DRAW THEREON OR TO HAVE ACCESS THERETO, AND EACH CREDIT CARD ISSUED TO AIIHC
OR ANY SUBSIDIARY OR ANY OTHER PERSON FOR WHICH AIIHC OR ANY SUBSIDIARY IS
RESPONSIBLE FOR CHARGES MADE THEREON, THE ISSUER OF SUCH CREDIT CARDS, THE
IDENTIFYING NUMBERS OR SYMBOLS THEREOF AND THE NAMES OF ALL PERSONS TO WHICH
SUCH CARDS HAVE BEEN ISSUED OR TO WHOM ACCESS TO SUCH CARDS HAS BEEN GIVEN AND
(C) THE NAMES AND TITLES OF ALL DIRECTORS AND OFFICERS OF AIIHC AND EACH OF THE
SUBSIDIARIES AND OF EACH TRUSTEE, FIDUCIARY OR PLAN ADMINISTRATORS OF EACH
EMPLOYEE BENEFIT PLAN OF AIIHC AND EACH SUBSIDIARY.

 

SECTION 2.21                    OPERATIONS INSURANCE. SCHEDULE 2.21 CONTAINS A
TRUE AND COMPLETE LIST AND DESCRIPTION OF ALL LIABILITY, PROPERTY, WORKERS
COMPENSATION, DIRECTORS AND OFFICERS LIABILITY, AND OTHER SIMILAR INSURANCE
POLICIES OR AGREEMENTS THAT INSURE THE BUSINESS, OPERATIONS, OR AFFAIRS OF AIIHC
AND EACH OF THE SUBSIDIARIES OR AFFECT OR RELATE TO THE OWNERSHIP, USE, OR
OPERATIONS OF ANY OF THE ASSETS OR PROPERTIES OF AIIHC OR ANY OF THE
SUBSIDIARIES. EXCLUDING INSURANCE POLICIES THAT HAVE EXPIRED AND BEEN REPLACED
BY AIIHC OR A SUBSIDIARY IN THE ORDINARY COURSE OF BUSINESS, NO INSURANCE POLICY
HAS BEEN CANCELED WITHIN THE LAST YEAR EXCEPT AS DISCLOSED IN SCHEDULE 2.21,
AND, TO THE KNOWLEDGE OF SELLER, AIIHC AND EACH OF THE SUBSIDIARIES, NO THREAT
HAS BEEN MADE TO CANCEL ANY INSURANCE POLICY OF AIIHC OR ANY OF THE SUBSIDIARIES
DURING SUCH PERIOD. EXCEPT AS DISCLOSED IN SCHEDULE 2.21, ALL SUCH INSURANCE
WILL REMAIN IN FULL FORCE AND EFFECT WITH RESPECT TO PERIODS BEFORE AND THROUGH
THE CLOSING. NO EVENT HAS OCCURRED, INCLUDING, WITHOUT LIMITATION, THE FAILURE
BY AIIHC OR ANY OF THE SUBSIDIARIES TO GIVE ANY NOTICE OR INFORMATION OR AIIHC
OR ANY OF THE SUBSIDIARIES GIVING ANY INACCURATE OR ERRONEOUS NOTICE OR
INFORMATION, WHICH LIMITS OR IMPAIRS THE RIGHTS OF SUCH PARTY UNDER ANY SUCH
INSURANCE POLICIES.

 

SECTION 2.22                    INVESTMENT PORTFOLIO AND OTHER ASSETS. AIIHC AND
EACH OF THE SUBSIDIARIES OWNS AN INVESTMENT PORTFOLIO ACQUIRED IN THE ORDINARY
COURSE OF BUSINESS, AND A TRUE AND COMPLETE LIST OF THE SECURITIES AND OTHER
INVESTMENTS IN SUCH INVESTMENT PORTFOLIO, AS OF MARCH 31, 2004 WITH RESPECT TO
MORTGAGE LOANS AND DEBT AND EQUITY SECURITIES AND OTHER INVESTMENTS, WITH TRUE
AND CORRECT INFORMATION INCLUDED THEREON AS TO THE COST OF EACH SUCH INVESTMENT
AND THE MARKET VALUE THEREOF AS OF SUCH DATE, IS LISTED IN SCHEDULE 2.22. EXCEPT
AS OTHERWISE SET FORTH IN SCHEDULE 2.22, (I) NONE OF THE INVESTMENTS INCLUDED IN
SUCH INVESTMENT PORTFOLIO IS IN DEFAULT IN THE PAYMENT OF PRINCIPAL OR INTEREST
OR DIVIDENDS OR IMPAIRED TO ANY EXTENT, (II) ALL INVESTMENTS INCLUDED IN SUCH
INVESTMENT PORTFOLIO COMPLY WITH ALL MATERIAL INSURANCE LAWS AND REGULATIONS OF
EACH OF THE STATES TO WHICH AIIHC AND EACH OF THE SUBSIDIARIES IS SUBJECT
RELATING THERETO, (III) SUCH INVESTMENTS CONSTITUTE ALL OF THE INVESTMENTS OR
HOLDINGS (INCLUDING LOANS TO AGENCIES) OF AIIHC AND EACH OF THE SUBSIDIARIES
OTHER THAN ANY DISCLOSED IN

 

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SCHEDULE 2.22 AND (IV) AIIHC OR THE SUBSIDIARIES, AS THE CASE MAY BE, HAS LEGAL
AND VALID TITLE TO SUCH INVESTMENTS, FREE AND CLEAR OF ALL LIENS.

 

SECTION 2.23                    REINSURANCE AGREEMENTS.  SCHEDULE 2.23 IS A TRUE
AND COMPLETE LIST OF ALL REINSURANCE TREATIES AND CONTRACTS APPLICABLE TO AIIHC
OR ANY OF THE SUBSIDIARIES (WHETHER AS CEDING INSURER OR ASSUMING REINSURER)
(INDIVIDUALLY, AN “EXISTING REINSURANCE AGREEMENT” AND COLLECTIVELY, THE
“EXISTING REINSURANCE AGREEMENTS”), COPIES OF WHICH SHALL BE DELIVERED OR MADE
AVAILABLE TO PURCHASER PRIOR TO THE DUE DILIGENCE END DATE.  EACH OF THE
EXISTING REINSURANCE AGREEMENTS IS VALID AND BINDING IN ALL MATERIAL RESPECTS IN
ACCORDANCE WITH ITS TERMS AND IS IN FULL FORCE AND EFFECT.  NONE OF THE EXISTING
REINSURANCE AGREEMENTS WILL TERMINATE BECAUSE OF A CHANGE IN CONTROL OF AIIHC OR
ANY OF THE SUBSIDIARIES, OR OTHERWISE AS A RESULT OF A TRANSACTION CONTEMPLATED
HEREBY.  NO OTHER PARTY TO ANY EXISTING REINSURANCE AGREEMENT HAS GIVEN NOTICE
TO AIIHC OR ANY OF THE SUBSIDIARIES THAT INTENDS TO TERMINATE OR CANCEL ANY SUCH
EXISTING REINSURANCE AGREEMENT.  NEITHER SELLER, AIIHC NOR ANY SUBSIDIARY, NOR,
TO THE KNOWLEDGE OF THE SELLER, AIIHC OR THE SUBSIDIARIES, ANY OTHER PARTY TO AN
EXISTING REINSURANCE AGREEMENT, IS IN DEFAULT IN ANY MATERIAL RESPECT AS TO ANY
PROVISION THEREOF.  EXCEPT FOR RESERVES FOR COLLECTIBILITY UNDER EXISTING
REINSURANCE AGREEMENTS IDENTIFIED ON SCHEDULE 2.23, AIIHC AND EACH OF THE
SUBSIDIARIES THAT HAS CEDED REINSURANCE PURSUANT TO ANY SUCH EXISTING
REINSURANCE AGREEMENT IS ENTITLED TO TAKE FULL CREDIT IN ITS FINANCIAL
STATEMENTS FOR ALL AMOUNTS RECOVERABLE WITH SUCH CREDIT ACCOUNTED FOR (I)
PURSUANT TO SAP, AS A REDUCTION OF SUCH PARTY’S LOSS RESERVES, AND (II) PURSUANT
TO GAAP, AS A REINSURANCE RECOVERABLE ASSET.

 

SECTION 2.24                    RESERVED

 

SECTION 2.25                    PRODUCERS.  SCHEDULE 2.25(A) LISTS EACH PERSON
WRITING, SELLING OR PRODUCING, EITHER DIRECTLY OR THROUGH REINSURANCE ASSUMED,
INSURANCE CONTRACTS FOR THE BUSINESS THAT IN THE AGGREGATE ACCOUNTED FOR 1% OR
MORE OF THE PREMIUM INCOME OF THE BUSINESS FOR THE YEAR ENDED DECEMBER 31, 2003
OR FOR THE QUARTER ENDED MARCH 31, 2004.  EXCEPT AS DISCLOSED IN
SCHEDULE 2.25(B) HERETO, SINCE JANUARY 1, 2003, NO PERSONS WRITING, SELLING, OR
PRODUCING, EITHER DIRECTLY OR THROUGH REINSURANCE ASSUMED, INSURANCE CONTRACTS
FOR THE BUSINESS, THAT INDIVIDUALLY OR IN THE AGGREGATE ACCOUNTED FOR 10% OR
MORE OF THE PREMIUM INCOME OF THE BUSINESS FOR THE YEAR ENDED DECEMBER 31, 2003,
HAVE TERMINATED OR, TO THE KNOWLEDGE OF THE SELLER, AIIHC OR THE SUBSIDIARIES,
THREATENED TO TERMINATE ITS RELATIONSHIP WITH PSIC OR AMERICAN INDEPENDENT
INSURANCE.  EACH MATERIAL CONTRACT BETWEEN PSIC OR AMERICAN INDEPENDENT
INSURANCE AND A PRODUCER OF BUSINESS THEREFOR (A “PRODUCER AGREEMENT”) IS VALID,
BINDING AND IN FULL FORCE AND EFFECT IN ACCORDANCE WITH ITS TERMS, AND, TO THE
KNOWLEDGE OF THE SELLER, AIIHC OR THE SUBSIDIARIES, NONE OF THE PARTIES THERETO
IS IN DEFAULT WITH RESPECT TO ANY SUCH PRODUCER AGREEMENT, OTHER THAN FOR SUCH
FAILURES TO BE VALID, BINDING AND IN FULL FORCE AND EFFECT OR SUCH DEFAULTS
WHICH WOULD NOT, INDIVIDUALLY OR IN THE AGGREGATE, HAVE A MATERIAL ADVERSE
EFFECT ON ANY SUBSIDIARY.  NO PARTY TO ANY PRODUCER AGREEMENT HAS GIVEN NOTICE
TO PSIC OR AMERICAN INDEPENDENT INSURANCE THAT IT INTENDS TO TERMINATE OR CANCEL
ANY PRODUCER AGREEMENT AS A RESULT OF THE TRANSACTIONS CONTEMPLATED HEREBY.
SINCE JANUARY 1, 2003, TO THE KNOWLEDGE OF THE SELLER, AIIHC OR THE
SUBSIDIARIES, AT THE TIME PSIC OR AMERICAN INDEPENDENT INSURANCE PAID
COMMISSIONS TO ANY PRODUCER IN CONNECTION WITH THE SALE OF INSURANCE CONTRACTS,
EACH SUCH PRODUCER WAS DULY LICENSED IF REQUIRED UNDER APPLICABLE LAW IN THE
PARTICULAR JURISDICTION IN WHICH SUCH PRODUCER SOLD SUCH INSURANCE CONTRACTS FOR
SUCH COMPANY, EXCEPT WHERE IN SUCH CASES

 

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WHERE THERE WOULD NOT BE, INDIVIDUALLY OR IN THE AGGREGATE, A MATERIAL ADVERSE
EFFECT ON AMERICAN INDEPENDENT INSURANCE OR PSIC.

 

SECTION 2.26                    NO BROKER.  THERE IS NO INVESTMENT BANKER,
BROKER, FINDER OR OTHER INTERMEDIARY WHICH HAS BEEN RETAINED BY OR IS AUTHORIZED
TO ACT ON BEHALF OF SELLER, AIIHC OR ANY SUBSIDIARY WHICH MIGHT BE ENTITLED TO
ANY FEE OR COMMISSION FROM PURCHASER UPON CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT.

 

SECTION 2.27                    BOOKS AND RECORDS.  THE BOOKS AND RECORDS,
INCLUDING, BUT NOT LIMITED TO, DOCUMENTS, DATABASES, ADMINISTRATIVE RECORDS
CLAIM RECORDS, POLICY FILES, SALES RECORDS, LISTS OF AGENTS AND BROKERS, FILES
AND RECORDS RELATING TO REGULATORY MATTERS OR CORRESPONDENCES WITH REGULATORY
AUTHORITIES, REINSURANCE RECORDS, UNDERWRITING RECORDS, ACCOUNTING RECORDS AND
ALL OTHER RECORDS, DATA AND INFORMATION (IN WHATEVER FORM MAINTAINED), IN THE
POSSESSION OR CONTROL OF ARCH PARENT, SELLER, AIIHC OR THE SUBSIDIARIES RELATING
TO THE CONDUCT OF THE BUSINESS, ARE CONSISTENT WITH AND ACCURATELY REFLECT THE
BUSINESS IN ALL MATERIAL RESPECTS.

 

SECTION 2.28                    ENVIRONMENTAL MATTERS.  EXCEPT AS SET FORTH IN
SCHEDULE 2.28 HERETO:

 

(a)                                  There is no pending or, to the knowledge of
Seller, AIIHC and the Subsidiaries, threatened written claim, lawsuit,
administrative proceeding, order, judgment or decree against or involving
Seller, AIIHC or any Subsidiary under or pursuant to any Environmental Law (as
defined below).  Neither Seller, AIIHC or any Subsidiary has received written
notice from any person, including but not limited to any governmental authority,
alleging that Seller, AIIHC or any Subsidiary has been or is in violation or
potentially in violation of any applicable Environmental Law or otherwise may be
liable under any applicable Environmental Law, or is subject to investigation
pursuant to any Environmental Law.

 

(b)                                 The Seller and Arch Parent have delivered to
Purchaser true and complete copies of all environmental studies in their
possession made in the last five years relating to real property owned by any of
AIIHC or the Subsidiaries (together with all improvements or fixtures thereon,
the “Owned Real Property”), all real property in which any of AIIHC or the
Subsidiaries has a leasehold interest (the “Leased Real Property”) and any other
property or facility previously owned, operated or leased by the AIIHC or the
Subsidiaries.

 

(c)                                  None of Seller and Arch Parent has, and to
the knowledge of Arch Parent, Seller, AIIHC and the Subsidiaries, no other
person has, released, discharged, or otherwise disposed, of any Hazardous
Substances (as defined below) on, beneath or adjacent to the Owned Real
Property, Leased Real Property or any property formerly owned, operated or
leased by AIIHC or the Subsidiaries, except for releases of Hazardous Substances
that are not likely to result in a claim against AIIHC or the Subsidiaries or
are not likely to require any of them to conduct an environmental cleanup.

 

(d)                                 None of Seller, AIIHC or any Subsidiary has
entered into any agreement, including, without limitation, policies of
insurance, that would require them to pay to, reimburse, guarantee, pledge,
defend, indemnify or hold harmless any person from or against any liabilities or
costs arising out of or in connection with (i) generation, manufacturing, use,
transportation or

 

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disposal of Hazardous Substances, or otherwise arising in connection with or
under Environmental Laws and (ii) exposure to asbestos or asbestos containing
materials, or property damage allegedly caused by the presence of asbestos or
asbestos containing materials.

 

(e)                                  To the knowledge of Arch Parent, Seller,
AIIHC and the Subsidiaries, none of AIIHC or the Subsidiaries holds a security
interest in any property that is subject to a claim under applicable
Environmental Laws or at which there has been a release of Hazardous Substances
that is likely to result in an obligation to conduct an environmental cleanup.

 

(f)                                    For purposes of this Agreement, (i)
“Environmental Laws”  shall mean all foreign, federal, state and local laws
(including common law), regulations, rules, ordinances, orders, decrees, and
judgments relating to pollution or protection of the environment or human health
and safety, including, without limitation, laws relating to releases or
threatened releases of Hazardous Substances into the indoor or outdoor
environment (including, without limitation, ambient air, surface water,
groundwater, land, surface and subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, release,
transport or handling of Hazardous Substances and all laws and regulations with
regard to recordkeeping, notification, disclosure and reporting requirements
respecting Hazardous Substances, and all laws relating to endangered or
threatened species of fish, wildlife and plants and the management or use of
natural resources; and (ii) “Hazardous Substance”  shall mean (a) any
petrochemical or petroleum products, radioactive materials, asbestos, urea
formaldehyde foam insulation, transformers or other equipment that contain
dielectric fluid containing polychlorinated biphenyls, and radon gas; (b) any
chemicals, materials or substances defined as or included in the definition of
“hazardous substances,” “hazardous wastes,” “hazardous materials,” “restricted
hazardous materials,” “extremely hazardous substances,” “toxic substances,”
“contaminants” or “pollutants” or words of similar meaning and regulatory
effect; or (c) any other chemical, material or substance, exposure to which is
prohibited, limited, or regulated by any applicable Environmental Law.

 

SECTION 2.29                    THIRD PARTY PURCHASER.  SELLER HAS ENTERED INTO
A STOCK PURCHASE AGREEMENT, AS AMENDED, IN JANUARY 2004 (THE “THIRD PARTY
AGREEMENT”) WITH AN ENTITY (THE “THIRD PARTY”) RELATING TO THE SALE OF AIIHC AND
THE SUBSIDIARIES.  NEITHER THE THIRD PARTY AGREEMENT NOR ANY OTHER AGREEMENT
BETWEEN SELLER OR ANY OF ITS AFFILIATES AND THE THIRD PARTY OR ANY OF ITS
AFFILIATES PROHIBITS ARCH PARENT OR SELLER FROM ENTERING INTO THIS AGREEMENT. 
THE THIRD PARTY AGREEMENT MAY BE TERMINATED BY SELLER AT ANY TIME UPON THREE (3)
CALENDAR DAYS WRITTEN NOTICE FROM SELLER TO THE THIRD PARTY.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF PURCHASER

 

Purchaser hereby represents and warrants to Seller as follows:

 

SECTION 3.01                    CORPORATE ORGANIZATION; SUBSIDIARIES.  PURCHASER
IS A CORPORATION DULY ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE
LAWS OF THE STATE OF DELAWARE.

 

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COPIES OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS OF PURCHASER, WITH ALL
AMENDMENTS THERETO TO THE DATE HEREOF, HAVE BEEN FURNISHED TO SELLER OR THEIR
REPRESENTATIVES, AND SUCH COPIES ARE ACCURATE AND COMPLETE AS OF THE DATE
HEREOF.

