Exhibit 10(GG)
QUOTA SHARE REINSURANCE AGREEMENT
     THIS QUOTA SHARE REINSURANCE AGREEMENT (this “Agreement”) is made this 30th
day of October, 2009 but effective as of 11:59 p.m. on October 31, 2009 (the
“Effective Date”) between SOUTHERN MUTUAL INSURANCE COMPANY, a Georgia mutual
insurance company with its principal office in Athens, Georgia (“Southern
Mutual”), and DONEGAL MUTUAL INSURANCE COMPANY, a Pennsylvania mutual fire
insurance company with its principal office in Marietta, Pennsylvania (“Donegal
Mutual”).
WITNESSETH:
     WHEREAS, Donegal Mutual has offered to provide reinsurance to Southern
Mutual to the extent and on the terms and conditions set forth in this Agreement
and nothing stated in this Agreement shall in any manner create any obligations
or establish any rights against Donegal Mutual in favor of any person not a
party to this Agreement; and
     WHEREAS, Southern Mutual has agreed to place such reinsurance with Donegal
Mutual to the extent and on the terms and conditions set forth in this
Agreement;
     NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Agreement, and intending to be legally bound hereby, Donegal Mutual and Southern
Mutual agree as follows:
ARTICLE 1
DEFINITIONS
     1.1 Definitions. As used in this Agreement:
     “Actual Effective Date Reserves” shall have the meaning set forth in
Section 6.1(a)(ii) of this Agreement.
     “Allocated Loss Adjustment Expenses” shall mean all court costs, interest
upon judgments and mitigation, investigation, adjustment and legal expenses
chargeable to or incurred in (i) the mitigation, investigation, negotiation,
settlement of or defense against a Loss under a Covered Policy, (ii) loss
prevention mitigation or investigation in respect of any Covered Policy as to
which Southern Mutual has posted a loss reserve, (iii) the investigation,
prevention and workout of a potential Loss under a Covered Policy, (iv) the
protection, perfection and exercise of any subrogation or salvage or rights of
reimbursement with respect to any Covered Policy or (v) any deficiency resulting
from the loss settlement or the workout of a potential Loss under a Covered
Policy. Allocated Loss Adjustment Expenses shall

 

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

 

exclude all office expenses and salaries of officers and employees of Southern
Mutual. All loss adjustment expenses that are not Allocated Loss Adjustment
Expenses shall constitute Unallocated Loss Adjustment Expenses.
     “Ceding Commission” shall have the meaning set forth in Section 6.1(b).
     “Covered Policies” shall mean an insurance policy first issued by Southern
Mutual on or after 12:01 a.m. on January 1, 1976. Donegal Mutual is not assuming
any liability from any insurance policy Southern Mutual first issued on or
before 12:01 a.m. on January 1, 1976.
     “Donegal Mutual” shall have the meaning set forth in the introductory
paragraph of this Agreement.
     “Effective Date” shall have the meaning set forth in the introductory
paragraph of this Agreement.
     “Estimated Effective Date Reserves” shall have the meaning set forth in
Section 6.1(a)(ii) of this Agreement.
     “Extra Contractual Obligations” shall mean all liabilities (i) for
compensatory, consequential, exemplary, punitive or similar damages which
directly relate to any alleged or actual act, error, omission, fraud or
misrepresentation by any Person, any of its affiliates or any of its or its
affiliates’ officers or employees, whether intentional or otherwise, in
connection with the Covered Policies or (ii) from any alleged or actual reckless
conduct or bad faith by any Person, any of its affiliates or any of its or its
affiliates’ officers or employees in connection with such Person’s handling of
any claim under any of the Covered Policies, including the settlement, defense
of or appeal of any claim or in connection with the issuance, offer, sale,
delivery, cancellation or administration by any Person or any of its affiliates
or any of its or its affiliates’ officers or employees under any of the Covered
Policies.
     “Loss” shall mean (i) amounts incurred by Southern Mutual in settlement or
satisfaction of claims under or in respect of the Covered Policies, (ii) any and
all Allocated Loss Adjustment Expenses Southern Mutual incurs under or in
respect of the Covered Policies, (iii) amounts payable to reinsurers other than
Donegal Mutual under or with respect to the Covered Policies and (iv) Extra
Contractual Obligations arising after the Effective Date from the acts of
Donegal Mutual, in each case net of amounts actually collected by Donegal Mutual
or Southern Mutual under Third Party Reinsurance Agreements.
     “Occurrence” shall be the definition of said term as set forth in Southern
Mutual’s Covered Policies, provided, however, in the event “Occurrence” is not
defined in any Covered Policy that is reinsured pursuant to this Agreement,
then, as to such policy, the term “each Occurrence” shall mean each accident or
Occurrence or series of accidents or Occurrences arising out of one event, and
shall include aggregate limits of liability for a period not exceeding 12 months
when a Covered Policy applies in excess of aggregate limits.

