Exhibit 10.2
CONSULTING AGREEMENT
     THIS CONSULTING AGREEMENT (this “Agreement”) dated as of July 29, 2011
among Donegal Mutual Insurance Company, a Pennsylvania mutual insurance company
having its principal place of business at 1195 River Road, Marietta,
Pennsylvania 17547 (“Donegal Mutual”), Donegal Group Inc., a Delaware
corporation having its principal place of business at 1195 River Road, Marietta,
Pennsylvania 17547 (“DGI,” and, together with Donegal Mutual, the “Companies”),
and Donald H. Nikolaus, an individual whose principal office address is 1195
River Road, Marietta, Pennsylvania 17547 (the “Consultant”).
WITNESSETH:
     WHEREAS, the Consultant has served for many years as the President and
Chief Executive Officer of Donegal Mutual and DGI; and
     WHEREAS, upon the earlier of the retirement of the Consultant or the date
on which the Companies shall have terminated the employment of the Consultant
under the Employment Agreement dated as of July 29, 2011 among Donegal Mutual,
DGI and the Consultant (the “Employment Agreement”) for other than Cause, as
defined in the Employment Agreement, the Death or the Permanent Disability of
the Consultant, as defined in this Agreement, or the Consultant shall have
terminated the Consultant’s employment as President and Chief Executive Officer
of the Companies under the Employment Agreement for Good Reason, as defined in
the Employment Agreement, the Companies agree to retain the Consultant to
provide consulting services to the Companies and their respective boards of
directors (together, the “Boards”), and the Consultant agrees to render
consulting services to the Companies and the Boards, in each case in accordance
with the terms and conditions set forth in this Agreement;
     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the Companies and the Consultant, intending to be
legally bound hereby, mutually agree as follows:
     1. Consulting Services.
          (a) (i) Effective on the date of the retirement of the Consultant as
the President and Chief Executive Officer of Donegal Mutual and DGI or such
earlier date on which the Companies shall have terminated the employment of the
Consultant as President and Chief Executive Officer of the Companies under the
Employment Agreement for other than Cause or the Death or Permanent Disability
of the Consultant or the date on which the Consultant shall have terminated the
employment of the Consultant as President and Chief

 

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

 

Executive Officer of the Companies under the Employment Agreement for Good
Reason (the “Effective Date”) and except as otherwise provided in this
Agreement, this Agreement shall supersede and replace the Employment Agreement
and the Companies shall thereupon retain the Consultant to provide consulting
services to the Companies and the Boards in accordance with the terms and
conditions set forth in this Agreement and the Consultant agrees to provide
consulting services to the Companies and the Boards in accordance with the terms
and conditions set forth in this Agreement. Donegal Mutual and DGI shall be
jointly and severally liable to the Consultant with respect to (i) all
liabilities of Donegal Mutual to the Consultant under this Agreement and
(ii) all liabilities of DGI to the Consultant under this Agreement; provided,
however, that Donegal Mutual shall not be responsible for any liability of DGI
to the Consultant to the extent that DGI has discharged such liability, and DGI
shall not be responsible for any liability of Donegal Mutual to the Consultant
to the extent that Donegal Mutual has discharged such liability.
               (ii) The term of this Agreement shall commence upon the Effective
Date and end on the fifth anniversary of the Effective Date, unless the
Companies earlier terminate the retention of the Consultant for Cause, as
defined in this Agreement, the death of the Consultant or the Permanent
Disability of the Consultant.
          (b) Unless this Agreement otherwise provides or pursuant to the mutual
agreement of the Companies and the Consultant, all of the terms and conditions
of this Agreement shall continue in full force and effect throughout the Term
and, with respect to those terms and conditions that apply after the Term, after
the Term.
          (c) Notwithstanding paragraph 1(a) of this Agreement, the Companies,
by action of the Boards and effective as specified in a written notice thereof
to the Consultant in accordance with the terms of this Agreement, shall have the
right to terminate the Consultant’s retention under this Agreement at any time
during the Term, for Cause or for other than for Cause or on account of the
Consultant’s Death or Permanent Disability, subject to the provisions of this
paragraph 1.
               (i) As used in this Agreement, “Cause” shall mean (A) the
Consultant’s willful and continued failure substantially to provide consulting
services to with the Companies as set forth in this Agreement, or the commission
by the Consultant of any activities constituting a willful violation or breach
under any material federal, state or local law or regulation applicable to the
activities of Donegal Mutual, DGI or their respective subsidiaries and
affiliates, in each case, after notice of such failure, breach or violation from
the Companies to the Consultant and a reasonable opportunity for the Consultant
to cure such failure, breach or violation in all material respects, (B) fraud,
breach of fiduciary duty, dishonesty, misappropriation or other actions by the
Consultant that cause intentional material damage to the property or business of
Donegal Mutual, DGI or their respective subsidiaries and affiliates, or (C) the
Consultant’s inability to render consulting services such