 

SECTION 3.02                    QUALIFICATION TO DO BUSINESS.  PURCHASER HAS THE
REQUISITE CORPORATE POWER AND AUTHORITY AND ALL NECESSARY GOVERNMENTAL AUTHORITY
TO OWN, OPERATE OR LEASE THE PROPERTIES THAT IT PURPORTS TO OWN, OPERATE OR
LEASE AND TO CARRY ON ITS BUSINESS AS IT IS NOW BEING CONDUCTED, AND IS DULY
QUALIFIED TO DO BUSINESS AS A FOREIGN CORPORATION, AND IS IN GOOD STANDING, IN
EACH JURISDICTION WHERE THE CHARACTER OF ITS PROPERTIES OWNED, OPERATED OR
LEASED OR THE NATURE OF ITS ACTIVITIES MAKES SUCH QUALIFICATION NECESSARY,
EXCEPT ANY SUCH JURISDICTION WHERE THE FAILURE TO BE SO QUALIFIED AND IN GOOD
STANDINGS WOULD NOT BE REASONABLY EXPECTED TO PREVENT OR MATERIALLY DELAY THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

 

SECTION 3.03                    AUTHORIZATION AND VALIDITY OF AGREEMENT. 
PURCHASER HAS ALL REQUISITE CORPORATE POWER AND AUTHORITY TO ENTER INTO THIS
AGREEMENT TO CARRY OUT ITS OBLIGATIONS HEREUNDER AND TO CONSUMMATE THE
TRANSACTIONS CONTEMPLATED HEREBY.  THE EXECUTION AND DELIVERY OF THIS AGREEMENT
AND THE PERFORMANCE OF ITS OBLIGATIONS HEREUNDER HAVE BEEN DULY AUTHORIZED BY
ALL NECESSARY CORPORATE ACTION OF PURCHASER, AND SUBJECT TO THE RECEIPT OF
REGULATORY APPROVALS DESCRIBED ON SCHEDULE 2.06, NO OTHER PROCEEDINGS ON THE
PART OR IN RESPECT OF PURCHASER, IS NECESSARY TO AUTHORIZE SUCH EXECUTION,
DELIVERY AND PERFORMANCE.  THIS AGREEMENT HAS BEEN DULY EXECUTED BY PURCHASER
AND CONSTITUTES A VALID AND BINDING OBLIGATION OF PURCHASER, ENFORCEABLE AGAINST
PURCHASER IN ACCORDANCE WITH ITS TERMS, EXCEPT AS MAY BE LIMITED BY APPLICABLE
BANKRUPTCY, INSOLVENCY, MORATORIUM OR SIMILAR LAWS OF GENERAL APPLICATION
RELATING TO OR AFFECTING CREDITORS’ RIGHTS GENERALLY AND EXCEPT FOR THE
LIMITATIONS IMPOSED BY GENERAL PRINCIPLES OF EQUITY.

 

SECTION 3.04                    NON-CONTRAVENTION.  THE EXECUTION, DELIVERY AND
PERFORMANCE OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY WILL NOT
(I) RESULT IN A BREACH OF ANY OF THE TERMS OF, OR CONSTITUTE A VIOLATION OF OR
DEFAULT UNDER THE ORGANIZATIONAL DOCUMENTS OF PURCHASER, (II) RESULT IN A BREACH
OF ANY OF THE TERMS OF, OR CONSTITUTE A VIOLATION OF OR DEFAULT UNDER, RESULT IN
ANY MODIFICATION OF, ACCELERATE OR PERMIT THE ACCELERATION OF THE PERFORMANCE
REQUIRED BY, OR OTHERWISE GIVE ANY OTHER CONTRACTING PARTY THE RIGHT TO
TERMINATE ANY CONTRACT, INDENTURE OR OTHER INSTRUMENT OR AGREEMENT BY WHICH
PURCHASER, OR ANY OF ITS RESPECTIVE ASSETS ARE SUBJECT OR BOUND, (III) VIOLATE
ANY STATUTE, LAW OR REGULATION OF ANY JURISDICTION OR ORDER, JUDGMENT,
INJUNCTION, AWARD OR DECREE OF ANY COURT OR GOVERNMENT OF COMPETENT JURISDICTION
BY WHICH PURCHASER IS BOUND; EXCEPT IN THE CASE OF CLAUSE (II) AND (III) ABOVE
FOR SUCH BREACHES, VIOLATIONS OR DEFAULTS WHICH WOULD NOT BE REASONABLY EXPECTED
TO PREVENT OR MATERIALLY DELAY THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
BY THIS AGREEMENT.

 

SECTION 3.05                    CONSENTS.  EXCEPT AS DISCLOSED ON SCHEDULE 2.06
HERETO, NO CONSENT, WAIVER, AUTHORIZATION, APPROVAL, ORDER, LICENSE, CERTIFICATE
OR PERMIT OF OR FROM, OR REGISTRATION, DECLARATION OR FILING WITH, OR NOTICE TO
ANY COURT OR OTHER TRIBUNAL, GOVERNMENTAL AGENCY OR ANY OTHER PERSON, NOR UNDER
ANY CONTRACT, INDENTURE, MORTGAGE, LEASE, LICENSE OR OTHER AGREEMENT OR
INSTRUMENT TO WHICH PURCHASER OR ANY OF ITS SUBSIDIARIES IS A PARTY OR BY WHICH
PURCHASER OR ANY OF ITS SUBSIDIARIES, OR ANY OF THEIR RESPECTIVE ASSETS, IS
SUBJECT OR BOUND, IS REQUIRED BY OR WITH RESPECT TO PURCHASER IN CONNECTION WITH
THE EXECUTION, DELIVERY OR PERFORMANCE OF THIS AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED HEREBY.

 

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SECTION 3.06                    NO BROKER.  THERE IS NO INVESTMENT BANKER,
BROKER, FINDER OR OTHER INTERMEDIARY WHICH HAS BEEN RETAINED BY OR IS AUTHORIZED
TO ACT ON BEHALF OF PURCHASER WHICH MIGHT BE ENTITLED TO ANY FEE OR COMMISSION
FROM SELLER OR ANY OF THEIR RESPECTIVE AFFILIATES UPON CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

 

SECTION 3.07                    LITIGATION.  THERE IS NO LITIGATION,
INVESTIGATION, PROCEEDING OR OTHER CLAIM PENDING OR, TO THE KNOWLEDGE OF
PURCHASER, THREATENED INVOLVING PURCHASER OR ANY OF ITS ASSETS OR ANY SUBSIDIARY
THEREOF OR ANY OF ITS ASSETS WHICH WOULD BE REASONABLY EXPECTED TO PREVENT OR
MATERIALLY DELAY THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT.  NEITHER PURCHASER NOR ANY OF ITS SUBSIDIARIES IS SUBJECT TO ANY
OUTSTANDING ORDERS, WRITS, INJUNCTIONS OR DECREES OF ANY COURT, GOVERNMENTAL
AGENCY OR ARBITRATION TRIBUNAL WHICH WOULD BE REASONABLY EXPECTED TO PREVENT OR
MATERIALLY DELAY THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT.

 

SECTION 3.08                    PURCHASE FOR INVESTMENT.

 

(a)                                  Purchaser is acquiring the AIIHC Common
Shares for its own account and not with a view to the distribution of the AIIHC
Common Shares.  Purchaser acknowledges that the AIIHC Common Shares have not
been registered under the Securities Act of 1933, as amended, and may not be
transferred or sold in the absence of registration under the Securities Act of
1933, as amended, or an exemption therefrom.

 

(b)                                 Purchaser has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of its investment in the AIIHC Common Shares as contemplated by this
Agreement, and is able to bear the economic risk of such investment for an
indefinite period of time.  It has been furnished access to such information and
documents as it has requested and has been afforded an opportunity to ask
questions of and receive answers from representatives of the Companies and the
Subsidiaries concerning the terms and conditions of this Agreement and the
purchase of the AIIHC Common Shares contemplated hereby.

 

SECTION 3.09                    FINANCING.  PURCHASER (I) ON THE DATE HEREOF HAS
BINDING COMMITMENTS FOR, AND (II) ON THE CLOSING DATE WILL HAVE, SUFFICIENT
FUNDS TO ENABLE PURCHASER TO PAY FOR THE AIIHC COMMON SHARES TO BE PURCHASED
PURSUANT TO THE TERMS HEREOF, TO PERFORM ITS OBLIGATIONS UNDER THIS AGREEMENT
AND TO PAY ALL FEES, EXPENSES AND OTHER AMOUNTS RELATED TO THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT PAYABLE BY IT.

 

ARTICLE IV

COVENANTS AND OTHER AGREEMENTS

 

SECTION 4.01                    CONDUCT OF BUSINESS.  FROM THE DATE HEREOF
THROUGH THE CLOSING, EXCEPT AS OTHERWISE CONSENTED TO BY PURCHASER IN WRITING,
AS SPECIFICALLY CONTEMPLATED BY THIS AGREEMENT OR AS SET FORTH ON SCHEDULE 4.01,
ARCH PARENT AND SELLER SHALL CAUSE AIIHC AND EACH SUBSIDIARY TO, AND AIIHC AND
EACH SUBSIDIARY SHALL, CARRY ON THE BUSINESS IN, AND ONLY IN, THE ORDINARY
COURSE IN SUBSTANTIALLY THE SAME MANNER AS CONDUCTED SINCE DECEMBER 31, 2003. 
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, FROM THE DATE HEREOF THROUGH
THE CLOSING,

 

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EXCEPT AS OTHERWISE CONSENTED TO BY PURCHASER IN WRITING, AS SPECIFICALLY
CONTEMPLATED BY THIS AGREEMENT OR AS SET FORTH ON SCHEDULE 4.01, ARCH PARENT AND
SELLER SHALL CAUSE AIIHC AND EACH SUBSIDIARY NOT TO:  (A) INCUR ANY INDEBTEDNESS
FOR BORROWED MONEY OTHER THAN TRADE PAYABLES IN THE ORDINARY COURSE OF THE
CONDUCT OF THE BUSINESS CONSISTENT WITH PAST PRACTICE, (B) ISSUE OR SELL ANY
DEBT OR EQUITY SECURITIES OR GRANT OR ISSUE ANY OPTION, WARRANT OR OTHER RIGHT
TO PURCHASE OR ACQUIRE ANY SUCH SECURITIES OR INSTITUTE ANY SPLIT, COMBINATION
OR RECLASSIFICATION OF ANY SUCH SECURITIES OR ISSUE OR AUTHORIZE ANY ISSUANCE OF
ANY OTHER SECURITIES IN RESPECT OF, IN LIEU OF OR IN SUBSTITUTION FOR SHARES OF
AIIHC’S OR ANY SUBSIDIARY’S OUTSTANDING CAPITAL STOCK, (C) (I) CHANGE THEIR
AUTHORIZED OR ISSUED STOCK, (II) RECLASSIFY, COMBINE, SPLIT, SUBDIVIDE,
PURCHASE, REDEEM, RETIRE, ISSUE SELL, OR OTHERWISE ACQUIRE OF DISPOSE OF ANY
SHARES OF THEIR RESPECTIVE CAPITAL STOCK, (III) GRANT OR ISSUE ANY OPTION,
WARRANT OR OTHER RIGHT TO PURCHASE OR ACQUIRE ANY SUCH SHARES OR (IV) ISSUE ANY
SECURITY CONVERTIBLE INTO CAPITAL STOCK, (D) MAKE ANY INVESTMENTS THAT ARE NOT
IN COMPLIANCE WITH THE INVESTMENT GUIDELINES OF AIIHC AND THE SUBSIDIARIES,
WHICH INVESTMENT GUIDELINES ARE ATTACHED HERETO AS EXHIBIT A, EXCEPT AS REQUIRED
BY LAW OR REGULATION, (E) AMEND OR CHANGE THE CHARTER, BY-LAWS OR OTHER
ORGANIZATIONAL DOCUMENTS OF AIIHC OR ANY OF THE SUBSIDIARIES, (F) MERGE AIIHC OR
ANY SUBSIDIARY WITH ANY OTHER ENTITY, (G) LIQUIDATE, DISSOLVE OR WIND UP, OR
DISPOSE OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF AIIHC OR ANY SUBSIDIARY,
(H) ORGANIZE ANY NEW SUBSIDIARY OF ANY AIIHC OR ANY SUBSIDIARY, (I) ABANDON,
ALLOW TO LAPSE, OR ENCUMBER ANY OF ITS MATERIAL PROPERTIES OR ASSETS, TANGIBLE
OR INTANGIBLE, INCLUDING THE INTELLECTUAL PROPERTY, EXCEPT FOR LIENS INCURRED IN
THE ORDINARY COURSE OF BUSINESS, CONSISTENT WITH PAST PRACTICE, (J) INSTITUTE
ANY INCREASE IN THE COMPENSATION OR BONUSES PAYABLE OR TO BECOME PAYABLE TO ANY
OF ITS DIRECTORS, OFFICERS OR EMPLOYEES, OR MAKE ANY CHANGES IN ITS PERSONNEL
POLICIES OR EMPLOYEE BENEFITS, IN EITHER CASE OTHER THAN IN THE ORDINARY COURSE
OF BUSINESS CONSISTENT WITH PAST PRACTICE, OR GRANT TO ANY SUCH DIRECTOR,
OFFICER OR OTHER EMPLOYEE ANY INCREASE IN SEVERANCE OR TERMINATION PAY, OR ENTER
INTO ANY MODIFICATION, AMENDMENT, WAIVER OR CONSENT WITH RESPECT TO ANY
EMPLOYMENT, SEVERANCE, CHANGE OF CONTROL, TERMINATION OR SIMILAR AGREEMENT,
ARRANGEMENT OR PLAN (ORAL OR OTHERWISE) WITH ANY DIRECTOR, OFFICER OR OTHER
EMPLOYEE, (K) DECLARE, SET ASIDE OR PAY ANY DIVIDENDS, RETURNS OF CAPITAL OR ANY
OTHER DISTRIBUTIONS TO SELLER OR ANY OF ITS AFFILIATES, AIIHC OR ANY OF THE
SUBSIDIARIES (L) MAKE ANY CHANGE IN THE ACCOUNTING PRACTICES OR POLICIES, OR IN
ANY ASSUMPTION UNDERLYING SUCH PRACTICES OR POLICIES, OR IN ANY METHOD OF
CALCULATING ANY BAD DEBT, CONTINGENCY OR INSURANCE, EXCEPT AS IS REQUIRED BY
GAAP, SAP, LAW OR REGULATION, (M) ENTER INTO ANY AGREEMENTS OR TRANSACTIONS WITH
ANY OF AIIHC, THE SUBSIDIARIES OR SELLER OR ANY OF ITS AFFILIATES (OTHER THAN IN
THE ORDINARY COURSE OF BUSINESS, CONSISTENT WITH PAST PRACTICE), (N) MAKE ANY
MATERIAL AMENDMENT TO THE INSURANCE POLICIES IN FORCE OF AIIHC OR ANY SUBSIDIARY
OR MAKE ANY CHANGE IN THE METHODOLOGY USED IN THE DETERMINATION OF THE RESERVE
LIABILITIES OF AIIHC OR ANY SUBSIDIARY OR ANY RESERVES CONTAINED IN THE
QUARTERLY OR ANNUAL FINANCIAL STATEMENTS EXCEPT AS REQUIRED BY GAAP, SAP, LAW OR
REGULATION, (O) CLOSE ANY CLAIM FILE PRIOR TO THE FINAL DISPOSITION OF SUCH
CLAIM OTHER THAN IN THE ORDINARY COURSE OF BUSINESS CONSISTENT WITH PAST
PRACTICE, (P) MAKE ANY TERMINATION, AMENDMENT OR ENTRANCE INTO AS CEDING OR
ASSUMING INSURER ANY REINSURANCE, COINSURANCE OR OTHER SIMILAR AGREEMENT OR ANY
TRUST AGREEMENT OR SECURITY AGREEMENT RELATING THERETO, EXCEPT IN THE ORDINARY
COURSE OF BUSINESS CONSISTENT WITH PAST PRACTICE, (Q) MAKE ANY INTRODUCTION OF
ANY INSURANCE POLICY OR ANY CHANGES IN ITS CUSTOMARY MARKETING, PRICING,
UNDERWRITING, INVESTING, FINANCIAL REPORTING, TAX OR ACTUARIAL PRACTICES AND
POLICIES, EXCEPT IN THE ORDINARY COURSE OF BUSINESS CONSISTENT WITH PAST
PRACTICE OR AS REQUIRED BY GAAP, SAP, LAW OR REGULATION, (R) CANCEL ANY
LIABILITY OWED TO AIIHC OR ANY OF THE SUBSIDIARIES BY ANY OTHER PERSON OR ENTITY
OTHER THAN IMMATERIAL AMOUNTS OWED BY A PERSON OR ENTITY WHO IS

 

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NOT SELLER OR AN AFFILIATE OR IN THE ORDINARY COURSE OF BUSINESS CONSISTENT WITH
PAST PRACTICE OR PURSUANT TO A BINDING CONTRACTUAL OBLIGATION, (S) MAKE ANY
WRITE-OFF OR WRITE-DOWN OF, OR ANY DETERMINATION TO WRITE-OFF OR WRITE-DOWN,
WHICH ARE MATERIAL IN THE AGGREGATE, THE ASSETS OR PROPERTIES (OTHER THAN ANY
STATUTORY WRITE-DOWN OF INVESTMENT ASSETS WHICH IS NOT RELATED TO A PERMANENT
IMPAIRMENT OF VALUE OR AS REQUIRED BY GAAP, SAP, LAW OR REGULATION) OF AIIHC OR
ANY OF THE SUBSIDIARIES, (T) MAKE ANY EXPENDITURE OR COMMITMENT FOR ADDITIONS TO
PROPERTY, PLANT, EQUIPMENT, OR OTHER TANGIBLE OR INTANGIBLE CAPITAL ASSETS OR
PROPERTIES OF AIIHC OR ANY OF THE SUBSIDIARIES WHICH EXCEEDS $100,000
INDIVIDUALLY OR IN THE AGGREGATE, (U) (I) MAKE A REQUEST FOR A TAX RULING FROM
OR ENTER INTO A CLOSING AGREEMENT WITH, ANY TAXING AUTHORITY, (II) SETTLE OR
COMPROMISE ANY CLAIM, ACTION, LITIGATION, PROCEEDING, ARBITRATION,
INVESTIGATION, AUDIT OR CONTROVERSY RELATING TO TAXES OR (III) MAKE ANY
ELECTIONS WITH RESPECT TO TAXES OR CHANGE ANY METHOD OF ACCOUNTING FOR TAX
PURPOSES (V) TAKE ANY ACTION THAT WOULD PREVENT OR MATERIALLY IMPAIR THE ABILITY
OF ARCH PARENT OR SELLER TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT, OR (W) ENTER INTO ANY CONTRACT OR ARRANGEMENT TO TAKE ANY OF THE
ACTIONS PROHIBITED IN THIS SECTION 4.01.

 

SECTION 4.02                    ACCESS AND INFORMATION.  SELLER SHALL CAUSE
AIIHC AND THE SUBSIDIARIES AND THEIR COUNSEL AND ACCOUNTANTS TO GIVE PURCHASER
AND ITS REPRESENTATIVES REASONABLE ACCESS, DURING NORMAL BUSINESS HOURS AND UPON
REASONABLE PRIOR NOTICE, AND PROVIDED SUCH ACCESS DOES NOT UNDULY INTERFERE WITH
THE OPERATION OF THE BUSINESS, THROUGHOUT THE PERIOD ENDING UPON THE EARLIER TO
OCCUR OF THE CLOSING DATE OR THE TERMINATION OF THIS AGREEMENT PURSUANT TO
ARTICLE VII HEREOF, TO THE BOOKS, LEASES, CONTRACTS, COMMITMENTS, MINUTES,
DOCUMENTS, INSTRUMENTS AND RECORDS OF AIIHC AND EACH SUBSIDIARY, AND TO THE
PREMISES AND REASONABLE NUMBER OF EMPLOYEES OF AIIHC AND THE SUBSIDIARIES, AND
SHALL CAUSE TO BE FURNISHED TO PURCHASER AND THEIR REPRESENTATIVES DURING SUCH
PERIOD SUCH INFORMATION CONCERNING THE AFFAIRS OF AIIHC AND THE SUBSIDIARIES AS
PURCHASER MAY REASONABLY REQUEST.

 

SECTION 4.03                    EMPLOYEE BENEFITS.

 

(a)                                  Purchaser shall honor and shall cause its
Affiliates (including, after the Closing, AIIHC and the Subsidiaries) to honor
all Company Plans maintained by AIIHC or the Subsidiaries in accordance with
their terms as in effect immediately before the Closing, subject to any
amendment or termination thereof that may be permitted by such terms.  For a
period of one year following the Closing, Purchaser shall either (i) continue to
maintain such Company Plans as in effect immediately prior to the Closing
(excluding any Company Plans providing medical benefits); provided, however,
that changes may be made to such Company Plans to the extent necessary to comply
with applicable law, or so long as clause (ii) of this Section 4.03(a) is
complied with and provided further that, unless clause (ii) of this
Section 4.03(a) is complied with, for such one-year period Purchaser shall not
reduce medical benefits to a level with average per employee employer costs
below those applicable under the applicable Company Plans as of December 31,
2003, or (ii) provide employees of AIIHC and the Subsidiaries with employee
welfare, pension and savings plans which, in the aggregate, are substantially no
less favorable than those provided to similarly situated employees of Purchaser
from time to time.  Nothing in this Section 4.03 shall be deemed to require that
the employment of any employee of AIIHC or any of the Subsidiaries as of the
Closing be continued for any specific period of time after the Closing.