-2-

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

 

If Southern Mutual and Donegal Mutual cannot specifically determine the date of
any Loss, accident, casualty or loss Occurrence, the date of such Loss,
accident, casualty or loss Occurrence shall be the inception date of the
original Covered Policy reinsured pursuant to this Agreement, provided that such
policy period shall be deemed not to exceed 12 calendar months.
     “Person” shall mean any individual, corporation, limited liability company,
association, joint-stock company, business trust or other similar organization,
partnership, joint venture, trust, unincorporated association or government or
any agency, instrumentality or political subdivision of a government.
     “Quota Share” shall mean 100%.
     “Recovery” shall mean any amount actually received by Southern Mutual in
respect of any Loss covered by Donegal Mutual under this Agreement, whether by
subrogation, salvage, reimbursement or other recovery.
     “Recovery Expenses” shall mean any expense, including court costs and legal
expenses Southern Mutual incurs for purposes of obtaining a Recovery with
respect to Losses, but excluding the expenses and salaries of the officers and
employees of Southern Mutual or its affiliates or normal overhead expenses of
Southern Mutual and its affiliates and excluding any expense that would
constitute an Allocated Loss Adjustment Expense.
     “Southern Mutual” shall have the meaning set forth in the introductory
paragraph of this Agreement.
     “Termination Date” shall have the meaning assigned to it in Section 17.1.
     “Third-Party Reinsurance Agreements” shall mean, to the extent such
treaties or agreements relate to Covered Policies, (i) all reinsurance treaties
and agreements under which Southern Mutual is a ceding party that were in force
on the date of this Agreement, and (ii) any such treaty or agreement that is
terminated or expired but under which Southern Mutual may continue to receive
reinsurance coverage.
     “Unallocated Loss Adjustment Expenses” shall have the meaning set forth in
the definition of Allocated Loss Adjustment Expenses.
     “Ultimate Net Loss” as used in this Agreement means the actual loss
Southern Mutual pays or that Southern Mutual becomes liable to pay under the
Covered Policies reinsured pursuant to this Agreement, including all loss
adjustment expense, 100% of any Extra Contractual Obligations and 100% of any
Loss in Excess of Policy Limits as defined in Sections 12.1 and 12.2 of this
Agreement. “Ultimate Net Loss” shall include any expenses of litigation, accrued
interest where such accrued interest is a part of any judgment, and all other
loss expenses of Southern Mutual including legal expenses and costs incurred in

-3-

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

 