-2-

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

 

that the Consultant is substantially unable to perform the Consultant’s duties
under this Agreement in all material respects other than for physical or mental
impairment or illness.
               (ii) As used in this Agreement, “Permanent Disability” shall mean
a physical or mental disability of the Consultant such that the Consultant is
substantially unable to perform those consulting services that the Consultant
would otherwise reasonably have been expected to continue to perform and the
nonperformance of such consulting services continues for a period of 240
consecutive days, provided, however, that in order to terminate the Consultant’s
retention under this Agreement on account of Permanent Disability, the Companies
must provide the Consultant with written notice of the respective Boards’ good
faith determinations to terminate the Consultant’s retention under this
Agreement for reason of Permanent Disability not less than 30 days prior to such
termination, which notice shall specify the date of termination. Until the
specified effective date of termination by reason of Permanent Disability, the
Consultant shall continue to receive the consulting fees at the rates set forth
in paragraph 3 of this Agreement. No termination of the Consultant’s retention
under this Agreement because of Permanent Disability shall impair any rights of
the Consultant under any disability insurance policy the Companies maintained at
the commencement of the aforesaid 240-day period.
          (d) The Consultant shall have the right to terminate the Consultant’s
retention under this Agreement at any time during the Term for Good Reason or
without Good Reason. As used in this Agreement, “Good Reason” shall mean a
material breach by either of the Companies of its respective obligations to the
Consultant under this Agreement, and the Companies do not cure such breach in
all material respects to the reasonable satisfaction of the Consultant, within
30 days, in each case following written notice of such breach from the
Consultant to the Companies, which notice the Companies shall provide within
90 days of the date on which the Companies first have actual knowledge of the
existence of the breach.
          (e) Termination Obligations.
               (i) If (A) the Companies terminate the retention of the
Consultant under this Agreement for any reason other than Cause or the death or
Permanent Disability of the Consultant or (B) the Consultant terminates the
retention of the Consultant under this Agreement for Good Reason, the Companies
shall pay the Consultant’s annual fee for the remainder of the Term at the same
times and in the same installments as the Companies paid the consulting fee to
the Consultant until the Companies shall have discharged such obligations.
               (ii) If (A) the Companies terminate the retention of the
Consultant under this Agreement for Cause or (B) the Consultant terminates the
Consultant’s retention under this Agreement for any reason other than Good
Reason, the sole obligation of the Companies to the Consultant shall be to pay
to the Consultant any accrued obligation of the

-3-

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

 