 

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(b)                                 To the extent service is relevant for
purposes of eligibility, participation or vesting (but not the accrual of
benefits) under any employee benefit plan, program or arrangement established or
maintained by Purchaser for the benefit of employees of AIIHC and the
Subsidiaries, the employees of AIIHC and the Subsidiaries shall be credited for
service accrued as of the Closing with AIIHC and the Subsidiaries to the extent
such service was credited under a similar Company Plan.

 

SECTION 4.04                    RESERVED

 

SECTION 4.05                    RESERVED

 

SECTION 4.06                    RESERVED

 

SECTION 4.07                    CONSENTS AND CONDITIONS.  UPON THE TERMS AND
SUBJECT TO THE CONDITIONS OF THIS AGREEMENT, EACH OF THE PARTIES HERETO SHALL
COOPERATE, AND USE THEIR RESPECTIVE REASONABLE BEST EFFORTS TO, MAKE ALL FILINGS
AND AGREE TO USE ALL REASONABLE BEST EFFORTS TO OBTAIN ANY REQUIRED THIRD PARTY
AND GOVERNMENTAL CONSENTS TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT,
AND TO CAUSE EACH OF THE CONDITIONS AND OBLIGATIONS OF SELLER AND PURCHASER
HEREUNDER TO BE SATISFIED.  CONSISTENT WITH SUCH PROVISION, AS SOON AS
REASONABLY PRACTICABLE FOLLOWING THE DUE DILIGENCE END DATE (AS DEFINED HEREIN),
BUT NO LATER THAN JULY 2, 2004, PURCHASER SHALL COMPLETE AND DELIVER TO THE
OFFICES OF THE DELAWARE, INDIANA, MARYLAND, OHIO AND PENNSYLVANIA INSURANCE
DEPARTMENTS, AS APPLICABLE, THE INITIAL FILINGS OF THE FORM A RELATING TO
PURCHASER’S PURCHASE OF THE AIIHC COMMON SHARES.  PRIOR TO CLOSING, PURCHASER
SHALL RESPOND TO ANY WRITTEN INQUIRY MADE BY EITHER SUCH OFFICE RELATING TO THE
FORM A WITHIN FIVE (5) BUSINESS DAYS OF THE RECEIPT OF ANY SUCH WRITTEN
INQUIRY.  IN ADDITION, PURCHASER, ON THE ONE HAND, AND SELLER, AIIHC AND THE
SUBSIDIARIES, ON THE OTHER HAND, HEREBY AGREE TO MUTUALLY COOPERATE DURING ANY
PRE-CLOSING DISCUSSIONS WITH RATINGS AGENCIES REGARDING AIIHC AND THE
SUBSIDIARIES WHICH ARE DEEMED APPROPRIATE AND REASONABLE BY BOTH SELLER AND
PURCHASER, INCLUDING PARTICIPATION IN MEETINGS AND PROVIDING DOCUMENTS AS MAY BE
REASONABLY REQUESTED BY SUCH RATINGS AGENCIES.

 

SECTION 4.08                    REINSURANCE AGREEMENTS.

 

(a)                                  Initial Term.  On the Closing Date,
Purchaser shall cause PSIC and American Independent Insurance (the “Ceding
Companies”), and Seller shall cause one or more Affiliates of Seller designated
by Seller (“Designated Affiliate”), to enter into reinsurance agreements (the
“Reinsurance Agreements”) with (A) a quota share percentage for Policy Year (as
defined below) 2004 of 80% and (B) a quota share percentage for Policy Year 2005
of 80%, provided that, if total direct written premiums (“DWP”) for the Ceding
Companies for Policy Year 2005 exceeds $100,000,000, the quota share percentage
for Policy Year 2005 shall be reduced to the percentage at which DWP ceded to
the Designated Affiliate for Policy Year 2005 equals $80,000,000 (collectively,
the “Initial Term”) on the terms set forth in the 80% quota share reinsurance
agreement in effect as of the date hereof between American Independent Insurance
and ARC attached as Exhibit B (the “Current Agreement”), with the following
additional terms: (i) the Reinsurance Agreements shall not cover lines of
business or risk in the states that are not covered by the Current Agreement
unless approved in advance and in writing by Seller (or Designated Affiliate);
(ii) in the event of a material breach by the Ceding Company

 

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of a Reinsurance Agreement that remains uncured for 45 days, following written
notice thereof (except that there shall be no cure period for a final arbitral
determination of fraud), the Designated Affiliate may terminate the Reinsurance
Agreements with respect to future writings; (iii) in the event of termination of
Bill Lockhorn’s (the “Executive”) employment as chief executive officer of AIIHC
and the Subsidiaries (A) for any reason other than as described in clause
(iii)(B) of this Section 4.08(a) and a replacement for him reasonably
satisfactory to the Designated Affiliate shall not have been employed by the
Ceding Companies within 120 days, or in the case of termination by the Executive
for Good Reason (as defined below) within 60 days, after such termination (it
being understood that the Designated Affiliate’s consent must not be
unreasonably withheld) or (B) due to termination by Purchaser or any of its
Affiliates without Cause (as defined below), then the Designated Affiliate may
terminate the Reinsurance Agreements with respect to future writings; (iv) any
rate changes with respect to the business covered by the Reinsurance Agreements
must be reasonably satisfactory to the Designated Affiliate; (v) the Reinsurance
Agreements shall provide that, (A) so long as the aggregate quota share
percentages of the Designated Affiliates are greater than 50% and (B)(i) in the
event that the Ceding Companies implement any claims administration practices
which materially and adversely impact the Designated Affiliates’ exposure to
loss under the Reinsurance Agreements or (ii) the loss ratio on the business
subject to any of the Reinsurance Agreements shall equal 75% or more, Seller
(and its Designated Affiliates) shall have the right, but not the obligation, to
take such action, in the name of the Ceding Company and at the expense of Seller
(or Designated Affiliate), as Seller (or Designated Affiliate) deems reasonably
necessary and appropriate for the handling of any claim or claims, including,
but not limited to, the selection of counsel and/or third party administrators;
and (vi) in the event that (1) the Designated Affiliate’s domiciliary state
insurance department orders it to cease writing business or cease its
operations, (2) the Designated Affiliate has been determined or declared
“insolvent” by its domiciliary state, or has been placed into liquidation or
receivership (whether voluntary or involuntary), or there has been instituted
against it proceedings for the appointment of a receiver, liquidator,
rehabilitator, conservator, or trustee in bankruptcy, or other statutory agent
known by whatever name, to take possession of its assets or control of its
operations, (3) the Designated Affiliate’s A.M. Best rating is reduced below A-,
or (4) the Designated Affiliate’s surplus has been reduced below 50% of such
surplus as of the date hereof (any of the foregoing, a “Reinsurer Triggering
Event”), the Seller shall (A) immediately notify Purchaser (both orally and in
writing) of such Reinsurer Triggering Event and (B) at the sole option of Seller
(or its Designated Affiliate) (for the avoidance of doubt, such option requires
Seller (or its Designated Affiliate) to elect to take the actions required by
one of the following clauses (i) and (ii)) either, (i) cooperate fully, at the
sole cost and expense of Purchaser for arranging and implementing such coverage,
with Purchaser, PSIC and American Independent Insurance, in all actions
necessary to obtain a substitute reinsurer acceptable to Purchaser, PSIC and
American Independent Insurance to either (x) effect novations under which such
substitute reinsurer shall assume all liability under such Reinsurance
Agreements without any interruption of reinsurance coverage or (y) assume all
liability of Ceding Companies reinsured under the Reinsurance Agreements on
terms acceptable to Purchaser, PSIC and American Independent Insurance without
any interruption of reinsurance coverage or (ii) cause the Designated Affiliate
to post collateral with respect to the business subject to such Reinsurance
Agreements on terms reasonably acceptable to Purchaser.  For the avoidance of
doubt, (a) collateral on terms reasonably acceptable to Purchaser shall consist
of either a letter of credit or a trust complying with Pennsylvania or Ohio, as
applicable, or such

 

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other state of domicile as applicable, credit for reinsurance regulations and
(b) the Designated Affiliate will be fully released from the Reinsurance
Agreements in the case of clause (vi)(B)(i) above upon implementation of the
replacement reinsurance coverage.  As used in this Section 4.08, the terms (i)
“Policy Year” shall mean the calendar year; (ii) “Cause” shall mean (a) theft or
embezzlement by the Executive with respect to the Ceding Companies and the
Subsidiaries; (b) malfeasance or gross negligence in the performance of the
Executive’s duties; (c) the commission by the Executive of any felony or any
crime involving moral turpitude; (d) willful or prolonged absence from work by
the Executive (other than by reason of disability due to physical or mental
illness) or failure, neglect or refusal by the Executive to perform his duties
and responsibilities without the same being corrected within ten (10) days after
being given written notice thereof; (e) continued and habitual use of alcohol by
the Executive to an extent which materially impairs the Executive’s performance
of his duties without the same being corrected within ten (10) days after being
given written notice thereof; (f) the Executive’s use of illegal drugs without
the same being corrected within ten (10) days after being given written notice
thereof; and (iii) “Good Reason” shall mean, without the Executive’s written
consent, (a) the material diminution of any material duties or responsibilities
of the Executive without the same being corrected within ten (10) days after
being given written notice thereof; or (b) a reduction in the Executive’s base
salary.

 

(b)                                 Option During Additional Term.  The
Purchaser agrees that Seller or one or more Designated Affiliates of Seller
shall have the option, but not the obligation, to provide quota share
reinsurance for the four-year period following the Initial Term (the “Additional
Period”) with a quota share percentage of up to the lesser of (A) 60% and (B)
the quota share percentage that would result in DWP of $60,000,000 ceded to the
Designated Affiliate in each year within such four-year term on substantially
the same terms and conditions contained in the Reinsurance Agreements of the
prior Policy Year (whether provided by any Designated Affiliate or a third
party).  Not less than 90 days prior to the commencement of the Policy Year (the
“Notice Period”) of each such year of the four-year period, Seller (or
Designated Affiliate) shall inform the Ceding Companies whether it is exercising
its option under this Section 4.08(b) for such Policy Year, provided that, to
the extent that Seller (or Designated Affiliate) desires to reduce its quota
share percentage for any Policy Year by more than 20% or $20,000,000 from the
prior year amount, such Notice Period shall be 120 days prior to the
commencement of such Policy Year.  Upon receiving such notice, Purchaser shall
cause the Ceding Companies to take such actions as are necessary, including the
execution and delivery of the documentation satisfactory to Seller (or
Designated Affiliate), to effect the cession required by the exercise of such
option.  Seller will forfeit the option set forth in this Section 4.08(b) solely
with respect to the amount of DWP not reinsured by Seller (or Designated
Affiliate) for any portion of the Additional Period following which (i) Seller
(or any of its Designated Affiliates) elects not to exercise this option in any
given year or (ii) any Reinsurance Agreement has been previously terminated by
any Designated Affiliate.

 

SECTION 4.09                    INTERIM FINANCIAL STATEMENTS.  AFTER THE DATE OF
THIS AGREEMENT AND PRIOR TO THE CLOSING DATE, SELLER SHALL DELIVER TO PURCHASER
(I) ANY AND ALL MONTHLY FINANCIAL STATEMENTS FOR AIIHC AND/OR ANY OF THE
SUBSIDIARIES, AUDITED OR UNAUDITED, PREPARED FOR THE MANAGEMENT OF SUCH
COMPANIES, WITHIN SEVEN (7) BUSINESS DAYS FOLLOWING THE APPLICABLE MONTH-END AND
(II) ANY AND ALL QUARTERLY FINANCIAL STATEMENTS FOR AIIHC AND/OR ANY OF THE
SUBSIDIARIES, AUDITED OR UNAUDITED, AT SUCH TIME AS SUCH QUARTERLY FINANCIAL
STATEMENTS ARE MADE AVAILABLE TO

 

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ARCH PARENT AND/OR SELLER OR THEIR AFFILIATES, BUT IN NO EVENT LATER THAN
FIFTEEN (15) DAYS FOLLOWING THE APPLICABLE QUARTER-END.

 

SECTION 4.10                    NON-SOLICITATION.  EACH OF ARCH PARENT AND
SELLER AGREES, AND AGREES TO CAUSE THEIR AFFILIATES (INCLUDING AIIHC AND THE
SUBSIDIARIES), NOT TO, DIRECTLY OR INDIRECTLY, THROUGH ANY OFFICER, DIRECTOR,
EMPLOYEE, REPRESENTATIVE (AS DEFINED BELOW) OR AGENT THEREOF, (I) SOLICIT,
INITIATE OR ENCOURAGE ANY INQUIRES OR PROPOSALS THAT CONSTITUTE, OR WOULD LEAD
TO, A PROPOSAL OR OFFER FOR A MERGER, CONSOLIDATION, BUSINESS COMBINATION, SALE
OF SUBSTANTIAL ASSETS, SALE OF SHARES OF CAPITAL STOCK OR SIMILAR TRANSACTIONS
INVOLVING AIIHC OR ANY SUBSIDIARY OR THE ASSETS OR CAPITAL STOCK THEREOF, OTHER
THAN A TRANSACTION WITH PURCHASER OR AN AFFILIATE OF PURCHASER (ANY OF THE
FOREGOING INQUIRIES OR PROPOSALS BEING REFERRED TO HEREIN AS AN “ACQUISITION
PROPOSAL”) OR (II) ENGAGE IN ANY NEGOTIATIONS OR DISCUSSIONS CONCERNING, OR
PROVIDE ANY NON-PUBLIC INFORMATION TO ANY PERSON RELATING TO, ANY ACQUISITION
PROPOSAL; PROVIDED, HOWEVER, THAT DURING THE INITIAL PERIOD (AS DEFINED BELOW)
SELLER MAY COMMUNICATE WITH THE THIRD PARTY AND ENGAGE IN DISCUSSIONS REGARDING
THE TRANSACTIONS CONTEMPLATED BY THE THIRD PARTY AGREEMENT.  ARCH PARENT AND
SELLER AGREE TO NOTIFY PURCHASER IMMEDIATELY AFTER RECEIPT BY EITHER OF THEM,
AIIHC OR ANY SUBSIDIARY OF ANY ACQUISITION PROPOSAL, BY ANY PARTY OTHER THAN THE
THIRD PARTY, SUCH NOTICE TO BE COMMUNICATED ORALLY AND IN WRITING AND TO INCLUDE
THE IDENTITY OF THE OFFEROR AND THE TERMS AND CONDITIONS OF SUCH ACQUISITION
PROPOSAL.  IN RESPECT OF ANY PARTY, THE TERM “REPRESENTATIVES” SHALL MEAN THE
OFFICERS, DIRECTORS, EMPLOYEES, ADVISORS, AGENTS, REPRESENTATIVES, AFFILIATES,
SECURITY HOLDERS, ACCOUNTANTS, ATTORNEYS, ACTUARIES OR ANYONE ELSE ACTING ON
BEHALF OF SUCH PARTY OR SUCH PERSONS.  “INITIAL PERIOD” MEANS THE PERIOD FROM
THE DATE HEREOF THROUGH THE DATE ON WHICH PURCHASER’S TERMINATION RIGHT RELATING
TO DUE DILIGENCE SET FORTH IN SECTION 7.01(D) HAS TERMINATED OR BEEN WAIVED BY
THE PURCHASER OR OTHERWISE EXPIRED.  ARCH PARENT AND SELLER AGREE, AND AGREE TO
CAUSE THEIR AFFILIATES AND REPRESENTATIVES TO, IMMEDIATELY CEASE ANY EXISTING
DISCUSSIONS OR NEGOTIATIONS WITH ANY THIRD PARTY, OTHER THAN THE THIRD PARTY,
WITH RESPECT TO AN ACQUISITION PROPOSAL.  SELLER SHALL NOT CONSUMMATE THE
TRANSACTIONS CONTEMPLATED BY THE THIRD PARTY AGREEMENT OR ANY AMENDMENT THERETO
OR REPLACEMENT THEREOF.  UPON CONCLUSION OF THE INITIAL PERIOD, UNLESS PURCHASER
HAS TERMINATED THIS AGREEMENT PURSUANT TO SECTION 7.01(D), SELLER SHALL PROMPTLY
NOTIFY THE THIRD PARTY THAT SELLER HAS ENTERED INTO THIS AGREEMENT AND THAT THE
CLOSING OF THE TRANSACTIONS CONTEMPLATED HEREBY REMAIN SUBJECT TO REGULATORY
APPROVAL, AND SELLER SHALL CEASE, AND CAUSE ITS AFFILIATES AND REPRESENTATIVES
TO CEASE, ANY AND ALL DISCUSSIONS WITH THE THIRD PARTY RELATING TO ANY
ACQUISITION PROPOSAL.  UNLESS THE THIRD PARTY AGREEMENT HAS ALREADY BEEN
TERMINATED, SELLER SHALL, WITHIN TWO (2) BUSINESS DAYS OF THE RECEIPT OF ALL OF
THE STATE INSURANCE REGULATORY APPROVALS NECESSARY TO CONSUMMATE THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, TERMINATE THE THIRD PARTY AGREEMENT
PURSUANT TO THE TERMS THEREOF.

 

SECTION 4.11                    CONTRIBUTIONS/REDEMPTION.  ARCH PARENT HEREBY
AGREES THAT IT WILL CAUSE (I) ARL AND SELLER TO MAKE THE CONTRIBUTIONS AND (II)
AIIHC TO COMPLETE THE REDEMPTION, IN EACH CASE, PRIOR TO THE CLOSING DATE ON
TERMS SATISFACTORY TO ARCH PARENT.

 

SECTION 4.12                    NOTIFICATION OF BREACH.  EACH PARTY SHALL GIVE
EACH OTHER PROMPT NOTICE AFTER IT HAS OBTAINED KNOWLEDGE OF (A) ANY FACT OR
CIRCUMSTANCES WHICH RENDERS UNTRUE, INCORRECT OR MISLEADING IN ANY MATERIAL
RESPECT ANY OF THE REPRESENTATIONS AND WARRANTIES MADE BY IT OR THE OTHER PARTY
HERETO IN THIS AGREEMENT AS OF THE DATE SUCH REPRESENTATION AND WARRANTY WAS
MADE, (B) ANY FAILURE ON ITS PART OR THE PART OF THE OTHER PARTY HERETO TO
COMPLY WITH OR SATISFY IN

 

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ANY MATERIAL RESPECT ANY COVENANT, CONDITION OR AGREEMENT WHICH THEY ARE TO
COMPLY WITH OR SATISFY UNDER THIS AGREEMENT OR (C) ANY ADVERSE CHANGE AFFECTING
ITS ABILITY OR THE ABILITY OF THE OTHER PARTY HERETO TO PERFORM ITS OBLIGATIONS
UNDER THIS AGREEMENT.  EXCEPT AS PROVIDED IN SECTION 6.06 AND SECTION 5.07, IN
NO EVENT SHALL ANY DISCLOSURE OF ANY SUCH BREACH OR INACCURACY IMPAIR THE RIGHTS
AND REMEDIES OF ANY PARTY HERETO WITH RESPECT TO ANY BREACH OR INACCURACY BY ANY
OTHER PERSON ARISING PRIOR TO SUCH DISCLOSURE.