connection with coverage and validity issues and any legal proceedings with
respect thereto that are allocable to a Covered Policy.
ARTICLE 2
APPLICATION OF AGREEMENT
     2.1 Business Covered. This Agreement applies to all insurance policies
Southern Mutual issued that are in effect as of the Effective Date and all
policies that Southern Mutual issues after the Effective Date and which Southern
Mutual issues during the term of this Agreement until 11:59 p.m. on the
Termination Date.
ARTICLE 3
COVER
     3.1 Quota Share Reinsurance. Subject to the terms and conditions of this
Agreement, Southern Mutual hereby cedes to Donegal Mutual, and Donegal Mutual
hereby accepts and reinsures from Southern Mutual, the Quota Share of any
Losses, including loss development on all Covered Policies issued prior to the
Effective Date, under the Covered Policies. Such Losses and all other
liabilities of Southern Mutual with respect to the Covered Policies are
sometimes collectively referred to in this Agreement as the “Reinsured
Liabilities.” Such cession by Southern Mutual and acceptance and reinsurance by
Donegal Mutual shall, in the sole discretion of Donegal Mutual, be gross or net
of any losses covered by the Third-Party Reinsurance Agreements of Southern
Mutual. To the extent Donegal Mutual elects to accept and reinsure such cession
net of any losses covered by Third Party Reinsurance Agreements of Southern
Mutual, Donegal Mutual hereby guarantees Southern Mutual from and against any
uncollectible third-party reinsurance recoverables. Donegal Mutual is not
assuming under this Agreement any liabilities of Southern Mutual that do not
constitute Reinsured Liabilities and any liabilities of Southern Mutual that are
not Reinsured Liabilities shall remain the liabilities of Southern Mutual.
ARTICLE 4
REINSURANCE FOLLOWS ORIGINAL POLICIES
     4.1 Follow the Fortunes. Except to the extent specifically otherwise
provided in this Agreement or as Southern Mutual and Donegal Mutual may agree in
writing, all reinsurance under this Agreement shall be subject in all respects
to the same rates, terms, conditions, waivers and interpretations, and to the
same modifications, cancellations and alterations as the Covered Policies, the
true intent of this Agreement being that Donegal Mutual shall, in every case to
which this Agreement applies, follow the fortunes of Southern Mutual; provided,
however, that the Agreement shall not be construed to expand the liability

-4-

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

 

of Donegal Mutual beyond the liabilities Donegal Mutual has specifically assumed
pursuant to this Agreement.
     4.2 Third-Party Rights. Except as set forth in Sections 7.1 or 13.1,
nothing in this Agreement shall in any manner create any obligations or
establish any rights against Donegal Mutual in favor of any Person not a party
to this Agreement.
ARTICLE 5
CHANGE IN POLICY FORMS
     5.1 Policy Forms. Southern Mutual and Donegal Mutual have agreed on the
forms of Covered Policies that Southern Mutual will issue and that Donegal
Mutual will reinsure pursuant to this Agreement. Southern Mutual shall advise
Donegal Mutual of any change in any form of any Covered Policy no less than
90 days prior to the implementation of any such change, and such change shall
not be implemented unless Donegal Mutual shall have approved such change in
writing within 30 days after receipt of such notice from Southern Mutual, such
approval not to be unreasonably withheld by Donegal Mutual.
ARTICLE 6
PREMIUMS AND COMMISSIONS
     6.1 Premiums and Commissions. In consideration of the respective
obligations of Southern Mutual and Donegal Mutual under this Agreement, Donegal
Mutual and Southern Mutual shall make the following respective payments:
          (a) On the Effective Date, Southern Mutual shall pay to Donegal Mutual
an amount equal to the Effective Date Reserves (as defined below) as follows:
               (i) On the Effective Date, Southern Mutual shall pay to Donegal
Mutual an amount equal to the Estimated Effective Date Reserves to this
Agreement net of the Estimated Effective Date Ceding Commission. The payment
this Section 6.1(a)(i) requires shall be made by Southern Mutual’s delivery to
Donegal Mutual of cash or securities whose value Donegal Mutual shall have
approved no earlier than the third business day preceding the Effective Date
having a fair market value as of the market close on the business day
immediately preceding the Effective Date equal to the amount payable pursuant to
this Section 6.1(a)(i).
               (ii) Promptly following the Effective Date, Southern Mutual and
Donegal Mutual agree to determine the Actual Effective Date Reserves on a
definitive basis. Not later than 60 days after the Effective Date, Southern
Mutual shall deliver a statement to Donegal Mutual that sets forth Southern
Mutual’s determination of the Actual Effective Date Reserves. If Donegal Mutual
does not provide an objection notice to such statement, such

-5-

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

 

Southern Mutual statement shall be deemed to have been accepted in the form in
which it was delivered to Donegal Mutual and shall be final and binding upon the
parties in the absence of fraud or manifest error. If Donegal Mutual shall
object to such Southern Mutual statement or if Southern Mutual shall object to
any response to such statement by Donegal Mutual, the objecting party shall give
the other party written notice of such objection within 30 days of the objecting
party’s receipt of such statement or response. Such notice of objection shall
set forth in reasonable detail the elements and amounts to which the objecting
party objects and the basis for such objections. If either party provides an
objection notice, the other party, within 15 days after its receipt of the
objection notice, shall seek to resolve the objection. In the event Southern
Mutual and Donegal Mutual are unable to resolve the objection within 15 days
thereafter, the parties shall submit the matter to KPMG LLP (“KPMG”) for final
resolution of the matter. Within 30 days of the submission of the matter to
KPMG, KPMG shall deliver its resolution of the matter to Southern Mutual and
Donegal Mutual. KPMG’s resolution of the matter shall be binding on Southern
Mutual and Donegal Mutual. Southern Mutual and Donegal Mutual shall bear equally
the costs of KPMG in determining such resolution.
               (iii) To the extent the amount of the Actual Effective Date
Reserves as so determined was less than the Estimated Effective Date Reserves,
Donegal Mutual shall forthwith remit to Southern Mutual the amount by which the
Estimated Effective Date Reserves exceeded the Actual Effective Date Reserves.
               (iv) To the extent the amount of the Actual Effective Date
Reserves as so determined was greater than the Estimated Effective Date
Reserves, Southern Mutual shall forthwith remit to Donegal Mutual the amount by
which the Actual Effective Date Reserves exceeded the Estimated Effective Date
Reserves.
          (b) On the Effective Date, Donegal Mutual shall pay to Southern Mutual
a Ceding Commission equal to 36% of the amount of Southern Mutual’s unearned
premium reserves included in the Estimated Effective Date Reserves as follows:
               (i) On the Effective Date, Donegal Mutual shall be deemed to have
paid to Southern Mutual an Estimated Ceding Commission equal to 36% of the
Estimated Effective Date Reserves (the “Estimated Effective Date Ceding
Commission”) upon Southern Mutual’s netting the amount of the amount of the
Estimated Effective Date Ceding Commission against the amount of the Estimated
Effective Date Reserves.
               (ii) Promptly following the Closing Date, Southern Mutual and
Donegal Mutual agree to determine the Actual Effective Date Ceding Commission on
a definitive basis according to the determination of the Actual Effective Date
Reserves. Not later than 60 days after the Effective Date, Donegal Mutual shall
deliver a statement to Southern Mutual that sets forth the amount of the Actual
Effective Date Ceding Commission.

-6-

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

 

               (iii) To the extent that the amount of the Actual Effective Date
Ceding Commission as so determined exceeds the amount of the Estimated Effective
Date Ceding Commission, Donegal Mutual shall forthwith remit to Southern Mutual
the amount by which the Actual Effective Date Ceding Commission exceeds the
Estimated Effective Date Ceding Commission.
               (iv) To the extent that the amount of the Estimated Effective
Date Ceding Commission as so determined was greater than the amount of the
Actual Effective Date Ceding Commission, Southern Mutual shall forthwith remit
to Donegal Mutual the amount by which the Estimated Effective Date Ceding
Commission exceeded the Actual Effective Date Ceding Commission.
          (c) As additional consideration in connection with the reinsurance
this Agreement establishes, Donegal Mutual shall be entitled to the Quota Share
of any premium, fee and other amounts actually collected, with the exception of
service charges, on or after the Effective Date by Southern Mutual with respect
to the Covered Policies and Donegal Mutual shall be responsible for all Losses,
including loss development, on Covered Policies after the Effective Date.
Southern Mutual shall promptly remit to Donegal Mutual any such amounts that
Southern Mutual receives net of any reinsurance reinstatement premiums paid.
          (d) If, after the Effective Date, either Southern Mutual or Donegal
Mutual discovers an error or omission in the calculation of any amount under
this Section 6.1, Southern Mutual and Donegal Mutual shall rectify such error or
omission as promptly as practicable after the discovery of the error or
omission. Without limiting the foregoing, after the Effective Date, Donegal
Mutual will promptly pay to Southern Mutual, upon notice from Southern Mutual,
without interest, any amount Southern Mutual paid to Donegal Mutual pursuant to
this Agreement, net of Ceding Commissions without interest, with respect to any
insurance policy that Southern Mutual or Donegal Mutual determines was not a
Covered Policy as of the Effective Date. In addition, in the event that after
the Effective Date, Southern Mutual or Donegal Mutual discover that Southern
Mutual has made payments to Donegal Mutual pursuant to this Section 6.1 with
respect to premiums that have been refunded in whole or in part, Donegal Mutual
will promptly upon notice from Southern Mutual return to Southern Mutual,
without interest, all of the amount Southern Mutual paid to Donegal Mutual
pursuant to this Section 6.1 in respect of such insurance policy to the extent
necessary to put Southern Mutual in the same position it would have been in had
Southern Mutual been aware of the return of premium prior to the Effective Date
net of Ceding Commissions.
ARTICLE 7
LOSSES AND LOSS ADJUSTMENT EXPENSES
     7.1 Payment to Southern Mutual for Ultimate Net Losses. Donegal Mutual
shall pay to Southern Mutual the Quota Share of sums actually paid by Southern
Mutual in