 

SECTION 4.13                    SETTLEMENT OF ACCOUNTS WITH AFFILIATES;
TERMINATION OF AGREEMENTS.  EXCEPT AS SET FORTH ON SCHEDULE 4.13(A), PRIOR TO
CLOSING, (I) AIIHC AND THE SUBSIDIARIES SHALL PAY OFF ALL PAYABLES AND OTHER
AMOUNTS DUE OR OTHERWISE OWED BY ANY OF THEM TO SELLER OR ANY AFFILIATE OF
SELLER (OTHER THAN AIIHC AND THE SUBSIDIARIES), AND SELLER SHALL AND SHALL CAUSE
EACH OF ITS AFFILIATES (OTHER THAN AIIHC AND THE SUBSIDIARIES) TO PAY OFF ALL
PAYABLES AND OTHER AMOUNTS DUE OR OTHERWISE OWED BY ANY OF THEM TO AIIHC OR ANY
SUBSIDIARY, AND (II) SELLER SHALL CAUSE AIIHC AND THE SUBSIDIARIES TO TERMINATE
THE AGREEMENTS SET FORTH ON SCHEDULE 4.13(B).

 

ARTICLE V

 

TAX MATTERS

 

SECTION 5.01                    TAX INDEMNIFICATION.

 

(a)                                  Arch Parent and Seller shall be liable to,
and shall indemnify, protect, defend and hold harmless the Purchaser Indemnified
Parties (as hereinafter defined) against any and all claims, losses, damages,
liabilities, assessments, settlements, costs and expenses arising from or in
connection with any liability for Taxes of AIIHC or any Subsidiary (“Tax
Losses”) sustained by any Purchaser Indemnified Party attributable or otherwise
relating to (i) any Pre-Closing Tax Period (as hereinafter defined) and (ii) any
liability pursuant to Treasury Regulations Section 1.1502-6 (or any comparable
provision under state, local or foreign law or regulation imposing several
liability upon members of a consolidated, combined, affiliated or unitary group)
for any Pre-Closing Tax Period; provided, however, that with respect to current
period Taxes not due and payable as of the Closing Date, the Purchaser
Indemnified Parties shall be entitled to indemnity pursuant to this
Section 5.01(a)  only to the extent that the amount of such Taxes exceeds the
amount accrued on the financial statements of AIIHC and any Subsidiary prepared
in accordance with GAAP.  Purchaser shall be liable to, and shall indemnify,
protect, defend and hold harmless Seller Indemnified Parties (as hereinafter
defined) against any and all Tax Losses sustained by any Seller Indemnified
Party attributable or otherwise relating to any Post-Closing Tax Period (as
hereinafter defined).  The term “Pre-Closing Tax Period” shall mean all taxable
periods ending on or before the Closing Date and the portion ending on and
including the Closing Date of any taxable period that includes (but does not end
on) the Closing Date.  The term “Post-Closing Tax Period” shall mean all taxable
periods that begin after the Closing Date and the portion beginning on the day
after the Closing Date of any taxable period that includes (but does not end on)
the Closing Date.

 

(b)                                 For purposes of this Section 5.01 and for
allocating Taxes to a Pre-Closing Tax Period or a Post-Closing Tax Period, in
the case of any Taxes that are payable for a Tax period that includes (but does
not end on) the Closing Date, the portion of such Taxes

 

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attributable to the Pre-Closing Tax Period shall (i) in the case of any Taxes
other than Taxes based upon or related to income, sales, gross receipts,
premiums, wages, capital expenditures or expenses, be deemed to be the amount of
such Taxes for the entire Tax period multiplied by a fraction the numerator of
which is the number of days in the Tax period ending on and including the
Closing Date and the denominator of which is the number of days in the entire
Tax period, and (ii) in the case of any Tax based upon or related to income,
sales, gross receipts, premiums, wages, capital expenditures or expenses, be
computed on an interim closing of the books basis as if the relevant Tax period
ended on and included the Closing Date.

 

(c)                                  Subject to paragraph (d) below, any payment
required to be made by Seller pursuant to this Section 5.01 shall be made (i) if
reflected on a Tax Return filed by, or at the direction of, Purchaser pursuant
to Section 5.02(a) or prepared and filed by, or at the direction of, Purchaser
pursuant to Section 5.02(b), within 10 days prior to the due date for the filing
of such Tax Returns and (ii) in all other cases, not later than 10 days after
receipt by Seller of written notice from Purchaser stating (1) that a Tax Loss
has been paid by or reflected on a Tax Return filed by Purchaser, any of its
Affiliates or, effective upon the Closing, AIIHC or any Subsidiary and (2) the
amount of the indemnity payment requested.

 

(d)                                 Except as otherwise provided in this
Section 5.01(d), if any notice of deficiency, proposed adjustment, adjustment,
assessment, audit, examination or other administrative or court proceeding,
suit, dispute or other claim (a “Tax Claim”) is delivered, sent, commenced or
initiated against Purchaser, any of its Affiliates or, effective upon the
Closing, AIIHC or any Subsidiary by any taxing authority, Purchaser shall be
solely responsible for controlling the defense of such Tax Claim.  If any Tax
Claim is asserted in writing against Purchaser, any of its Affiliates or,
effective upon the Closing, AIIHC or any Subsidiary, in respect of which
indemnity may be sought from Seller pursuant to this Section 5.01, Purchaser
shall promptly notify Seller of such Tax Claim within 15 days of Purchaser’s
receipt of written notice of such Tax Claim and shall give Seller such
information with respect thereto as Seller may reasonably request.  Seller may
discharge, at any time, its indemnification obligation under this Section 5.01
by paying to Purchaser the amount of the applicable Tax Losses, calculated on
the date of such payment. Seller may, at its own expense, participate in and,
upon timely written notice to Purchaser, assume the defense of any such claim,
suit, action, litigation or proceeding (including any Tax audit); provided,
however, that, notwithstanding anything to the contrary set forth herein, (i)
Seller shall keep Purchaser fully informed of any proceedings, events and
developments related to or in connection with such Tax Claim; (ii) Purchaser
shall be entitled to receive copies of all correspondence and documents related
to such Tax Claim; (iii) Seller shall consult with Purchaser and shall not enter
into any settlement with respect to any such Tax Claim without Purchaser’s prior
written consent, which shall not be unreasonably withheld; (iv) at its own cost
and expense, Purchaser shall have the right to participate in (but not control)
the defense of such Tax Claim.  Purchaser and its Affiliates (including AIIHC
and any Subsidiary after the Closing) agree to cooperate with Seller in pursuing
any Tax Claim.  Whether or not Seller chooses to defend or prosecute any Tax
Claim, all of the parties hereto shall cooperate in the defense or prosecution
thereof.  Notwithstanding any other provision of this Agreement, Seller shall
not have the right to control, defend, settle, compromise or contest any Tax
Claim to the extent that Purchaser and its Affiliates waive their right to
indemnification from Seller with respect to such Tax Claim.

 

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SECTION 5.02                    RETURN FILINGS AND PAYMENT OF TAXES.

 

(a)                                  Seller shall prepare, or caused to be
prepared, and Purchaser shall file, or cause to be filed, on a timely basis, all
Tax Returns with respect to AIIHC and each of the Subsidiaries for all taxable
periods ending on or prior to the Closing Date that are filed after the Closing
Date.  Purchaser shall cause AIIHC or the appropriate Subsidiary to pay all
Taxes shown to be due and payable on such Tax Returns.

 

(b)                                 Purchaser shall prepare, or cause to be
prepared, and file or cause to be filed, on a timely basis, all Tax Returns with
respect to AIIHC and each of the Subsidiaries for all (i) taxable periods
beginning before and ending after the Closing Date and (ii) taxable periods
beginning after the Closing Date, and Purchaser shall be responsible for
remitting all Taxes reflected on such Tax Returns to the appropriate taxing
authorities, subject to indemnification and reimbursement therefor to the extent
provided in Section 5.01.  Purchaser shall permit Seller to review and comment
on each Tax Return described in (i) above prior to filing.

 

SECTION 5.03                    ASSISTANCE AND COOPERATION.  AFTER THE CLOSING,
EACH OF PURCHASER AND SELLER SHALL (A) FURNISH OR CAUSE TO BE FURNISHED TO THE
OTHER UPON REQUEST, AS PROMPTLY AS PRACTICABLE, SUCH INFORMATION (INCLUDING
ACCESS TO BOOKS AND RECORDS) AND ASSISTANCE RELATING TO AIIHC AND THE
SUBSIDIARIES AS IS REASONABLY NECESSARY FOR THE PREPARATION AND FILING OF ANY
TAX RETURN, THE PREPARATION OF ANY TAX AUDIT AND THE PROSECUTION OR DEFENSE OF
ANY CLAIM, SUIT OR PROCEEDING RELATING TO ANY PROPOSED TAX ADJUSTMENT OF AIIHC
OR ANY SUBSIDIARY, (B) MAKE AVAILABLE TO ANY TAXING AUTHORITY AS REASONABLY
REQUESTED ALL INFORMATION AND DOCUMENTS RELATING TO TAXES OF AIIHC OR OF ANY OF
THE SUBSIDIARIES, (C) PROVIDE TIMELY NOTICE TO THE OTHER IN WRITING OF ANY
PENDING OR THREATENED TAX CLAIM WITH RESPECT TO AIIHC OR OF ANY OF THE
SUBSIDIARIES FOR ANY TAXABLE PERIOD FOR WHICH THE OTHER PARTY MAY HAVE LIABILITY
UNDER THIS ARTICLE V AND (D) FURNISH THE OTHER WITH COPIES OF ALL CORRESPONDENCE
RECEIVED FROM ANY TAXING AUTHORITY IN CONNECTION WITH ANY TAX CLAIM WITH RESPECT
TO ANY TAXABLE PERIOD FOR WHICH THE OTHER MAY HAVE LIABILITY UNDER THIS
ARTICLE V.

 

SECTION 5.04                    TRANSFER TAXES.  ALL TRANSFER, DOCUMENTARY,
SALES, USE, STAMP, REGISTRATION AND OTHER SUCH TAXES AND FEES (INCLUDING ANY
PENALTIES AND INTEREST) INCURRED IN CONNECTION WITH THIS AGREEMENT (“TRANSFER
TAXES”) SHALL BE PAID BY SELLER WHEN DUE, AND SELLER SHALL FILE ALL NECESSARY
TAX RETURNS AND OTHER DOCUMENTATION WITH RESPECT TO ALL SUCH TRANSFER TAXES AND,
IF REQUIRED BY APPLICABLE LAW; PURCHASER WILL, AND WILL CAUSE ITS AFFILIATES TO,
JOIN IN THE EXECUTION OF ANY SUCH TAX RETURNS AND OTHER DOCUMENTATION.

 

SECTION 5.05                    CHARACTERIZATION OF INDEMNIFICATION PAYMENTS. 
ALL AMOUNTS PAID BY SELLER TO PURCHASER OR ITS AFFILIATES OR BY PURCHASER TO
SELLER OR ITS AFFILIATES PURSUANT TO THIS ARTICLE V OR ARTICLE VI SHALL BE
TREATED AS ADJUSTMENTS TO THE PURCHASE PRICE FOR ALL TAX PURPOSES.

 

SECTION 5.06                    SURVIVAL OF TAX CLAIMS.  NOTWITHSTANDING ANY
OTHER PROVISION OF THIS AGREEMENT TO THE CONTRARY, ANY OBLIGATIONS OF THE
PARTIES PURSUANT TO THIS ARTICLE V SHALL SURVIVE UNTIL SIXTY (60) DAYS AFTER THE
EXPIRATION OF THE APPLICABLE STATUTE OF LIMITATIONS (TAKING INTO ACCOUNT ANY
APPLICABLE EXTENSIONS OR TOLLINGS THEREOF) RELATING TO THE TAXES AT ISSUE.

 

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SECTION 5.07                    EXCLUSIVE REMEDY.  NOTWITHSTANDING ANY OTHER
PROVISION OF THIS AGREEMENT TO THE CONTRARY, THE PROVISIONS OF THIS ARTICLE V
SHALL BE THE EXCLUSIVE MEANS BY WHICH ANY PARTY MAY RECOVER TAX LOSSES FROM ANY
OTHER PARTY WITH RESPECT TO ANY CLAIM RELATED THERETO.

 

SECTION 5.08                    NON-USRPHC CERTIFICATION.  SELLER SHALL FURNISH,
OR CAUSE TO BE FURNISHED TO PURCHASER, A CERTIFICATION IN ACCORDANCE WITH
SECTION 1445 OF THE CODE AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER
THAT NONE OF AIIHC OR ANY OF THE SUBSIDIARIES IS A USRPHC WITHIN THE MEANING OF
SECTION 897 OF THE CODE NOR HAS BEEN A USRPHC AT ANY TIME DURING THE 5-YEAR
PERIOD ENDING ON THE CLOSING DATE.

 

ARTICLE VI

 

INDEMNIFICATION

 

SECTION 6.01                    FROM AND AFTER THE CLOSING, EXCEPT WITH RESPECT
TO TAX LOSSES (WHICH WILL BE GOVERNED EXCLUSIVELY BY THE PROVISIONS SET FORTH IN
ARTICLE V), AND SUBJECT TO THE TERMS AND CONDITIONS OF THIS ARTICLE VI, ARCH
PARENT AND SELLER SHALL BE LIABLE TO, AND SHALL INDEMNIFY, PROTECT, DEFEND AND
HOLD HARMLESS PURCHASER AND ITS AFFILIATES AND THEIR RESPECTIVE SUCCESSORS (SUCH
PERSONS ARE HEREINAFTER COLLECTIVELY REFERRED TO AS THE “PURCHASER INDEMNIFIED
PARTIES”) AGAINST ANY AND ALL CLAIMS, LOSSES, DAMAGES, LIABILITIES, ASSESSMENTS,
SETTLEMENTS, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES AND
EXPENSES) (COLLECTIVELY, THE “DAMAGES”) SUSTAINED BY ANY PURCHASER INDEMNIFIED
PARTY, (I) RESULTING FROM OR ARISING OUT OF THE BREACH OF ANY REPRESENTATION,
WARRANTY OR COVENANT MADE BY ARCH PARENT OR SELLER IN THIS AGREEMENT, SUCH
BREACHES BEING HEREINAFTER REFERRED TO COLLECTIVELY AS “INDEMNIFIABLE BREACHES,”
(II) IN CONNECTION WITH OR AS A RESULT OF THE CASE CAPTIONED LEWIS SMALL, ET AL.
V. ARCH CAPITAL GROUP, LTD. [SIC], ET AL., 03 CIV. 5604 (JFK) PENDING IN THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, OR ANY OTHER
LITIGATION ARISING OUT OF ALL OR SOME OF THE SAME FACTS OR ALLEGATIONS AS RELATE
TO THAT LITIGATION, (III) (A) IN CONNECTION WITH OR AS A RESULT OF THE
COUNTERCLAIMS IN THE CASE CAPTIONED AMERICAN INDEPENDENT INSURANCE COMPANY, ET
AL. V. CHARLES M. LEDERMAN, ET AL., CIVIL ACTION NO. 97-4153, PENDING IN THE
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, OR ANY
OTHER LITIGATION ARISING OUT OF ALL OR SOME OF THE SAME FACTS OR ALLEGATIONS AS
RELATE TO THAT LITIGATION, (B) THE MATTERS SET FORTH IN ITEM 36 OF
SCHEDULE 2.08, (C) ITEMS 3 AND 4 OF SCHEDULE 2.11(A) AND (D) ITEM 1, THE MATTER
TITLED “LEWIS SMALL” IN ITEM 2 AND ALL MATTERS SET FORTH IN ITEM 3 OTHER THAN
THAT MATTER TITLED “JEANNE LIGGONS”, AS ALL SUCH MATTERS IN THIS CLAUSE (D) ARE
SET FORTH IN SCHEDULE 6.11 OF THE REORGANIZATION AGREEMENT (AS HEREINAFTER
DEFINED), (IV) ANY PAYMENT MADE WITH RESPECT TO THE SURPLUS NOTES (AS DEFINED IN
SCHEDULE 2.08), WHETHER AS A RESULT OF RESCISSION, REFORMATION, SETTLEMENT,
ADJUDICATION OR OTHERWISE, IT BEING AGREED THAT INDEMNIFICATION WITH RESPECT
THERETO SHALL MEAN THE REPLACEMENT OF ONE OR MORE SURPLUS NOTES BY SELLER WITH
SUBSTANTIALLY SIMILAR INSTRUMENTS OR THE IDENTICAL CASH AMOUNT OF THE APPLICABLE
SURPLUS NOTE(S), AT THE OPTION OF ARCH PARENT OR SELLER, OR (V) IN CONNECTION
WITH OR AS A RESULT OF ANY LEGAL PROCEEDING OR ANY OTHER ACTION BROUGHT BY THE
THIRD PARTY IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT;
PROVIDED, HOWEVER, THAT IN NO EVENT WILL THE AGGREGATE LIABILITY OF ARCH PARENT
AND SELLER UNDER CLAUSE (I) OF THIS SECTION 6.01 EXCEED SEVENTY-FIVE PERCENT
(75%) OF THE PURCHASE PRICE (THE “CAP”), AND PROVIDED, FURTHER, THAT NO CLAIMS
FOR INDEMNIFICATION CAN BE MADE AGAINST ARCH PARENT AND SELLER UNDER CLAUSE (I)
OF THIS SECTION 6.01 UNLESS AND UNTIL THE AGGREGATE AMOUNT OF SUCH

 

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DAMAGES FOR WHICH THE PURCHASER INDEMNIFIED PARTIES ARE ENTITLED TO INDEMNITY
UNDER THE TERMS HEREOF EXCEEDS $800,000 (THE “BASKET”).  IN THE EVENT THE
AGGREGATE AMOUNT OF THE DAMAGES SUSTAINED BY THE PURCHASER INDEMNIFIED PARTIES
IN RESPECT OF INDEMNIFIABLE BREACHES UNDER CLAUSE (I) UNDER THIS SECTION 6.01
EXCEEDS THE BASKET, THE INDEMNIFICATION OBLIGATIONS OF ARCH PARENT AND SELLER
SHALL APPLY ONLY TO THOSE DAMAGES IN RESPECT OF INDEMNIFIABLE BREACHES ACTUALLY
SUSTAINED BY THE PURCHASER INDEMNIFIED PARTIES IN EXCESS OF THE BASKET. 
NOTWITHSTANDING THE FOREGOING, NEITHER THE BASKET NOR THE CAP SHALL APPLY TO
DAMAGES RESULTING FROM BREACHES BY SELLER WITH RESPECT TO THE REPRESENTATIONS
AND WARRANTIES SET FORTH IN SECTIONS 2.03 AND 2.04 OF THIS AGREEMENT, FOR ALL OF
WHICH DAMAGES SELLER SHALL BE LIABLE WHETHER OR NOT THE BASKET HAS BEEN
SATISFIED.  FOR THE AVOIDANCE OF DOUBT, NEITHER THE BASKET NOR THE CAP SHALL
APPLY TO DAMAGES FOR WHICH PURCHASER INDEMNIFIED PARTIES ARE ENTITLED TO
INDEMNIFICATION UNDER CLAUSES (II), (III), (IV) OR (V) OF THIS SECTION 6.01.