-7-

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

 

settlement of the Ultimate Net Losses under the Covered Policies, on and after
the Effective Date; provided, however, that in the event of the insolvency of
Southern Mutual, Donegal Mutual shall pay such amount to the liquidator,
receiver or statutory successor of Southern Mutual in accordance with the
provisions of Article 13 of this Agreement.
     7.2 Expenses to be Borne by Donegal Mutual. Donegal Mutual shall bear its
Quota Share of all external loss adjustment expenses Southern Mutual incurs in
the investigation, adjustment and litigation of all claims under the Covered
Policies.
     7.3 Salvage. Donegal Mutual shall receive its Quota Share of all salvage,
recoveries and payments received subsequent to a Loss settlement under this
Agreement whether received before or after the final adjudication of any claim
under the Covered Policies.
     7.4 Loss Development. Southern Mutual shall advise Donegal Mutual promptly
of all claims and any subsequent loss reserve developments pertaining to the
Covered Policies reinsured pursuant to this Agreement.
     7.5 Defense of Claims. Southern Mutual shall investigate and, to the extent
that may be required by the Covered Policies reinsured under this Agreement,
defend any claim affecting the reinsurance provided by this Agreement and pursue
such claim to final determination.
     7.6 Donegal Mutual Participation. Southern Mutual agrees, upon the request
of Donegal Mutual, that when so requested, Southern Mutual will afford Donegal
Mutual an opportunity to participate with Southern Mutual, at the expense of
Donegal Mutual, in the defense or control of any claim, suit or proceeding
involving the reinsurance provided pursuant to this Agreement; and Southern
Mutual and Donegal Mutual shall cooperate in all material respects in the
defense of such suit, claim or proceeding.
ARTICLE 8
PREMIUM
     8.1 Payment of Direct Written Premium. During the term of this Agreement,
Donegal Mutual shall assume from Southern Mutual 100% of Southern Mutual’s net
written premiums applicable to its liability under the Covered Policies for the
reinsurance provided pursuant to this Agreement. Southern Mutual shall pay such
premiums, net of any premiums for third-party reinsurance.
     8.2 Summary Statements. As soon as possible after the end of each month,
Southern Mutual shall submit to Donegal Mutual a statement that summarizes the
net premiums ceded, return premiums and conversions on Southern’s net written
business, the actual premiums due, net of commission, and Southern Mutual shall
pay to Donegal Mutual any amount due within 15 days of Southern Mutual’s
delivery of such statement to Donegal

-8-

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

 

Mutual. Southern Mutual shall furnish quarterly to Donegal Mutual, Southern
Mutual’s unearned premium reserve on the Covered Policies. Southern Mutual shall
compute its unearned premium reserve on the daily pro rata basis.
     8.3 Payment of Losses. Donegal Mutual shall pay its proportion of Loss and
loss expenses paid by Southern Mutual to Southern Mutual within 15 days after
Southern Mutual renders a monthly account summarizing the Losses and loss
expenses. Donegal Mutual shall have the right, at its option, to offset the
amount of such Loss or loss expense as provided in Article 14.
ARTICLE 9
CEDING COMMISSION
     9.1 Payment of Ceding Commission. Donegal Mutual shall pay a ceding
commission as provided in Article 6 to Southern Mutual on the net written
premiums Southern Mutual cedes to Donegal Mutual under this Agreement. On all
return premiums, Southern Mutual shall promptly return to Donegal Mutual the
Ceding Commission applicable to such returned premium.
     9.2 Statement of Ceding Commission. As soon as possible after the end of
each month, Donegal Mutual shall submit to Southern Mutual a statement that sets
forth the Ceding Commission fees, and Donegal Mutual shall pay any amount due
within fifteen (15) days of Donegal Mutual’s receipt of the monthly statements
required by Section 8.2.
     9.3 Taxes. The Ceding Commission allowance that Donegal Mutual pays to
Southern Mutual on the Covered Policies reinsured pursuant to this Agreement
includes provision for all premium taxes, licenses and fees with the exception
of service charges, assessments and any other expenses whatsoever, except
external loss adjustment expenses.
ARTICLE 10
INSPECTION
     10.1 Right of Inspection. Southern Mutual shall place at the disposal of
Donegal Mutual and Donegal Mutual shall have the right to inspect, through its
authorized representatives, at all reasonable times during the term of this
Agreement and thereafter, the books, records and papers of Southern Mutual
pertaining to the reinsurance provided pursuant to this Agreement and all claims
made in connection therewith.

-9-

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

 

ARTICLE 11
RESERVES AND TAXES
     11.1 Maintenance of Reserves. Donegal Mutual shall maintain legal reserves
with respect to the unearned premiums and claims it assumes pursuant to this
Agreement.
     11.2 Premium Taxes. Southern Mutual shall be liable for all taxes on
premiums reported to Donegal Mutual under this Agreement and Southern Mutual
shall reimburse Donegal Mutual for such taxes where Donegal Mutual is required
to pay the same.
ARTICLE 12
EXTRA CONTRACTUAL OBLIGATIONS/EXCESS OF POLICY LIMITS
     12.1 Extra Contractual Obligations. The obligations reinsured pursuant to
this Agreement shall include Extra Contractual Obligations under the Covered
Policies.
     12.2 Losses In Excess of Policy Limits. The obligations reinsured pursuant
to this Agreement shall include Loss in Excess of Policy Limits with respect to
any Covered Policy. “Loss in Excess of Policy Limits” shall mean losses in
excess of the policy limit, having been incurred because of, but not limited to,
failure by Southern Mutual to settle within the Covered Policy limit or by
reason of alleged or actual negligence, fraud or bad faith in rejecting an offer
of settlement or in preparation of the defense or in the trial of any action
against its insured or reinsured or in the preparation or prosecution of an
appeal consequent upon such action.
     12.3 Date of Occurrence. An Extra Contractual Obligation and Loss in Excess
of Policy Limits shall be deemed to have occurred on the same date as the Loss
covered under a Covered Policy, and shall constitute part of the original Loss.
     12.4 Meaning of Loss. For the purposes of the Loss in Excess of Policy
Limits coverage under this Agreement, the word “Loss” shall mean any amount for
which Southern Mutual would have been contractually liable to pay had it not
been for the limit of the Covered Policy.
     12.5 Loss Adjustment Expense. Loss adjustment expense in respect of Extra
Contractual Obligations and Loss in Excess of Policy Limits shall be covered
under this Agreement in the same manner as other loss adjustment expense.
     12.6 Georgia Law. In no event shall Donegal Mutual provide reinsurance to
Southern Mutual to the extent not permitted under the laws of Georgia.

-10-

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

 