 

SECTION 6.02                    FROM AND AFTER THE CLOSING, EXCEPT WITH RESPECT
TO TAX LOSSES (WHICH WILL BE GOVERNED EXCLUSIVELY BY THE PROVISIONS SET FORTH IN
ARTICLE V), AND SUBJECT TO THE TERMS AND CONDITIONS OF THIS ARTICLE VI,
PURCHASER SHALL BE LIABLE TO, AND SHALL INDEMNIFY, PROTECT, DEFEND AND HOLD
HARMLESS SELLER AND ITS AFFILIATES AND THEIR RESPECTIVE SUCCESSORS (SUCH PERSONS
ARE HEREINAFTER COLLECTIVELY REFERRED TO AS THE “SELLER INDEMNIFIED PARTIES”)
AGAINST ANY AND ALL DAMAGES SUSTAINED BY ANY SELLER INDEMNIFIED PARTY, RESULTING
FROM OR ARISING OUT OF THE BREACH OF ANY REPRESENTATION, WARRANTY OR COVENANT
MADE BY PURCHASER IN THIS AGREEMENT, SUCH BREACHES BEING HEREINAFTER REFERRED TO
COLLECTIVELY AS “SELLER INDEMNIFIABLE BREACHES”; PROVIDED, HOWEVER, THAT IN NO
EVENT WILL THE AGGREGATE LIABILITY OF PURCHASER UNDER THIS SECTION 6.02 EXCEED
SEVENTY-FIVE PERCENT (75%) OF THE PURCHASE PRICE (THE “SELLER CAP”), AND
PROVIDED, FURTHER, THAT NO CLAIMS FOR INDEMNIFICATION CAN BE MADE AGAINST
PURCHASER HEREUNDER UNLESS AND UNTIL THE AGGREGATE AMOUNT OF SUCH DAMAGES FOR
WHICH THE SELLER INDEMNIFIED PARTIES ARE ENTITLED TO INDEMNITY UNDER THE TERMS
HEREOF EXCEEDS $800,000 (THE “SELLER BASKET”).  IN THE EVENT THE AGGREGATE
AMOUNT OF THE DAMAGES SUSTAINED BY THE SELLER INDEMNIFIED PARTIES IN RESPECT OF
SELLER INDEMNIFIABLE BREACHES HEREUNDER EXCEEDS THE SELLER BASKET, THE
INDEMNIFICATION OBLIGATIONS OF PURCHASER SHALL APPLY ONLY TO THOSE DAMAGES IN
RESPECT OF SELLER INDEMNIFIABLE BREACHES ACTUALLY SUSTAINED BY THE SELLER
INDEMNIFIED PARTIES IN EXCESS OF THE SELLER BASKET.  NOTWITHSTANDING THE
FOREGOING, NEITHER THE SELLER BASKET NOR THE SELLER CAP SHALL APPLY TO DAMAGES
RESULTING FROM BREACHES BY SELLER WITH RESPECT TO THE REPRESENTATIONS AND
WARRANTIES SET FORTH IN SECTION 3.03 OF THIS AGREEMENT, FOR ALL OF WHICH DAMAGES
PURCHASER SHALL BE LIABLE WHETHER OR NOT THE SELLER BASKET HAS BEEN SATISFIED.

 

SECTION 6.03                    PROMPTLY AFTER ANY PARTY HERETO HAS RECEIVED
NOTICE OR HAS KNOWLEDGE OF ANY CLAIM OR THE COMMENCEMENT OF ANY ACTION OR
PROCEEDING FOR WHICH SUCH PARTY MAY BE ENTITLED TO INDEMNIFICATION HEREUNDER
(HEREINAFTER THE “INDEMNIFIED PARTY”), THE INDEMNIFIED PARTY SHALL, IF A CLAIM
WITH RESPECT THERETO IS INDEMNIFIABLE BY THE OTHER PARTY PURSUANT TO THE TERMS
HEREOF (HEREINAFTER THE “INDEMNIFYING PARTY”), GIVE THE INDEMNIFYING PARTY
WRITTEN NOTICE OF SUCH CLAIM OR THE COMMENCEMENT OF SUCH ACTION OR PROCEEDING
AND PROVIDE THE INDEMNIFYING PARTY WITH ALL RELEVANT INFORMATION RESPECTING SUCH
CLAIMS WHICH IS IN THE POSSESSION OF THE INDEMNIFIED PARTY.  SUCH NOTICE SHALL
STATE THE NATURE AND BASIS OF SUCH CLAIM AND, IF ASCERTAINABLE, THE AMOUNT
THEREOF.  IN EACH SUCH CASE, THE INDEMNIFIED PARTY AGREES TO GIVE SUCH NOTICE TO
THE INDEMNIFYING PARTY PROMPTLY FOLLOWING ITS RECEIPT OF NOTICE OR OTHER
KNOWLEDGE OF ANY SUCH CLAIM, ACTION OR PROCEEDING; PROVIDED, HOWEVER, THAT THE
FAILURE OF THE INDEMNIFIED PARTY TO GIVE SUCH NOTICE SHALL NOT EXCUSE THE
INDEMNIFYING PARTY’S OBLIGATION TO

 

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INDEMNIFY EXCEPT TO THE EXTENT THE INDEMNIFYING PARTY HAS SUFFERED DAMAGE OR
PREJUDICE BY REASON OF THE INDEMNIFIED PARTY’S FAILURE TO GIVE OR DELAY IN
GIVING SUCH NOTICE.  IF SUCH NOTICE CONCERNS A CLAIM OF A THIRD PERSON, THE
INDEMNIFYING PARTY MAY ELECT, AT SUCH PARTY’S SOLE EXPENSE, TO ASSUME EXCLUSIVE
CONTROL OF THE DEFENSE, SETTLEMENT, ADJUSTMENT OR COMPROMISE OF ANY SUCH CLAIM,
WITH COUNSEL REASONABLY ACCEPTABLE TO THE INDEMNIFIED PARTY, IT BEING UNDERSTOOD
THAT WITH RESPECT TO THE MATTER DESCRIBED IN CLAUSE (II) OF SECTION 6.01, THE
COUNSEL SET FORTH ON SCHEDULE 6.03 IS DEEMED APPROVED BY PURCHASER.  THE
INDEMNIFYING PARTY MAY ENTER INTO ANY SETTLEMENT, ADJUSTMENT OR COMPROMISE OF
ANY SUCH CLAIM WITHOUT THE PRIOR WRITTEN CONSENT OF THE INDEMNIFIED PARTY IF
SUCH SETTLEMENT, ADJUSTMENT OR COMPROMISE INVOLVES A REMEDY OR REMEDIES FOR
MONEY DAMAGES AND THE INDEMNIFYING PARTY OBTAINS A WRITTEN RELEASE OF THE
INDEMNIFIED PARTY FROM SUCH THIRD PERSON.  THE INDEMNIFYING PARTY SHALL OBTAIN
THE PRIOR WRITTEN CONSENT OF THE INDEMNIFIED PARTY (WHICH CONSENT SHALL NOT BE
UNREASONABLY WITHHELD, CONDITIONED OR DELAYED) BEFORE ENTERING INTO ANY
SETTLEMENT, ADJUSTMENT OR COMPROMISE THAT WOULD INVOLVE A REMEDY OR REMEDIES
OTHER THAN THE PAYMENT OF MONEY DAMAGES BY THE INDEMNIFYING PARTY.  IN THE EVENT
THE INDEMNIFYING PARTY HAS ELECTED NOT TO ASSUME THE CONTROL OF THE DEFENSE,
SETTLEMENT, ADJUSTMENT OR COMPROMISE OF ANY THIRD PERSON CLAIM OR IF THE
INDEMNIFYING PARTY SHALL HAVE FAILED, AFTER THE LAPSE OF A REASONABLE PERIOD OF
TIME, WHICH SHALL IN NO EVENT BE LESS THAN THIRTY (30) CALENDAR DAYS AFTER
RECEIPT OF WRITTEN NOTICE OF SUCH THIRD PERSON CLAIM, TO ASSUME THE CONTROL OF
THE DEFENSE, SETTLEMENT, ADJUSTMENT OR COMPROMISE OF SUCH CLAIM, THE INDEMNIFIED
PARTY SHALL BE ENTITLED TO DEFEND AGAINST THE SAME AND TO EMPLOY COUNSEL
REASONABLY SATISFACTORY TO THE INDEMNIFYING PARTY, AT THE EXPENSE OF THE
INDEMNIFYING PARTY; PROVIDED, HOWEVER, IN SUCH EVENT, THE INDEMNIFIED PARTY
SHALL OBTAIN THE PRIOR WRITTEN CONSENT OF THE INDEMNIFYING PARTY (WHICH CONSENT
SHALL NOT BE UNREASONABLY WITHHELD, CONDITIONED OR DELAYED) BEFORE ENTERING INTO
ANY SETTLEMENT, ADJUSTMENT OR COMPROMISE OF ANY SUCH CLAIM. AT ANY TIME AFTER
RECEIPT OF NOTICE OF ANY THIRD PERSON CLAIM, THE INDEMNIFYING PARTY MAY REQUEST
THE INDEMNIFIED PARTY TO AGREE IN WRITING TO THE PAYMENT OR COMPROMISE OF THE
THIRD PERSON CLAIM (PROVIDED SUCH PAYMENT OR COMPROMISE HAS BEEN PREVIOUSLY
APPROVED IN WRITING BY THE THIRD PARTY CLAIMANT), WHEREUPON SUCH ACTION SHALL BE
DEEMED AGREED TO BY THE INDEMNIFIED PARTY AND SHALL BE AGREED TO IN WRITING BY
THE INDEMNIFIED PARTY UNLESS SUCH SETTLEMENT WOULD INVOLVE A REMEDY OR REMEDIES
OTHER THAN THE PAYMENT OF MONEY DAMAGES BY THE INDEMNIFYING PARTY.  IN
CONNECTION WITH ANY THIRD PERSON CLAIM, THE INDEMNIFIED PARTY, OR THE
INDEMNIFYING PARTY, IF IT HAS ASSUMED THE DEFENSE OF SUCH CLAIM PURSUANT HERETO,
SHALL DILIGENTLY PURSUE THE DEFENSE OF SUCH THIRD PERSON CLAIM AND THE PARTIES
SHALL COOPERATE WITH ONE ANOTHER IN CONNECTION WITH THE HANDLING OF SUCH CLAIM,
SHALL MAKE AVAILABLE PERSONNEL, WITNESSES, BOOKS AND RECORDS RELEVANT THERETO
AND GRANT SUCH AUTHORIZATIONS AS ARE NECESSARY AND REASONABLE TO THEIR
RESPECTIVE AGENTS, REPRESENTATIVES AND COUNSEL UPON REASONABLE REQUEST.

 

SECTION 6.04                    THE TERMS OF THIS ARTICLE VI ARE INTENDED TO
BENEFIT THE PARTIES HERETO, AND SHALL SURVIVE THE CLOSING UNTIL THE DATE THAT IS
FORTY FIVE (45) DAYS FOLLOWING THE DATE OF DELIVERY OF THE ANNUAL FINANCIAL
STATEMENTS OF PSIC AND AMERICAN INDEPENDENT INSURANCE FOR THE YEAR ENDED
DECEMBER 31, 2005 TO THE APPLICABLE STATE INSURANCE DEPARTMENT (THE “SURVIVAL
DATE”); PROVIDED, HOWEVER, THAT (I) ANY WRITTEN CLAIMS FOR INDEMNIFICATION MADE
ON OR PRIOR TO SUCH EXPIRATION DATE SHALL SURVIVE THE CLOSING UNTIL FINAL
RESOLUTION THEREOF, (II) ANY CLAIMS FOR INDEMNIFICATION RELATING TO THE MATTERS
SET FORTH IN SECTIONS 2.03 AND 2.04 HEREOF SHALL SURVIVE THE CLOSING
INDEFINITELY, (III) ANY CLAIMS FOR INDEMNIFICATION RELATING TO MATTERS SET FORTH
IN SECTION 2.09 SHALL SURVIVE UNTIL DECEMBER 31, 2007, (IV) ANY CLAIMS FOR
INDEMNIFICATION RELATING TO MATTERS SET FORTH IN SECTION 2.10 SHALL SURVIVE AS
IF GOVERNED BY SECTION 5.06 HEREOF, (V) ANY

 

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CLAIMS FOR INDEMNIFICATION UNDER CLAUSES (II), (III) OR (IV) OF SECTION 6.01
HEREOF SHALL SURVIVE THE CLOSING UNTIL THE FINAL DISPOSITION OF THE LITIGATION
REFERRED TO THEREIN AND (VI) ANY CLAIMS FOR INDEMNIFICATION UNDER CLAUSE (V) OF
SECTION 6.01 HEREOF SHALL SURVIVE THE CLOSING UNTIL THE EXPIRATION OF ANY
APPLICABLE STATUTE OF LIMITATIONS.

 

SECTION 6.05                    WITH RESPECT TO THE DETERMINATION OF DAMAGES
UNDER ARTICLE V OR ARTICLE VI, NO DAMAGES SHALL BE DEEMED TO HAVE BEEN SUSTAINED
BY THE INDEMNIFIED PARTY AND ANY PAYMENT OTHERWISE PAYABLE BY AN INDEMNIFYING
PARTY PURSUANT TO THE TERMS HEREOF SHALL BE LIMITED TO THE AMOUNT OF ANY DAMAGES
THAT REMAIN AFTER DEDUCTING THEREFROM (I) ANY PROCEEDS ACTUALLY RECEIVED BY THE
INDEMNIFIED PARTY FROM ANY INSURANCE POLICIES WITH RESPECT THERETO, AND (II) ANY
PROCEEDS ACTUALLY RECEIVED FROM ANOTHER RESPONSIBLE PERSON.  IN ADDITION, IF ANY
INDEMNIFIED PARTY RECOGNIZES A TAX BENEFIT (AS DEFINED BELOW) AS A RESULT OF ANY
DAMAGES SUSTAINED BY SUCH INDEMNIFIED PARTY WITH RESPECT TO WHICH ANY CLAIM IS
MADE UNDER ARTICLE V OR ARTICLE VI (AN “INDEMNITY CLAIM”), THE INDEMNIFYING
PARTY SHALL BE ENTITLED TO SUCH TAX BENEFIT AND THE INDEMNIFIED PARTY SHALL PAY
TO THE INDEMNIFYING PARTY THE AMOUNT OF SUCH TAX BENEFIT (BUT NOT IN EXCESS OF
THE INDEMNIFICATION PAYMENT OR PAYMENTS ACTUALLY RECEIVED FROM THE INDEMNIFYING
PARTY WITH RESPECT TO SUCH DAMAGES) AT SUCH TIME OR TIMES AS AND TO THE EXTENT
THAT THE INDEMNIFIED PARTY ACTUALLY REALIZES SUCH TAX BENEFIT THROUGH A REFUND
OF TAX OR REDUCTION IN THE ACTUAL AMOUNT OF TAXES WHICH THE INDEMNIFIED PARTY
WOULD OTHERWISE HAVE HAD TO PAY IF SUCH PAYMENT FOR DAMAGES HAD NOT BEEN MADE;
PROVIDED, HOWEVER, THAT ANY SUCH TAX BENEFIT SHALL BE REDUCED BY THE AMOUNT OF
TAX DETRIMENT (INCLUDING THE TAX EFFECT OF ANY ITEM OF INCOME OR GAIN OR OTHER
ITEM, INCLUDING ANY DECREASE IN TAX BASIS, WHICH INCREASES ANY AMOUNTS PAID WITH
RESPECT TO TAXES, ANY REDUCTION IN THE AMOUNT OF ANY REFUND OF TAX WHICH WOULD
OTHERWISE HAVE BEEN AVAILABLE, THE UTILIZATION OF ANY NET OPERATING LOSS OR
CAPITAL LOSS OR THE UTILIZATION OF ANY TAX CREDITS OR OTHER TAX ATTRIBUTES) THE
INDEMNIFIED PARTY SUFFERED AS A RESULT OF ANY DAMAGES; AND, PROVIDED FURTHER,
THAT THE AMOUNT OF ANY SUCH TAX DETRIMENT SHALL BE TAKEN INTO ACCOUNT (BUT NOT
IN EXCESS OF ANY SUCH TAX BENEFIT) AT SUCH TIME OR TIMES AS AND TO THE EXTENT
THAT THE INDEMNIFIED PARTY ACTUALLY SUFFERS SUCH TAX DETRIMENT THROUGH AN ACTUAL
PAYMENT OF TAX OR REDUCTION IN THE AMOUNT RECEIVED AS TAX REFUND, IN ALL EVENTS
COMPUTED ON THE SAME BASIS AS THE TAX BENEFIT.  FOR THE PURPOSES OF THIS
AGREEMENT, ANY REALIZED TAX BENEFIT SHALL BE TREATED AS THOUGH IT WERE A
REDUCTION IN THE AMOUNT OF THE INITIAL INDEMNITY CLAIM, AND THE LIABILITIES OF
THE PARTIES SHALL BE REDETERMINED AS THOUGH BOTH OCCURRED AT OR PRIOR TO THE
TIME OF THE INDEMNITY PAYMENT.  FOR PURPOSES OF THIS SECTION 6.05, A “TAX
BENEFIT” MEANS AN AMOUNT BY WHICH THE TAX LIABILITY OF THE INDEMNIFIED PARTY IS
REDUCED (INCLUDING, WITHOUT LIMITATION, BY DEDUCTION, REDUCTION OF INCOME BY
VIRTUE OF INCREASED TAX BASIS OR OTHERWISE, RECEIPT OF REFUND, CREDIT OR
OTHERWISE) PLUS ANY RELATED INTEREST RECEIVED FROM THE RELEVANT TAXING
AUTHORITY.  WHERE A PARTY HAS OTHER LOSSES, DEDUCTIONS, CREDITS OR ITEMS
AVAILABLE TO IT, THE TAX BENEFIT FROM ANY LOSSES, DEDUCTIONS, CREDITS OR ITEMS
RELATING TO THE INDEMNITY CLAIM SHALL BE DEEMED TO BE REALIZED PROPORTIONATELY
WITH ANY OTHER LOSSES, DEDUCTIONS, CREDITS OR ITEMS.  IN THE EVENT THAT THERE
SHOULD BE A DETERMINATION DISALLOWING THE TAX BENEFIT, THE INDEMNIFYING PARTY
SHALL BE LIABLE TO REFUND TO THE INDEMNIFIED PARTY THE AMOUNT OF ANY RELATED
REDUCTION PREVIOUSLY ALLOWED OR PAYMENTS PREVIOUSLY MADE TO THE INDEMNIFYING
PARTY PURSUANT TO THIS SECTION 6.05.  THE AMOUNT OF THE REFUNDED REDUCTION OR
PAYMENT SHALL BE DEEMED A PAYMENT UNDER THIS SECTION 6.05 AND THUS SHALL BE PAID
SUBJECT TO ANY APPLICABLE REDUCTIONS UNDER THIS SECTION 6.05.

 

SECTION 6.06                    PURCHASER, ON THE ONE HAND, AND ARCH PARENT AND
SELLER, ON THE OTHER HAND, EACH HEREBY ACKNOWLEDGES AND AGREES THAT (EXCEPT IN
THE CASE OF FRAUD, IN WHICH CASE

 

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EACH SUCH PERSON RESERVES ANY AND ALL RIGHTS AND REMEDIES AVAILABLE TO IT) ITS
SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO ANY AND ALL CLAIMS RELATING TO THE
SUBJECT MATTER OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY (BUT,
FOR THE AVOIDANCE OF DOUBT, NOT INCLUDING TAX LOSSES, WHICH WILL BE GOVERNED
EXCLUSIVELY BY THE PROVISIONS SET FORTH IN ARTICLE V) SHALL BE PURSUANT TO THE
INDEMNIFICATION PROVISIONS SET FORTH IN THIS ARTICLE VI, EXCEPT THAT THE PARTIES
SHALL NOT BE LIMITED TO THE REMEDIES PROVIDED IN THIS ARTICLE VI WITH RESPECT TO
ANY DISPUTES PURSUANT TO THE REINSURANCE AGREEMENTS OR ANY OTHER REINSURANCE
ARRANGEMENTS BETWEEN AIIHC OR ANY SUBSIDIARY, ON THE ONE HAND, AND SELLER OR ANY
OF ITS AFFILIATES, ON THE OTHER HAND.  IN FURTHERANCE OF THE FOREGOING,
PURCHASER AND SELLER EACH HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY AND ALL RIGHTS, CLAIMS AND CAUSES OF ACTION IT MAY HAVE
AGAINST ANY OTHER PARTY HERETO OR ANY OF ITS AFFILIATES, ARISING UNDER OR BASED
UPON ANY LAW (INCLUDING, WITHOUT LIMITATION, ANY SUCH RIGHTS, CLAIMS OR CAUSES
OF ACTION ARISING UNDER OR BASED UPON COMMON LAW OR OTHERWISE) WITH RESPECT TO
ANY AND ALL CLAIMS RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED HEREBY, EXCEPT AS SET FORTH IN THE PRECEDING
SENTENCE.  IN ADDITION, NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE
CONTRARY, NO PARTY SHALL BE LIABLE TO ANY OTHER PARTY FOR SPECIAL, INDIRECT,
INCIDENTAL, CONSEQUENTIAL DAMAGES OR LOST PROFITS, WHETHER IN CONTRACT,
WARRANTY, NEGLIGENCE, TORT, STRICT LIABILITY OR OTHERWISE, ARISING OUT OF THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.  IF ANY PARTY HERETO HAS
KNOWLEDGE OF ANY CLAIM FOR WHICH SUCH PARTY MAY BE ENTITLED TO INDEMNIFICATION
HEREUNDER (ASSUMING CLOSING OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT)
(A “PROSPECTIVE INDEMNIFIED PARTY”) SUCH PARTY SHALL GIVE THE OTHER PARTY (A
“PROSPECTIVE INDEMNIFYING PARTY”) PROMPT WRITTEN NOTICE OF SUCH CLAIM AND
PROVIDE THE PROSPECTIVE INDEMNIFYING PARTY WITH ALL RELEVANT INFORMATION WITH
RESPECT TO SUCH CLAIM WHICH IS IN THE POSSESSION OF SUCH PARTY; PROVIDED,
HOWEVER, THAT THE FAILURE OF THE PROSPECTIVE INDEMNIFIED PARTY TO GIVE SUCH
NOTICE SHALL NOT EXCUSE THE PROSPECTIVE INDEMNIFYING PARTY’S OBLIGATION TO
INDEMNIFY EXCEPT TO THE EXTENT THE PROSPECTIVE INDEMNIFYING PARTY HAS SUFFERED
DAMAGE OR PREJUDICE BY REASON OF THE PROSPECTIVE INDEMNIFIED PARTY’S FAILURE TO
GIVE OR DELAY IN GIVING SUCH NOTICE.