ARTICLE 13
INSOLVENCY CLAUSE
     13.1 Insolvency. In the event of the insolvency and the appointment of a
conservator, rehabilitator, liquidator or statutory successor of Southern
Mutual,
          (a) the reinsurance provided by this Agreement and each and every
reinsurance agreement heretofore or hereafter entered into between Donegal
Mutual and Southern Mutual shall be payable, subject to Section 13.1(b) by
Donegal Mutual directly to Southern Mutual or to its conservator, rehabilitator,
liquidator, receiver or statutory successor on the basis of the liability of
Southern Mutual under the Covered Policies without diminution because of the
insolvency of Southern Mutual or because the conservator, rehabilitator,
liquidator, receiver, or statutory successor has failed to pay all or any
portion of any claims.
          (b) Donegal Mutual shall make the payments as set forth above directly
to Southern Mutual or to its conservator, rehabilitator, liquidator, receiver or
statutory successor. If an insured under a Covered Policy submits a claim to
Southern Mutual’s conservator, rehabilitator, liquidator, receiver or statutory
successor, Donegal Mutual shall have the right, in lieu of making a payment to
such conservator, rehabilitator, liquidator, receiver or statutory successor, to
make a payment on the claim directly to the insured. Any such payment by Donegal
Mutual shall discharge Donegal Mutual from its related payment obligation under
such Covered Policy.
ARTICLE 14
OFFSET CLAUSE
     14.1 Offset. Except for payments to be made pursuant to Section 6.1, which
may only be offset against each other, Donegal Mutual and Southern Mutual shall
each have, and may exercise at any time and from time to time, the right to
offset any balance or amount, whether on account of premiums, premium
adjustments, commissions, claims, Losses, Recoveries or otherwise, due from such
party to the other party hereto under this Agreement. The party asserting the
right of offset shall have and may exercise such right at any time whether the
balance or balances due or to become due to such party from the other are on
account of premiums or on account of Losses or otherwise. If Donegal Mutual is
required to make a payment directly to an insured under a Covered Policy, no
offset shall be allowed between Donegal Mutual and the insured under a Covered
Policy, provided, however, that Donegal Mutual shall continue to maintain its
offset rights against Southern Mutual pursuant to this Agreement.

-11-

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

 

ARTICLE 15
ARBITRATION
     15.1 Arbitration. Should an irreconcilable difference of opinion arise
between Southern Mutual and Donegal Mutual as to the interpretation of this
Agreement or the transactions this Agreement contemplates, as a condition
precedent to any right of action under this Agreement, such difference shall be
submitted to arbitration to the decision of a board of arbitration composed of
two arbitrators and an umpire, meeting in Atlanta, Georgia under the rules of
the American Arbitration Association.
     15.2 Identity of Arbitrators. The members of the board of arbitration shall
be active or retired disinterested executive officers of insurance or
reinsurance companies. Each party shall appoint one arbitrator and the two
arbitrators shall choose an umpire before they enter into arbitration. If either
party fails to appoint its arbitrator within four weeks after being requested to
do so, the other party shall also appoint the second arbitrator. If the two
arbitrators fail to agree upon the appointment of an umpire within four weeks
after their nominations, each of them shall name three nominees for umpire, of
whom each arbitrator shall decline two nominees and the decision among the two
remaining nominees shall be made by the claimant party drawing lots.
     15.3 Default Selection. In the event that either party shall fail to choose
an arbitrator within four weeks following a request by Donegal Mutual or
Southern Mutual for arbitration, the requesting party shall choose two
arbitrators who shall choose the umpire.
     15.4 Submission of Initial Brief. The claimant shall submit its initial
brief within 20 days from appointment of the umpire. The respondent shall submit
its brief within 20 days after receipt of the claimant’s brief and the claimant
may submit a reply brief within 10 days after receipt of the respondent’s brief.
     15.5 Arbitrator Decision. The board of arbitration shall make its decision
with regard to the custom and usage of the insurance and reinsurance business.
The board of arbitration shall issue its decision in writing based upon a
hearing in which evidence may be introduced without following strict rules of
evidence but in which cross examination and rebuttal shall be allowed. The board
of arbitration shall make its decision within 60 days following the conclusion
of the hearings unless the parties consent to an extension. The majority
decision of the board of arbitration shall be final and binding upon all parties
to the proceeding. Judgment may be entered upon the award of the board of
arbitration in any court having jurisdiction thereof.
     15.6 Multiple Reinsurers. If more than one reinsurer is involved in the
same dispute, all such reinsurers shall constitute and act as one party for
purposes of this clause and communications shall be made by Southern Mutual to
each of the reinsurers constituting