 

ARTICLE VII

 

TERMINATION AND ABANDONMENT.

 

SECTION 7.01                    THIS AGREEMENT MAY BE TERMINATED AND THE
TRANSACTIONS CONTEMPLATED HEREBY MAY BE ABANDONED AT ANY TIME PRIOR TO THE
CLOSING DATE:

 

(A)                                  BY THE MUTUAL WRITTEN CONSENT OF PURCHASER
AND SELLER

 

(B)                                 BY PURCHASER, IN WRITING, IF ARCH PARENT OR
SELLER SHALL HAVE (I) FAILED TO PERFORM IN ANY MATERIAL RESPECT THEIR AGREEMENTS
CONTAINED HEREIN REQUIRED TO BE PERFORMED BY THEM ON OR PRIOR TO THE CLOSING
DATE, OR (II) MATERIALLY BREACHED ANY OF THEIR REPRESENTATIONS OR WARRANTIES
CONTAINED HEREIN, WHICH FAILURE OR BREACH IS NOT CURED WITHIN TWENTY (20) DAYS
AFTER PURCHASER NOTIFIES ARCH PARENT OR SELLER OF ITS INTENT TO TERMINATE THIS
AGREEMENT PURSUANT TO THIS SUBSECTION (B) OF SECTION 7.01;

 

(C)                                  BY SELLER, IN WRITING, IF PURCHASER SHALL
HAVE (I) FAILED TO PERFORM IN ANY MATERIAL RESPECT ITS AGREEMENTS CONTAINED
HEREIN REQUIRED TO BE PERFORMED BY IT ON OR PRIOR TO THE CLOSING DATE, OR (II)
MATERIALLY BREACHED ANY OF ITS REPRESENTATIONS OR WARRANTIES CONTAINED

 

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HEREIN, WHICH FAILURE OR BREACH IS NOT CURED WITHIN TWENTY (20) DAYS AFTER
SELLER NOTIFIES PURCHASER OF ITS INTENT TO TERMINATE THIS AGREEMENT PURSUANT TO
THIS SUBSECTION (C) OF SECTION 7.01;

 

(D)                                 BY PURCHASER, IN WRITING, AT ANY TIME ON OR
PRIOR TO JUNE 14, 2004 (THE “DUE DILIGENCE END DATE”), IF PURCHASER NOTIFIES
SELLER IN WRITING THAT THE RESULTS OF ITS DUE DILIGENCE INVESTIGATION ARE
UNSATISFACTORY TO PURCHASER; PROVIDED, THAT, PURCHASER MAY DELIVER TO SELLER,
NOT LATER THAN THE DUE DILIGENCE END DATE, WRITTEN NOTICE ENUMERATING ANY
MATTERS REASONABLY ACCEPTABLE TO SELLER WITH RESPECT TO WHICH PURCHASER REQUIRES
ADDITIONAL DUE DILIGENCE, IN WHICH CASE, WITH RESPECT TO SUCH MATTERS ONLY, THE
DUE DILIGENCE END DATE SHALL BE JUNE 24, 2004.

 

(E)                                  BY SELLER OR PURCHASER, IN WRITING, IF THE
CLOSING HAS NOT OCCURRED ON OR BEFORE SEPTEMBER 30, 2004; PROVIDED, THAT THE
RIGHT TO TERMINATE THIS AGREEMENT UNDER THIS SECTION 7.01(E) SHALL NOT BE
AVAILABLE TO ANY PARTY WHOSE FAILURE, OR WHOSE AFFILIATE’S FAILURE, TO FULFILL
ANY OBLIGATION UNDER THIS AGREEMENT SHALL HAVE BEEN THE CAUSE OF, OR SHALL HAVE
RESULTED IN, THE FAILURE OF SUCH CONDITIONS TO HAVE BEEN COMPLIED WITH,
PERFORMED OR SATISFIED PRIOR TO SUCH DATE; AND PROVIDED, FURTHER, THAT SUCH DATE
MAY BE EXTENDED, IN THE SOLE DISCRETION OF EITHER SELLER OR PURCHASER, TO
NOVEMBER 1, 2004, IF THE SOLE CONDITION TO CLOSING THAT IS NOT YET CAPABLE OF
BEING SATISFIED IS THE APPROVAL OF ANY STATE INSURANCE REGULATORY BODY;

 

(F)                                    BY PURCHASER OR SELLER, IN WRITING, IF
THERE SHALL BE ANY ORDER WRIT, INJUNCTION OR DECREE OF ANY COURT OR GOVERNMENT
ENTITY BINDING ON ARCH PARENT, SELLER OR PURCHASER WHICH PROHIBITS OR RESTRAINS
ARCH PARENT, SELLER OR PURCHASER FROM CONSUMMATING THE TRANSACTIONS CONTEMPLATED
HEREBY; PROVIDED, HOWEVER, THAT THE PARTY SEEKING TERMINATION UNDER THIS
SECTION 7.01(F) SHALL HAVE USED ITS REASONABLE BEST EFFORTS, AND ITS APPLICABLE
AFFILIATES SHALL HAVE USED THEIR REASONABLE BEST EFFORTS, TO HAVE ANY SUCH
ORDER, WRIT, INJUNCTION OR DECREE LIFTED; AND

 

(G)                                 BY ARCH PARENT OR SELLER AT ANY TIME ON OR
PRIOR TO THE DUE DILIGENCE END DATE, IF ARCH PARENT OR SELLER HAS A REASONABLE
BASIS TO BELIEVE THAT PURCHASER IS SEEKING TO MATERIALLY MODIFY THE AGREEMENT
AND EITHER ARCH PARENT OR SELLER HAS NOT OBTAINED THE APPROVAL OF ITS RESPECTIVE
BOARD OF DIRECTORS FOR SUCH MODIFIED AGREEMENT.

 

SECTION 7.02                    IF THIS AGREEMENT IS TERMINATED IN ACCORDANCE
WITH SECTION 7.01 HEREOF, THIS AGREEMENT SHALL BECOME NULL AND VOID AND HAVE NO
FURTHER FORCE AND EFFECT, AND NO PARTY HERETO SHALL HAVE ANY LIABILITY TO ANY
OTHER PARTY HERETO OR ITS RESPECTIVE SHAREHOLDERS, MEMBERS OR DIRECTORS,
OFFICERS, MANAGERS OR OTHER AFFILIATES IN RESPECT THEREOF, EXCEPT THAT THE
OBLIGATIONS SET FORTH IN THE CONFIDENTIALITY AGREEMENT, DATED AS OF MARCH 31,
2004 (THE “CONFIDENTIALITY AGREEMENT”), EXECUTED BY AIIHC AND WAND PARTNERS,
INC., AN AFFILIATE OF PURCHASER, AND IN ARTICLE X HEREOF SHALL SURVIVE ANY SUCH
TERMINATION; PROVIDED, HOWEVER, THAT NOTHING HEREIN SHALL RELIEVE ANY PARTY FROM
LIABILITY FOR THE BREACH OF THIS AGREEMENT.

 

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ARTICLE VIII

 

CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASER

 

The obligations of Purchaser to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment of each of the following
conditions, except to the extent any such conditions are expressly waived in
writing by Purchaser at or prior to the Closing.

 

SECTION 8.01                    ACCURACY OF REPRESENTATIONS AND WARRANTIES.  THE
REPRESENTATIONS AND WARRANTIES MADE BY ARCH PARENT AND SELLER IN THIS AGREEMENT
SHALL BE TRUE AND CORRECT IN ALL MATERIAL RESPECTS (EXCEPT THAT REPRESENTATIONS
AND WARRANTIES QUALIFIED BY MATERIALITY OR MATERIAL ADVERSE EFFECT SHALL BE TRUE
AND CORRECT IN ALL RESPECTS) ON AND AS OF THE DATE OF THIS AGREEMENT AND (EXCEPT
TO THE EXTENT SUCH REPRESENTATIONS REFER TO AN EARLIER DATE) ON AND AS OF THE
CLOSING DATE AS IF MADE ON AND AS OF THE CLOSING DATE.

 

SECTION 8.02                    COVENANTS PERFORMED.  ARCH PARENT AND SELLER
SHALL HAVE PERFORMED AND COMPLIED IN ALL MATERIAL RESPECTS WITH ALL COVENANTS
AND AGREEMENTS REQUIRED BY THE AGREEMENT TO BE PERFORMED OR COMPLIED WITH BY
ARCH PARENT AND SELLER ON OR PRIOR TO THE CLOSING DATE.

 

SECTION 8.03                    CERTIFICATES DELIVERED.  AT THE CLOSING, ARCH
PARENT AND SELLER SHALL HAVE DELIVERED TO PURCHASER CERTIFICATES REPRESENTING
THE AIIHC COMMON SHARES, DULY ENDORSED FOR TRANSFER OR TOGETHER WITH DULY
EXECUTED STOCK POWERS (WITH, IF APPLICABLE, ALL APPROPRIATE STOCK TRANSFER TAX
STAMPS AFFIXED), FREE AND CLEAR OF ALL LIENS (OTHER THAN LIENS ARISING UNDER
APPLICABLE FEDERAL AND STATE SECURITIES LAWS).

 

SECTION 8.04                    NO ADVERSE PROCEEDING.  AS OF THE CLOSING DATE,
THERE SHALL NOT HAVE BEEN INSTITUTED OR BE PENDING OR THREATENED ANY SUIT,
ACTION OR OTHER PROCEEDING BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON IN
WHICH IT IS SOUGHT TO RESTRAIN OR PROHIBIT, OR QUESTION THE VALIDITY OR LEGALITY
OF, OR MAKE MATERIALLY MORE COSTLY TO PURCHASER, THE TRANSACTIONS CONTEMPLATED
BY THIS AGREEMENT OR SEEKING TO OBTAIN MATERIAL DAMAGES IN CONNECTION WITH SUCH
TRANSACTIONS.

 

SECTION 8.05                    CORPORATE RECORDS DELIVERED.  SELLER SHALL HAVE
DELIVERED TO PURCHASER THE CORPORATE MINUTE BOOKS OF AIIHC AND EACH SUBSIDIARY
AND THE CERTIFICATES REPRESENTING THE SUBSIDIARY SHARES.

 

SECTION 8.06                    REQUIRED CONSENTS.  THE APPROVALS AND CONSENTS
LISTED ON SCHEDULE 2.06 HERETO SHALL HAVE BEEN OBTAINED WITHOUT ANY CONDITIONS,
RESTRICTIONS OR LIMITATIONS MATERIALLY ADVERSE TO PURCHASER OR THE INTERESTS OF
PURCHASER.

 

SECTION 8.07                    CONTRIBUTIONS AND REDEMPTION.  THE CONTRIBUTIONS
AND THE REDEMPTION SHALL HAVE BEEN COMPLETED ON THE TERMS SET FORTH IN THIS
AGREEMENT OR OTHERWISE SATISFACTORY TO PURCHASER.

 

SECTION 8.08                    MATERIAL ADVERSE EFFECT.  FROM THE DATE OF THIS
AGREEMENT, THERE SHALL NOT HAVE OCCURRED ANY MATERIAL ADVERSE EFFECT, NOR SHALL
ANY EVENT OR EVENTS HAVE OCCURRED

 

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THAT, INDIVIDUALLY OR IN THE AGGREGATE, WITH OR WITHOUT THE LAPSE OF TIME, MAY
CAUSE OR CREATE ANY MATERIAL ADVERSE EFFECT.

 

SECTION 8.09                    ADDITIONAL DOCUMENTS.  PURCHASER SHALL HAVE
RECEIVED:

 

(A)                                  A CERTIFICATE SIGNED BY AN OFFICER OF
SELLER, DATED AS OF THE CLOSING DATE, AS TO THE MATTERS SET FORTH IN SECTIONS
8.01 AND 8.02 AND THE CHARTER DOCUMENTS OF EACH OF AIIHC AND THE SUBSIDIARIES
ATTACHED TO SUCH CERTIFICATE AND (II) THE FOLLOWING CERTIFICATES: (1)
CERTIFICATES OF GOOD STANDING FOR EACH OF AIIHC AND THE SUBSIDIARIES DATED ON OR
WITHIN ONE (1) BUSINESS DAY OF THE CLOSING DATE; AND (2) CERTIFICATES OF
AUTHORITY FOR AMERICAN INDEPENDENT INSURANCE OR PSIC DATED ON OR WITHIN (1)
BUSINESS DAY OF THE CLOSING DATE FROM THE INSURANCE DEPARTMENTS OF EACH OF
PENNSYLVANIA AND OHIO, RESPECTIVELY.

 

(B)                                 CERTIFICATES OF SECRETARIES OR ASSISTANT
SECRETARIES OR ANOTHER OFFICER, DATED THE CLOSING DATE, SETTING FORTH THE
RESOLUTIONS OF THE BOARDS OF DIRECTORS OF ARCH PARENT AND SELLER APPROVING AND
AUTHORIZING THE EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY, AND CERTIFYING THAT SUCH
RESOLUTIONS HAVE NOT BEEN AMENDED OR RESCINDED AND ARE IN FULL FORCE AND EFFECT;

 

(C)                                  A RECEIPT EVIDENCING RECEIPT OF THE
PURCHASE PRICE;

 

(D)                                 THE CERTIFICATE TO BE PROVIDED PURSUANT TO
SECTION 5.08 OF THIS AGREEMENT.

 

(E)                                  DULY EXECUTED COPIES OF THE REINSURANCE
AGREEMENTS;

 

(F)                                    RESIGNATIONS OF ALL DIRECTORS OF AIIHC
AND EACH SUBSIDIARY, AS REQUESTED BY PURCHASER AT LEAST TEN (10) BUSINESS DAYS
PRIOR TO THE CLOSING DATE.

 

SECTION 8.10                    THIRD PARTY AGREEMENT.  THE THIRD PARTY
AGREEMENT SHALL HAVE BEEN TERMINATED PURSUANT TO THE TERMS THEREOF.

 

ARTICLE IX

 

CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
ARCH PARENT AND THE SELLER

 

The obligations of Arch Parent and Seller to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment of each of
the following conditions, except to the extent any such conditions are expressly
waived in writing by Arch Parent and Seller at or prior to the Closing.

 

SECTION 9.01                    ACCURACY OF REPRESENTATIONS AND WARRANTIES.  THE
REPRESENTATIONS AND WARRANTIES MADE BY PURCHASER IN THIS AGREEMENT SHALL BE TRUE
AND CORRECT IN ALL MATERIAL RESPECTS (EXCEPT THAT REPRESENTATIONS AND WARRANTIES
QUALIFIED BY MATERIALITY SHALL BE TRUE AND CORRECT IN ALL RESPECTS) ON AND AS OF
THE DATE OF THIS AGREEMENT AND (EXCEPT TO THE EXTENT SUCH REPRESENTATIONS REFER
TO AN EARLIER DATE) ON AND AS OF THE CLOSING DATE.

 

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SECTION 9.02                    COVENANTS PERFORMED.  PURCHASER SHALL HAVE
PERFORMED AND COMPLIED IN ALL MATERIAL RESPECTS WITH ALL COVENANTS AND
AGREEMENTS REQUIRED BY THIS AGREEMENT TO BE PERFORMED OR COMPLIED WITH BY
PURCHASER ON OR PRIOR TO THE CLOSING DATE.

 

SECTION 9.03                    PURCHASE PRICE.  AT THE CLOSING, PURCHASER SHALL
HAVE PAID THE PURCHASE PRICE AS REQUIRED PURSUANT TO SECTION 1.03 ABOVE.

 

SECTION 9.04                    OFFICER’S CERTIFICATE.  PURCHASER SHALL HAVE
DELIVERED TO SELLER A CERTIFICATE SIGNED BY AN OFFICER OF PURCHASER, DATED AS OF
THE CLOSING DATE, AS TO THE MATTERS SET FORTH IN SECTIONS 9.01 AND 9.02.

 

SECTION 9.05                    SECRETARY’S CERTIFICATE.  PURCHASER SHALL HAVE
DELIVERED TO SELLER A CERTIFICATE OF THE SECRETARY OR ASSISTANT SECRETARY, DATED
THE CLOSING DATE, SETTING FORTH THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF
PURCHASER APPROVING AND AUTHORIZING THE EXECUTION, DELIVERY AND PERFORMANCE OF
THIS AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY, AND
CERTIFYING THAT SUCH RESOLUTIONS HAVE NOT BEEN AMENDED OR RESCINDED AND ARE IN
FULL FORCE AND EFFECT.

 

SECTION 9.06                    NO ADVERSE PROCEEDING.  AS OF THE CLOSING DATE,
THERE SHALL NOT HAVE BEEN INSTITUTED OR BE PENDING OR THREATENED ANY SUIT,
ACTION OR OTHER PROCEEDING BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON IN
WHICH IT IS SOUGHT TO RESTRAIN OR PROHIBIT, OR QUESTION THE VALIDITY OR LEGALITY
OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR SEEKING TO OBTAIN MATERIAL
DAMAGES IN CONNECTION WITH SUCH TRANSACTIONS.

 

SECTION 9.07                    REQUIRED CONSENTS.  THE APPROVALS AND CONSENTS
LISTED ON SCHEDULE 2.06 HERETO SHALL HAVE BEEN OBTAINED.

 

SECTION 9.08                    REINSURANCE AGREEMENTS.  SELLER SHALL HAVE
RECEIVED DULY EXECUTED REINSURANCE AGREEMENTS.

 

SECTION 9.09                    Certificate.  Seller shall have received a
receipt acknowledging Purchaser’s receipt of the certificates referenced in
Section 8.03.

 

ARTICLE X

 

ADDITIONAL AGREEMENTS AND PROVISIONS

 

SECTION 10.01              SURVIVAL OF CERTAIN REPRESENTATIONS AND WARRANTIES. 
THE REPRESENTATIONS AND WARRANTIES IN THIS AGREEMENT SHALL SURVIVE THE CLOSING
UNTIL THE SURVIVAL DATE; PROVIDED, HOWEVER, THAT (A) THE REPRESENTATIONS AND
WARRANTIES SET FORTH IN SECTION 2.03 AND 2.04 SHALL SURVIVE THE CLOSING
INDEFINITELY, (B) THE REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 2.10
(RELATING TO TAXES) SHALL SURVIVE THE CLOSING UNTIL THE EXPIRATION OF THE
APPLICABLE STATUTE OF LIMITATIONS (TAKING INTO ACCOUNT ANY APPLICABLE EXTENSIONS
OR TOLLINGS THEREOF), (C) THE REPRESENTATIONS AND WARRANTIES SET FORTH IN
SECTION 2.09 (RELATING TO EMPLOYEE BENEFIT PLANS) SHALL SURVIVE THE CLOSING
UNTIL DECEMBER 31, 2007 AND (D) THIS SECTION 10.01 SHALL NOT LIMIT ANY OTHER
COVENANT OR AGREEMENT OF THE PARTIES THAT EXPRESSLY CONTEMPLATES PERFORMANCES
BEYOND SUCH PERIOD.

 

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SECTION 10.02              DEFINITIONS OF CERTAIN TERMS.

 

(A)                                  THE TERM “MATERIAL ADVERSE EFFECT” OR
“MATERIAL ADVERSE CHANGE,” WHEN USED IN THIS AGREEMENT MEANS ANY EVENT,
CIRCUMSTANCE OR CHANGE THAT  (I) IS MATERIALLY ADVERSE TO THE ASSETS, BUSINESS,
RESULTS OF OPERATION OR FINANCIAL CONDITION OF AIIHC AND THE SUBSIDIARIES, TAKEN
AS A WHOLE OR (II) MATERIALLY ADVERSELY AFFECTS THE ABILITY OF SELLER OR ARCH
PARENT TO PERFORM ITS OBLIGATIONS HEREUNDER OR TO CONSUMMATE THE TRANSACTIONS
CONTEMPLATED HEREBY; PROVIDED, HOWEVER THAT THE FOLLOWING SHALL BE EXCLUDED FROM
ANY DETERMINATION AS TO WHETHER A MATERIAL ADVERSE EFFECT OR MATERIAL ADVERSE
CHANGE HAS OCCURRED: (A) ANY CHANGES OR EFFECTS ATTRIBUTABLE TO GENERAL ECONOMIC
OR POLITICAL CONDITIONS OR THE SECURITIES MARKETS OR (B) ANY CHANGES OR EFFECTS
THAT ARE GENERALLY APPLICABLE TO PERSONS ENGAGED IN THE BUSINESS, INCLUDING
WITHOUT LIMITATION, ANY SUCH CHANGES OR EFFECTS RESULTING FROM THE BREAK-OUT OF
WAR OR A TERRORIST OR SIMILAR ATTACK.

 

(b)                                  For purposes of this Agreement, an
“Affiliate” of a person means any other person in control of, controlled by or
under common control with such person.  For purposes of this Agreement, the term
“control” (including the terms “controlling,” “controlled by” and “under common
control with”) means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or otherwise.

 

(c)                                   The term “Reorganization Agreement,” when
used in this Agreement, means the Reorganization Agreement, dated as of
December 31, 2000, relating to the acquisition of all of the capital stock of
AIIHC by Arch Parent.

 

(d)                                  The term “Person,” when used in this
Agreement, means any individual, corporation, limited liability company,
partnership, limited partnership, firm, joint venture, association, joint-stock
company, trust, unincorporated organization, governmental, judicial or
regulatory body or other entity.

 

SECTION 10.03              FEES AND EXPENSES.

 

(A)                                  PURCHASER, ON THE ONE HAND, AND ARCH PARENT
AND SELLER, ON THE OTHER HAND, HEREBY AGREE THAT THEY WILL EACH BE RESPONSIBLE
FOR THEIR OWN COSTS AND EXPENSES INCURRED IN CONNECTION WITH THIS AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED HEREBY, AND THAT ARCH PARENT AND SELLER WILL BE
RESPONSIBLE FOR THE COSTS AND EXPENSES OF AIIHC AND THE SUBSIDIARIES INCURRED IN
CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY PRIOR TO
THE CLOSING DATE, INCLUDING IN EACH INSTANCE, WITHOUT LIMITATION, ALL COSTS OF
BROKERS, ADVISORS, CONSULTANTS, LEGAL COUNSEL, ACCOUNTANTS, APPRAISERS,
EMPLOYEES AND ANY OTHER INDIVIDUALS, RELATED, DIRECTLY OR INDIRECTLY, TO THE
TRANSACTIONS CONTEMPLATED HEREBY.

 

(B)                                 ARCH PARENT AND SELLER, ON THE ONE HAND, AND
PURCHASER, ON THE OTHER HAND, SHALL INDEMNIFY THE OTHER AND HOLD IT OR THEM, AS
THE CASE MAY BE, HARMLESS FROM AND AGAINST ANY CLAIMS FOR ADVISOR’S FEES,
FINDERS’ FEES OR BROKERAGE COMMISSIONS, IN RELATION TO OR IN CONNECTION WITH THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AS A RESULT OF ANY AGREEMENT OR
UNDERSTANDING BETWEEN ARCH PARENT, AIIHC OR SELLER, ON THE ONE HAND, OR
PURCHASER, ON THE OTHER HAND, AND ANY THIRD PARTY.

 

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SECTION 10.04              PUBLICITY.  ARCH PARENT AND SELLER, ON THE ONE HAND,
AND PURCHASER, ON THE OTHER HAND, AGREE THAT, PRIOR TO THE CLOSING, NEITHER THEY
NOR ANY OF THEIR AFFILIATES OR AGENTS OR REPRESENTATIVES SHALL ISSUE ANY PRESS
RELEASE OR MAKE ANY OTHER PUBLIC ANNOUNCEMENT OR DISCLOSURE CONCERNING THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY WITHOUT THE PRIOR CONSENT OF
THE OTHER PARTY, PROVIDED THAT ARCH PARENT, SELLER, PURCHASER AND/OR THEIR
RESPECTIVE AFFILIATES MAY MAKE OR DIRECT THEIR AGENTS OR REPRESENTATIVES TO MAKE
SUCH PUBLIC ANNOUNCEMENTS OR DISCLOSURES THAT THEY BELIEVE IN GOOD FAITH BASED
UPON THE ADVICE OF COUNSEL TO BE REQUIRED BY APPLICABLE LAWS, RULES AND
REGULATIONS, IN WHICH CASE ARCH PARENT, SELLER, PURCHASER OR THE AFFILIATE
MAKING OR DIRECTING THAT THE REQUIRED ANNOUNCEMENT OR DISCLOSURE BE MADE SHALL
INFORM THE OTHER PARTY AS TO THE TIMING AND CONTENTS OF SUCH ANNOUNCEMENT OR
DISCLOSURE PRIOR TO MAKING SUCH ANNOUNCEMENT OR DISCLOSURE AND SHALL PROVIDE
SUCH PARTY WITH A REASONABLE OPPORTUNITY TO REVIEW AND COMMENT UPON ANY SUCH
REQUIRED ANNOUNCEMENT OR DISCLOSURE.

 

SECTION 10.05              CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL.

 

(A)                                  FOR THE PURPOSE OF ANY ACTION THAT MAY BE
BROUGHT IN CONNECTION WITH THIS AGREEMENT, PURCHASER, ARCH PARENT AND SELLER
HEREBY CONSENT TO THE JURISDICTION AND VENUE OF THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK OR OF THE SUPREME COURT OF THE STATE OF
NEW YORK, COUNTY OF NEW YORK.  PURCHASER, ARCH PARENT AND SELLER HEREBY WAIVE
THE RIGHT TO CONTEST THE JURISDICTION AND VENUE OF ANY OF SAID COURTS ON THE
GROUND OF INCONVENIENCE OR OTHERWISE.  THE PROVISIONS OF THIS SECTION SHALL NOT
LIMIT OR OTHERWISE AFFECT THE RIGHT OF EITHER PARTY TO INSTITUTE AND CONDUCT AN
ACTION IN ANY OTHER APPROPRIATE MANNER, JURISDICTION OR COURT.

 

(B)                                  NEITHER PURCHASER, ARCH PARENT NOR SELLER,
NOR ANY ASSIGNEE OR SUCCESSOR OF ANY OF THEM SHALL SEEK A JURY TRIAL IN ANY
PROCEEDING BASED UPON OR ARISING OUT OF THIS AGREEMENT, OR ANY OTHER DOCUMENT OR
AGREEMENT EXECUTED PURSUANT HERETO OR IN CONNECTION HEREWITH.  NO SUCH PERSON
WILL SEEK TO CONSOLIDATE ANY SUCH ACTION INTO ONE IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED.  EACH PARTY HERETO (I) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT
ANY PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVERS, AND (II) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS
AGREEMENT AND EACH OTHER DOCUMENT OR AGREEMENT EXECUTED IN CONNECTION HEREWITH,
AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
HEREIN.  THE PROVISIONS OF THIS SECTION HAVE BEEN FULLY DISCLOSED BY AND TO THE
PARTIES HERETO AND THE PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS.  NO
PARTY HERETO HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY HERETO
THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.

 

SECTION 10.06              EXECUTION IN COUNTERPARTS.  FOR THE CONVENIENCE OF
THE PARTIES, 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.

 

43

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SECTION 10.07              NOTICES.  ALL NOTICES THAT ARE REQUIRED OR MAY BE
GIVEN PURSUANT TO THE TERMS OF THIS AGREEMENT SHALL BE IN WRITING AND DELIVERED
BY HAND OR NATIONAL OVERNIGHT COURIER SERVICE OR SENT BY FACSIMILE TRANSMISSION
(AND IMMEDIATELY AFTER TRANSMISSION RECEIPT OF WHICH HAS BEEN CONFIRMED BY
TELEPHONE BY SENDER), AS FOLLOWS:

 

If to Purchaser, to:

 

Protective Underwriting Services, Inc.

c/o Wand Partners, Inc.

630 Fifth Avenue

Suite 2435

New York, NY 10111

Tel No.:  (212) 632-3795

Fax No.: (212) 307-5599

Attention: Bruce W. Schnitzer

 

With a copy to:

Skadden, Arps, Slate, Meagher & Flom LLP

1440 New York Avenue, NW

Washington, DC 20005

Attention: Marc Gerber, Esq.

Tel No.:  (202) 371-7000

Fax No.:  (202) 393-5760

 

If to the Seller and/or Arch Parent:

 

To Seller:

 

Wessex House
45 Reid Street
Hamilton, HM 12, Bermuda
Tel No.: (441) 278-9250

Fax No.:  (441) 278-9255
Attention: President

 

To Arch Parent:

 

Wessex House
45 Reid Street
Hamilton, HM 12, Bermuda

Tel No.:   (441) 278-9250
Fax No.:  (441) 278-9255
Attention: President

 

or such other address or addresses or facsimile number as any party hereto shall
have designated by notice in writing to the other parties hereto in accordance
with the terms hereof.  A notice shall be deemed to have been given (a) upon
personal delivery, if delivered by hand or courier or

 

44

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(b) the next business day if sent by facsimile transmission (and immediately
after transmission receipt of which has been confirmed by telephone by sender).

 

SECTION 10.08              WAIVERS.  ARCH PARENT AND SELLER MAY, BY WRITTEN
NOTICE TO PURCHASER, AND PURCHASER MAY, BY WRITTEN NOTICE TO ARCH PARENT AND
SELLER: (A) EXTEND THE TIME FOR THE PERFORMANCE OF ANY OF THE OBLIGATIONS OR
OTHER ACTIONS OF THE OTHER UNDER THIS AGREEMENT; (B) WAIVE ANY INACCURACIES IN
THE REPRESENTATIONS OR WARRANTIES OF THE OTHER CONTAINED IN THIS AGREEMENT OR IN
ANY DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT; OR (C) WAIVE COMPLIANCE WITH
ANY OF THE COVENANTS AND AGREEMENTS OF THE OTHER CONTAINED IN THIS AGREEMENT.
THE WAIVER BY ANY PARTY HERETO OF A BREACH OF ANY PROVISION OF THIS AGREEMENT
SHALL NOT OPERATE OR BE CONSTRUED AS A WAIVER OF ANY SUBSEQUENT BREACH.

 

SECTION 10.09              ENTIRE AGREEMENT.  THIS AGREEMENT, THE AGREEMENTS
CONTEMPLATED HEREIN AND IN THE SCHEDULES AND EXHIBITS HERETO, AND IN THE
AGREEMENTS AND DOCUMENTS EXECUTED AT THE CLOSING IN CONNECTION HEREWITH AND
THEREWITH, TOGETHER WITH THE CONFIDENTIALITY AGREEMENT, CONSTITUTE THE ENTIRE
AGREEMENT AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND
THEREOF AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, ORAL AND WRITTEN,
AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF.  NO
REPRESENTATION, WARRANTY, PROMISE, INDUCEMENT OR STATEMENT OF INTENTION HAS BEEN
MADE BY ANY PARTY THAT IS NOT EXPRESSLY EMBODIED IN THIS AGREEMENT OR SUCH OTHER
DOCUMENTS, AND NONE OF THE PARTIES SHALL BE BOUND BY, OR BE LIABLE FOR, ANY
ALLEGED REPRESENTATION, WARRANTY, PROMISE, INDUCEMENT OR STATEMENT OF INTENTION
NOT EMBODIED HEREIN OR THEREIN.

 

SECTION 10.10              APPLICABLE LAW.  THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAW THEREOF.

 

SECTION 10.11              BINDING EFFECT, BENEFITS.  THIS AGREEMENT SHALL INURE
TO THE BENEFIT OF AND BE BINDING UPON THE PARTIES HERETO AND THEIR RESPECTIVE
SUCCESSORS AND PERMITTED ASSIGNS. NOTWITHSTANDING ANYTHING CONTAINED IN THIS
AGREEMENT TO THE CONTRARY, NOTHING IN THIS AGREEMENT, EXPRESS OR IMPLIED, IS
INTENDED TO CONFER ON ANY PERSON OTHER THAN THE PARTIES HERETO OR THEIR
RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS, ANY RIGHTS, REMEDIES, OBLIGATIONS
OR LIABILITIES UNDER OR BY REASON OF THIS AGREEMENT.

 

SECTION 10.12              ASSIGNABILITY.  NEITHER THIS AGREEMENT NOR ANY OF THE
PARTIES’ RIGHTS OR OBLIGATIONS HEREUNDER SHALL BE ASSIGNABLE BY ANY PARTY HERETO
WITHOUT THE PRIOR WRITTEN CONSENT OF THE OTHER PARTIES HERETO, PROVIDED, THAT
SELLER MAY ASSIGN ITS RIGHTS AND OBLIGATIONS TO AN AFFILIATE OF SELLER IN
CONNECTION WITH SELLER’S TRANSFER OF THE AIIHC COMMON SHARES.

 

SECTION 10.13              AMENDMENTS.  THIS AGREEMENT MAY BE MODIFIED, AMENDED
OR SUPPLEMENTED AT ANY TIME BY PURCHASER, AND ARCH PARENT AND SELLER.  WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, THIS AGREEMENT MAY ONLY BE AMENDED,
VARIED OR SUPPLEMENTED BY AN INSTRUMENT IN WRITING, SIGNED BY THE PARTIES
HERETO.

 

SECTION 10.14              KNOWLEDGE.  TO THE EXTENT THAT ANY REPRESENTATION OR
WARRANTY OF ANY PARTY HEREUNDER IS EXPRESSLY QUALIFIED BY REFERENCE TO THE
KNOWLEDGE OF SUCH PARTY, SUCH

 

45

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KNOWLEDGE SHALL MEAN THE ACTUAL KNOWLEDGE OF ONE OR MORE OF THE FOLLOWING
PERSONS AFTER REASONABLE INQUIRY.

 

(a)                                  with respect to the knowledge of Arch
Parent, Seller, AIIHC and/or any of  the Subsidiaries:  Constantine Iordanou
(for Arch Parent), John D. Vollaro, Peter A. Appel and Louis T. Petrillo (for
Arch Parent and/or Seller) and William B. Lockhorn, Mark J. Keyser, Bruce
Arneson, Joseph Timoney and Joseph King (for AIIHC and the Subsidiaries); and

 

(b)                                 with respect to the knowledge of Purchaser: 
Bruce W. Schnitzer and John S. Struck.

 

SECTION 10.15              DISCLOSURE.  THE WRITTEN DISCLOSURES BY SELLER IN
THIS AGREEMENT OR IN A SCHEDULE OR EXHIBIT HERETO OR IN ANY AGREEMENT,
CERTIFICATE OR OTHER DOCUMENT EXECUTED AND DELIVERED PURSUANT HERETO OF SUCH
INFORMATION AS IS NOT REQUIRED UNDER THE TERMS HEREOF OR THEREOF TO BE DISCLOSED
HEREIN OR THEREIN SHALL NOT EFFECT THE STANDARDS OF MATERIALITY OR DISCLOSURE
APPLICABLE TO THIS AGREEMENT AND THE SCHEDULES AND EXHIBITS HERETO OR SUCH OTHER
AGREEMENT, CERTIFICATE OR OTHER DOCUMENT EXECUTED AND DELIVERED PURSUANT
HERETO.  ARCH PARENT AND SELLER SHALL HAVE THE RIGHT, AT ANY TIME ON OR BEFORE
JUNE 7, 2004, TO SUPPLEMENT OR AMEND THE WRITTEN DISCLOSURES BY SELLER IN THE
SCHEDULES ATTACHED HERETO, WHICH AMENDED OR SUPPLEMENTED SCHEDULES SHALL BE
DEEMED TO HAVE BEEN DISCLOSED AS OF THE DATE OF THIS AGREEMENT.

 

SECTION 10.16              HEADINGS.  THE HEADINGS IN THIS AGREEMENT ARE FOR
REFERENCE ONLY, AND SHALL NOT AFFECT THE INTERPRETATION OF THIS AGREEMENT.

 

SECTION 10.17              NO THIRD PARTY BENEFICIARIES.  EXCEPT AS OTHERWISE
EXPRESSLY SET FORTH IN ARTICLE IV OR IN ANY PROVISION OF THIS AGREEMENT, NOTHING
IN THIS AGREEMENT IS INTENDED OR SHALL BE CONSTRUED TO GIVE ANY PERSON, OTHER
THAN THE PARTIES HERETO, ANY LEGAL OR EQUITABLE RIGHT, REMEDY OR CLAIM UNDER OR
IN RESPECT OF THIS AGREEMENT OR ANY PROVISION CONTAINED HEREIN.

 

SECTION 10.18              SPECIFIC PERFORMANCE.  THE PARTIES RECOGNIZE AND
AGREE THAT IF FOR ANY REASON ANY OF THE PROVISIONS OF THIS AGREEMENT ARE NOT
PERFORMED IN ACCORDANCE WITH THEIR SPECIFIC TERMS OR OTHERWISE BREACHED,
IMMEDIATE AND IRREPARABLE HARM OR INJURY WOULD BE CAUSED FOR WHICH MONEY DAMAGES
WOULD NOT BE AN ADEQUATE REMEDY.  ACCORDINGLY, EACH PARTY AGREES THAT, IN
ADDITION TO ANY OTHER AVAILABLE REMEDIES, THE OTHER PARTY SHALL BE ENTITLED TO
SPECIFIC PERFORMANCE OF THE TERMS HEREOF, IN ADDITION TO ANY OTHER REMEDY AT LAW
OR EQUITY.  IN THE EVENT THAT ANY ACTION SHOULD BE BROUGHT IN EQUITY TO ENFORCE
THE PROVISIONS OF THIS AGREEMENT, NO PARTY WILL ALLEGE, AND EACH PARTY HEREBY
WAIVES THE DEFENSE, THAT THERE IS AN ADEQUATE REMEDY AT LAW.

 

46

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IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have
executed and delivered this Stock Purchase Agreement as of the day and year
first above written.

 

 

 

PROTECTIVE UNDERWRITING
SERVICES, INC.

 

 

 

 

 

 

 

By:

 

/s/ Bruce W. Schnitzer

 

 

Name:  Bruce W. Schnitzer

 

 

Title:  President

 

 

 

 

 

 

 

 

ARCH CAPITAL HOLDINGS LTD.