-12-

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

 

the one party, provided, however, that nothing therein shall impair the rights
of such reinsurers to assert several, rather than joint defenses or claims, nor
be construed as changing the liability of the reinsurers under the terms of this
Agreement from several to joint.
     15.7 Arbitration Expenses. Each party shall bear the expense of its own
arbitrator and shall jointly and equally bear with the other party the expense
of the umpire. The remaining costs of the arbitration proceedings shall be
allocated by the board of arbitration.
ARTICLE 16
GOVERNING LAW
     16.1 Governing Law. This Agreement shall be interpreted under and pursuant
to the laws of the State of Georgia in all respects.
ARTICLE 17
COMMENCEMENT AND TERMINATION
     17.1 Effective Time. This Agreement shall take effect as of 12:01 A.M. on
the Effective Date and is entered into for an unlimited term, but either party
may terminate the term of this Agreement at any time by giving not less than
12 months notice in writing to the other party of a date of termination of this
Agreement (the “Termination Date”).
     17.2 Participation Until Termination. Donegal Mutual shall participate in
business coming within the terms of this Agreement until the date of termination
of this Agreement.
     17.3 Run-Off. In the event either party terminates this Agreement the
reinsurance pursuant to this Agreement shall be provided on a “run-off” basis
for all Covered Policies under this Agreement written prior to the Termination
Date until all liabilities under the Covered Policies have been satisfied in
full.
ARTICLE 18
CURRENCY OF PAYMENT
     18.1 Currency of Payment. All payments under this Agreement shall be made
in the currency of the United States of America.
ARTICLE 19
ACCESS TO RECORDS
     19.1 Access to Records. Donegal Mutual, by its duly appointed
representatives, shall have the right at any reasonable time, to examine all
papers in the possession of

-13-

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

 

Southern Mutual that relate to the Covered Policies that Donegal Mutual has
reinsured pursuant to this Agreement.
ARTICLE 20
STATISTICS
     20.1 Statistics. Southern Mutual shall furnish Donegal Mutual such
statistics as may be necessary to comply with statutory requirements and in such
form as Donegal Mutual may reasonably request from Southern Mutual.
ARTICLE 21
ERRORS AND OMISSIONS
     21.1 Errors and Omissions. Any inadvertent delay, omission or error by
either party shall not relieve the other party from any liability that would
have attached under this Agreement, provided that such delay, omission or error
shall not impose any greater liability on Donegal Mutual than would have
attached under this Agreement if such act, delay, omission or error had not
occurred, and such act, delay, omission or error is promptly and reasonably
rectified upon discovery by the responsible party.
ARTICLE 22
MISCELLANEOUS
     22.1 Notices. All reports, remittances, notices, letters, financial
statements or any other communications between the parties to this Agreement
shall be addressed as follows:
     To Donegal Mutual:
Donegal Mutual Insurance Company
1195 River Road
Marietta, Pennsylvania 17547
Attention: President
Facsimile: (717) 426-7009
     To Southern Mutual:
Southern Mutual Insurance Company
360 Alps Road
Athens, Georgia 30606
Attention: President
Facsimile: (706) 549-7855

-14-

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

 

     22.2 Assignment. Neither this Agreement nor any rights or obligations under
this Agreement may be assigned or otherwise transferred by any party to this
Agreement, including by operation of law, without the consent of the other party
to this Agreement and the prior approval of the Commissioner of Insurance of the
State of Georgia; provided, however, that Donegal Mutual may assign its rights
or obligations under this Agreement to any entity that has a current A.M. Best
rating equal to or greater than A.
     22.3 Severability. If any provision of this Agreement shall be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement and this
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been part of this Agreement unless the deletion of such
provision would result in such a material change as to cause completion or
continuation of the transactions contemplated by this Agreement to be
unreasonable or materially frustrate the objectives of Southern Mutual and
Donegal Mutual as expressed in this Agreement.
     22.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts together
shall constitute one and the same agreement.
     IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed in duplicate and delivered as of the day and year first above written.

            DONEGAL MUTUAL INSURANCE COMPANY
      By:   /s/ Donald H. Nikolaus         Donald H. Nikolaus, President       
        SOUTHERN MUTUAL INSURANCE COMPANY
      By:   /s/ Allen R. Green         Allen R. Green, President             

-15-