 

 

 

 

 

 

 

By:

 

/s/ John D. Vollaro

 

 

Name:  John D. Vollaro

 

 

Title:  Director

 

 

 

 

 

 

 

 

ARCH CAPITAL GROUP LTD.

 

 

 

 

 

 

 

By:

 

/s/ John D. Vollaro

 

 

Name:  John D. Vollaro

 

 

Title:  Executive Vice President and
Chief Financial Officer

 

 

--------------------------------------------------------------------------------

 

Exhibit A

 

Investment Guidelines of PSIC and American Independent Insurance

 

--------------------------------------------------------------------------------

 

Exhibit B

 

Current Reinsurance Agreement

 

--------------------------------------------------------------------------------

 

AMENDMENT NO. 1 TO THE
STOCK PURCHASE AGREEMENT

 

AMENDMENT NO. 1 (this “Amendment”), dated as of July 9, 2004, by and among
PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware corporation (“Purchaser”),
ARCH CAPITAL HOLDINGS LTD., a Bermuda company (“Seller”), and ARCH CAPITAL GROUP
LTD., a Bermuda company (“Arch Parent”).

 

WHEREAS, Purchaser, Seller and Arch Parent entered into that certain Stock
Purchase Agreement (the “Agreement”) dated as of May 13, 2004; and

 

WHEREAS, the parties to the Agreement desire to amend the Agreement as set forth
in this Amendment.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties, intending to be legally bound, hereby agree as
follows:

 

1.                                       Section 1.02 of the Agreement is
amended to read in its entirety as follows:

 

“SECTION 1.02  Purchase Price.  The purchase price for the AIIHC Common Shares
(the “Purchase Price”) shall consist of $45,000,000 in cash to Seller.”

 

2.                                       Section 4.07 of the Agreement is
amended to read in its entirety as follows:

 

“SECTION 4.07  Consents and Conditions.

 

(a)  Upon the terms and subject to the conditions of this Agreement, each of the
parties hereto shall cooperate, and use their respective reasonable best efforts
to, make all filings and agree to use all reasonable best efforts to obtain any
required third party and governmental consents to the transactions contemplated
by this Agreement, and to cause each of the conditions and obligations of Seller
and Purchaser hereunder to be satisfied.  Consistent with such provision, as
soon as reasonably practicable following the Due Diligence End Date (as defined
herein), Purchaser shall complete and deliver to the Offices of the Delaware,
Indiana, Maryland, Ohio and Pennsylvania Insurance Departments, as applicable,
the initial filings of the Form A relating to Purchaser’s purchase of the AIIHC
Common Shares.  Prior to Closing, Purchaser shall respond to any written inquiry
made by any such Office relating to the Form A within five (5) business days of
the receipt of any such written inquiry.

 

--------------------------------------------------------------------------------

 

(b)  Purchaser, on the one hand, and Seller, AIIHC and the Subsidiaries, on the
other hand, hereby agree to mutually cooperate during any pre-Closing
discussions with ratings agencies regarding AIIHC and the Subsidiaries which are
deemed appropriate and reasonable by both Seller and Purchaser, including
participation in meetings and providing documents as may be reasonably requested
by such ratings agencies.  In furtherance of the foregoing, the parties have
scheduled a meeting with A. M. Best for July 14, 2004 (such meeting, and any
postponement, adjournment or continuation thereof, and any follow up proximately
related thereto, referred to herein as the “Best Meeting”).  Purchaser and
Seller each agree to cause their respective representatives, and Seller and Arch
Parent agree to cause representatives of their applicable reinsurance affiliates
and representatives of AIIHC, to attend the Best Meeting.  In connection with
the Best Meeting, the parties agree to mutually cooperate to develop (i)
statutory financial information and analytics for a presentation to be made at
the Best Meeting, including (x) projected income statements and balance sheets
for AIIHC and the Subsidiaries for 2004 and 2005 and (y) estimated Best Capital
Adequacy Ratio (BCAR) calculations for 2003 and 2004, and (ii) a business plan
for AIIHC and the Subsidiaries, including (v) a chart of management
responsibilities, (w) a presentation of the proposed capital structure and a
description of the sponsors and investors, (x) plans with regard to dividends
and/or other planned reductions of, or additions to, statutory capital, (y)
changes in product strategy, distribution channels or geographic coverage and
(z) growth plans.”

 

3.                                       Section 4.08 of the Agreement is
amended by adding the following provisions at the end of Section 4.08:

 

“(c)  On the Closing Date, Seller and Arch Parent shall cause the Current
Agreement to be amended as set forth in Exhibit C to this Agreement and this
amendment to the Current Agreement shall apply to the Reinsurance Agreements
provided for in this Section 4.08.”

 

“(d)  On the Closing Date, Seller and Arch Parent shall cause the Loss Portfolio
Transfer Reinsurance Agreement between American Independent Insurance and Arch
Reinsurance Ltd. (the “Loss Portfolio Agreement”) to be amended as set forth in
Exhibit D to this Agreement.”

 

4.                                       Article VI of the Agreement is amended
by adding a new Section 6.07 as follows:

 

“SECTION 6.07  From and after the Closing, and subject to the terms and
conditions of this Article VI, Arch Parent and Seller shall be liable to, and
shall indemnify, protect, defend and hold harmless the Purchaser Indemnified
Parties against any and all Damages sustained by any Purchaser Indemnified Party
resulting from or arising out of the

 

2

--------------------------------------------------------------------------------

 

matters set forth on Schedule 6.07.  For the avoidance of doubt, such
indemnification shall not be subject to the Cap or Basket.  Notice of a claim
hereunder shall survive the Closing until the expiration of the applicable
statute of limitations.”

 

5.                                       Section 7.01(d) of the Agreement is
amended to read in its entirety as follows:

 

“(d)  by Purchaser, in writing, (i) at any time on or prior to the Due Diligence
End Date (as defined herein) in the event that a Due Diligence Trigger Event (as
defined herein) has occurred; “Due Diligence End Date” means reasonably promptly
after the Best Meeting; “Due Diligence Trigger Event” means Purchaser reasonably
believes after the Best Meeting that AIIHC’s insurance subsidiaries will receive
a Best rating post-Closing of less than B+; or (ii) at any time on or prior to
July 14, 2004 in the event that Purchaser and the members of AIIHC management
listed on Schedule 7.01 have not entered into mutually satisfactory management
agreements;”

 

6.                                       Section 7.01(e) of the Agreement is
amended to read in its entirety as follows:

 

“(e)  by Seller or Purchaser, in writing, if the Closing has not occurred on or
before November 15, 2004; provided, that the right to terminate this Agreement
under this Section 7.01(e) shall not be available to any party whose failure, or
whose Affiliate’s failure, to fulfill any obligation under this Agreement shall
have been the cause of, or shall have resulted in, the failure of such
conditions to have been complied with, performed or satisfied prior to such
date; and provided, further, that such date may be extended, in the sole
discretion of either Seller or Purchaser, by thirty (30) days, if the sole
condition to Closing that is not yet capable of being satisfied is the approval
of any state insurance regulatory body;”

 

7.                                       Article VIII of the Agreement is
amended by adding the following at the end of Article VIII:

 

“SECTION 8.11  Reinsurance.  Each of the Current Agreement and the Loss
Portfolio Agreement shall have been amended as provided in Section 4.08(c) and
(d) of this Agreement.”

 

8.                                       Each of Seller and Arch Parent
represents and warrants to Purchaser that (i) it has the requisite corporate
power and authority to execute and deliver this Amendment and (ii) the execution
and delivery of this Amendment has been duly authorized and approved by all
necessary corporate action of Arch Parent and Seller and no other corporate
proceedings on the part of Arch Parent or Seller are necessary to authorize the
execution and delivery of this Amendment.

 

3

--------------------------------------------------------------------------------

 

9.                                       Purchaser represents to Seller and Arch
Parent that (i) it has the requisite corporate power and authority to execute
and deliver this Amendment and (ii) the execution and delivery of this Amendment
has been duly authorized and approved by all necessary corporate action of
Purchaser and no other corporate proceedings on the part of Purchaser are
necessary to authorize the execution and delivery of this Amendment.

 

10.                                 Following execution of this Amendment, all
references to the Agreement appearing in the Agreement or in any ancillary
document shall mean the Agreement as amended by this Amendment.

 

11.                                 This Amendment 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.

 

[Remainder of this page is intentionally blank.]

 

4

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have
executed and delivered this Amendment as of the day and year first above
written.

 

 

PROTECTIVE UNDERWRITING SERVICES, INC.

 

 

 

 

 

 

 

 

 

 

By:

/s/ John Struck

 

 

 

Name: John Struck

 

 

Title:  Vice President

 

 

 

 

 

 

 

 

 

 

ARCH CAPITAL HOLDINGS LTD.

 

 

 

 

 

 

 

 

 

 

By:

/s/ John D. Vollaro

 

 

 

Name: John D. Vollaro

 

 

Title:  Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARCH CAPITAL GROUP LTD.

 

 

 

 

 

 

 

 

By:

/s/ John D. Vollaro

 

 

 

Name: John D. Vollaro

 

 

Title:  Executive Vice President and
Chief Financial Officer

 

 

 

 

--------------------------------------------------------------------------------

 

AMENDMENT NO. 2 TO THE
STOCK PURCHASE AGREEMENT

 

AMENDMENT NO. 2 (this “Amendment”), dated as of July 13, 2004, by and among
PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware corporation (“Purchaser”),
ARCH CAPITAL HOLDINGS LTD., a Bermuda company (“Seller”), and ARCH CAPITAL GROUP
LTD., a Bermuda company (“Arch Parent”).

 

WHEREAS, Purchaser, Seller and Arch Parent entered into that certain Stock
Purchase Agreement, dated as of May 13, 2004, as amended by Amendment No. 1 to
the Stock Purchase Agreement, dated as of July 9, 2004 (the “Agreement”); and

 

WHEREAS, the parties to the Agreement desire to amend the Agreement as set forth
in this Amendment.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties, intending to be legally bound, hereby agree as
follows:

 

1.                                      Section 7.01(d) of the Agreement is
amended to read in its entirety as follows:

 

“(d)  by Purchaser, in writing, (i) at any time on or prior to the Due Diligence
End Date (as defined herein) in the event that a Due Diligence Trigger Event (as
defined herein) has occurred; “Due Diligence End Date” means reasonably promptly
after the Best Meeting; “Due Diligence Trigger Event” means Purchaser reasonably
believes after the Best Meeting that AIIHC’s insurance subsidiaries will receive
a Best rating post-Closing of less than B+; or (ii) at any time on or prior to
July 16, 2004 in the event that Purchaser and the members of AIIHC management
listed on Schedule 7.01 have not entered into mutually satisfactory management
agreements;”

 

2.                                       Each of Seller and Arch Parent
represents and warrants to Purchaser that (i) it has the requisite corporate
power and authority to execute and deliver this Amendment and (ii) the execution
and delivery of this Amendment has been duly authorized and approved by all
necessary corporate action of Arch Parent and Seller and no other corporate
proceedings on the part of Arch Parent or Seller are necessary to authorize the
execution and delivery of this Amendment.

 

3.                                       Purchaser represents to Seller and Arch
Parent that (i) it has the requisite corporate power and authority to execute
and deliver this Amendment and (ii) the execution and delivery of this Amendment
has been duly authorized and approved by all necessary corporate action of
Purchaser and no other corporate proceedings on the part of Purchaser are
necessary to authorize the execution and delivery of this Amendment.

 

--------------------------------------------------------------------------------

 

4.                                       Following execution of this Amendment,
all references to the Agreement appearing in the Agreement or in any ancillary
document shall mean the Agreement as amended by this Amendment.

 

5.                                       This Amendment 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.

 

[Remainder of this page is intentionally blank.]

 

2

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have
executed and delivered this Amendment as of the day and year first above
written.

 

 

PROTECTIVE UNDERWRITING
SERVICES, INC.

 

 

 

 

 

 

 

By:

/s/ John Struck

 

 

Name: John Struck

 

Title:  Vice President

 

 

 

 

ARCH CAPITAL HOLDINGS LTD.

 

 

 

 

 

 

 

By:

/s/ John D. Vollaro

 

 

Name: John D. Vollaro

 

Title:  Director

 

 

 

 

 

 

ARCH CAPITAL GROUP LTD.

 

 

 

 

 

 

 

By:

/s/ John D. Vollaro

 

 

Name: John D. Vollaro

 

Title:  Executive Vice President and
Chief Financial Officer

 

--------------------------------------------------------------------------------

 

AMENDMENT NO. 3 TO THE
STOCK PURCHASE AGREEMENT

 

AMENDMENT NO. 3 (this “Amendment”), dated as of July 16, 2004, by and among
PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware corporation (“Purchaser”),
ARCH CAPITAL HOLDINGS LTD., a Bermuda company (“Seller”), and ARCH CAPITAL GROUP
LTD., a Bermuda company (“Arch Parent”).

 

WHEREAS, Purchaser, Seller and Arch Parent entered into that certain Stock
Purchase Agreement, dated as of May 13, 2004, as amended (the “Agreement”); and

 

WHEREAS, the parties to the Agreement desire to amend the Agreement as set forth
in this Amendment.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties, intending to be legally bound, hereby agree as
follows:

 

1.                                       Section 7.01(d) of the Agreement is
amended to read in its entirety as follows:

 

“(d)  by Purchaser, in writing, (i) at any time on or prior to the Due Diligence
End Date (as defined herein) in the event that a Due Diligence Trigger Event (as
defined herein) has occurred; “Due Diligence End Date” means reasonably promptly
after the Best Meeting; “Due Diligence Trigger Event” means Purchaser reasonably
believes after the Best Meeting that AIIHC’s insurance subsidiaries will receive
a Best rating post-Closing of less than B+; or (ii) at any time on or prior to
July 23, 2004 in the event that Purchaser and the members of AIIHC management
listed on Schedule 7.01 have not entered into mutually satisfactory management
agreements;”

 

2.                                       Each of Seller and Arch Parent
represents and warrants to Purchaser that (i) it has the requisite corporate
power and authority to execute and deliver this Amendment and (ii) the execution
and delivery of this Amendment has been duly authorized and approved by all
necessary corporate action of Arch Parent and Seller and no other corporate
proceedings on the part of Arch Parent or Seller are necessary to authorize the
execution and delivery of this Amendment.

 

3.                                       Purchaser represents to Seller and Arch
Parent that (i) it has the requisite corporate power and authority to execute
and deliver this Amendment and (ii) the execution and delivery of this Amendment
has been duly authorized and approved by all necessary corporate action of
Purchaser and no other corporate proceedings on the part of Purchaser are
necessary to authorize the execution and delivery of this Amendment.

 

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4.                                       Following execution of this Amendment,
all references to the Agreement appearing in the Agreement or in any ancillary
document shall mean the Agreement as amended by this Amendment.

 

5.                                       This Amendment 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.

 

[Remainder of this page is intentionally blank.]

 

2

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IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have
executed and delivered this Amendment as of the day and year first above
written.

 

 

PROTECTIVE UNDERWRITING
SERVICES, INC.

 

 

 

 

 

 

 

By:

/s/ John Struck

 

 

Name: John Struck

 

Title:  Vice President

 

 

 

 

 

 

 

ARCH CAPITAL HOLDINGS LTD.

 

 

 

 

 

 

 

By:

/s/ John D. Vollaro

 

 

Name: John D. Vollaro

 

Title:  Director

 

 

 

 

 

 

 

ARCH CAPITAL GROUP LTD.

 

 

 

 

 

 

 

By:

/s/ John D. Vollaro

 

 

Name: John D. Vollaro

 

Title:  Executive Vice President and
Chief Financial Officer

 

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AMENDMENT NO. 4 TO THE
STOCK PURCHASE AGREEMENT

 

AMENDMENT NO. 4 (this “Amendment”), dated as of July 28, 2004, by and among
PROTECTIVE UNDERWRITING SERVICES, INC., a Delaware corporation (“Purchaser”),
ARCH CAPITAL HOLDINGS LTD., a Bermuda company (“Seller”), and ARCH CAPITAL GROUP
LTD., a Bermuda company (“Arch Parent”).

 

WHEREAS, Purchaser, Seller and Arch Parent entered into that certain Stock
Purchase Agreement, dated as of May 13, 2004, as amended (the “Agreement”); and

 

WHEREAS, the parties to the Agreement desire to amend the Agreement as set forth
in this Amendment.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties, intending to be legally bound, hereby agree as
follows:

 

1.                                       ARTICLE II of the Agreement is amended
by adding a new Section 2.30 as follows:

 

“SECTION 2.30  Payments to AIIHC Management.  Schedule 2.30 sets forth the
amounts of cash payments to be paid by Arch Parent, Seller or any of their
Affiliates to current and former employees, officers and directors of AIIHC or
the Subsidiaries as a result of the consummation of the transactions
contemplated by this Agreement (whether or not the arrangement is set forth in
Schedule 2.09(g)).”

 

2.                                       ARTICLE IV of the Agreement is amended
by adding a new Section 4.14 as follows:

 

“SECTION 4.14  Capital Contribution.  Arch Parent hereby agrees it shall cause
Seller to and Seller hereby agrees that it shall make a capital contribution to
AIIHC in the amount of $350,000 on or prior to the Closing Date.”

 

3.                                       Section 7.01(d) of the Agreement is
amended to read in its entirety as follows:

 

“(d)  by Purchaser, in writing, (i) at any time on or prior to the Due Diligence
End Date (as defined herein) in the event that a Due Diligence Trigger Event (as
defined herein) has occurred; “Due Diligence End Date” means July 23, 2004; “Due
Diligence Trigger Event” means Purchaser reasonably believes after the Best
Meeting that AIIHC’s insurance subsidiaries will receive a Best rating
post-Closing of less than B+; or (ii) at any time on or prior to July 30, 2004
in the event that

 

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Purchaser and the members of AIIHC management listed on Schedule 7.01 have not
entered into mutually satisfactory management agreements;”

 

4.                                       ARTICLE VIII of the Agreement is
amended by adding a new Section 8.12 as follows:

 

“SECTION 8.12  Completion of Capital Contribution.  The capital contribution by
Seller to AIIHC in the amount of $350,000, pursuant to Section 4.14, shall have
been made.”

 

5.                                       Each of Seller and Arch Parent
represents and warrants to Purchaser that (i) it has the requisite corporate
power and authority to execute and deliver this Amendment and (ii) the execution
and delivery of this Amendment has been duly authorized and approved by all
necessary corporate action of Arch Parent and Seller and no other corporate
proceedings on the part of Arch Parent or Seller are necessary to authorize the
execution and delivery of this Amendment.

 

6.                                       Purchaser represents to Seller and Arch
Parent that (i) it has the requisite corporate power and authority to execute
and deliver this Amendment and (ii) the execution and delivery of this Amendment
has been duly authorized and approved by all necessary corporate action of
Purchaser and no other corporate proceedings on the part of Purchaser are
necessary to authorize the execution and delivery of this Amendment.

 

7.                                       Following execution of this Amendment,
all references to the Agreement appearing in the Agreement or in any ancillary
document shall mean the Agreement as amended by this Amendment.

 

8.                                       This Amendment 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.

 

[Remainder of this page is intentionally blank.]

 

2

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IN WITNESS WHEREOF, intending to be legally bound hereby, the parties have
executed and delivered this Amendment as of the day and year first above
written.

 

 

 

PROTECTIVE UNDERWRITING
SERVICES, INC.

 

 

 

 

 

 

 

By:

/s/ John Struck

 

 

Name: John Struck

 

Title:  Vice President

 

 

 

 

 

 

 

ARCH CAPITAL HOLDINGS LTD.

 

 

 

 

 

 

 

By:

/s/ John D. Vollaro

 

 

Name: John D. Vollaro

 

Title:  Director

 

 

 

 

 

 

 

ARCH CAPITAL GROUP LTD.

 

 

 

 

 

 

 

By:

/s/ John D. Vollaro

 

 

Name: John D. Vollaro

 

Title:  Executive Vice President and
Chief Financial Officer

 

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