Companies to the Consultant pursuant to this Agreement within 30 days after the
date of such termination.
               (iii) No provision of this Agreement shall adversely affect any
vested rights of the Consultant under the Companies’ employee benefit plans or
other plans the Companies have established prior to the Effective Date of this
Agreement.
          (f) The Companies and the Consultant intend that this Agreement be
drafted and administered in compliance with Section 409A of the Code, including,
but not limited to, any future amendments to Section 409A, and any other
Internal Revenue Service (“IRS”) or other governmental rulings or
interpretations (together, “Section 409A”) issued pursuant to Section 409A so as
not to subject the Consultant to payment of interest or any additional tax under
Section 409A. The Companies and the Consultant intend for any payments under
paragraphs 1(e)(i) or (ii) to satisfy either the requirements of Section 409A or
to be exempt from the application of Section 409A, and the Companies and the
Consultant shall construe and interpret this Agreement accordingly. In
furtherance of such intent, if payment or provision of any amount or benefit
under this Agreement that is subject to Section 409A at the time specified in
this Agreement would subject such amount or benefit to any additional tax under
Section 409A, the Companies shall postpone payment or provision of such amount
or benefit to the earliest commencement date on which the Companies can make
such payment or provision of such amount or benefit can be made without
incurring such additional tax. In addition, to the extent that any IRS guidance
issued under Section 409A would result in the Consultant being subject to the
payment of interest or any additional tax under Section 409A, the Companies and
the Consultant agree, to the extent reasonably possible, to amend this Agreement
in order to avoid the imposition of any such interest or additional tax under
Section 409A. Any such amendment shall have the minimum economic effect
necessary and be determined reasonably and in good faith by the Companies and
the Consultant.
          (g) If a payment under paragraphs 1(e)(i) or (ii) of this Agreement
does not qualify as a short-term deferral under Section 409A or any similar or
successor provisions, as of the Consultant’s Termination Date, the Companies may
not make such distributions to the Consultant before the date that is six months
after the date of the Consultant’s Termination Date or, if earlier, the date of
the Consultant’s death (the “Six-Month Delay”). The Companies shall accumulate
payments to which the Consultant would otherwise be entitled during the first
six months following the Termination Date (the “Six-Month Delay Period”) and
make such payments on the first day of the seventh month following the
Consultant’s Termination Date. Notwithstanding the Six-Month Delay set forth in
this paragraph 1(g):
               (i) To the maximum extent Section 409A or any similar or
successor provisions permit, during each month of the Six-Month Delay Period,
the Companies will pay the Consultant an amount equal to one-sixth of the lesser
of (1) the maximum amount that Code Section 401(a)(17) permits to be taken into
account under a qualified plan for the

-4-

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

 

year in which the Consultant’s Termination Date occurs and (2) the sum of the
Consultant’s annualized fees based upon the annual rate of pay for the
consulting services provided to the Companies for the taxable year of the
Consultant preceding the taxable year of the Consultant in which the
Consultant’s Termination Date occurs, adjusted for any increase during that year
that was expected to continue indefinitely if the Consultant’s Termination Date
has not occurred ; provided that amounts paid under this sentence will count
toward, and will not be in addition to, the total payment amount the Companies
have the obligation to pay to the Consultant under paragraphs 1(e)(i) and
(ii) of this Agreement; and
               (ii) To the maximum extent Section 409A, or any similar or
successor provisions, permits within ten days following the Consultant’s
Termination Date, the Companies shall pay the Consultant an amount equal to the
applicable dollar amount under Code Section 402(g)(1)(B) for the year in which
the Consultant’s Termination Date occurred; provided that the amount the
Companies pay under this sentence may include, and need not be in addition to,
the total payment amount this Agreement requires the Companies to pay to the
Consultant under paragraph 1(e).
          (h) In the event that the independent registered public accounting
firm of either of the Companies or the IRS determines that any payment, coverage
or benefit provided to the Consultant pursuant to this Agreement is subject to
the excise tax imposed by Sections 280G or 4999 of the Code or any successor
provisions of Sections 280G and 4999 or any interest or penalties the Consultant
incurs with respect to such excise tax, the Companies, within 30 days
thereafter, shall pay to the Consultant, in addition to any other payment,
coverage or benefit due and owing under this Agreement, an additional amount
that will result in the Consultant’s net after tax position, after taking into
account any interest, penalties or taxes imposed on the amounts payable under
this paragraph 1(h), upon the receipt of the payments for which this Agreement
provides be no less advantageous to the Consultant than the net after tax
position to the Consultant that would have been obtained had Sections 280G and
4999 of the Code not been applicable to such payment, coverage or benefits.
Except as this Agreement otherwise provides, tax counsel, whose selection shall
be reasonably acceptable to the Consultant and the Companies and whose fees and
costs shall be paid for by the Companies, shall make all determinations this
paragraph 1(h) requires.
          (i) In the event that the independent registered public accounting
firm of either of the Companies or the IRS determines that any payment, coverage
or benefit due or owing to the Consultant pursuant to this Agreement is subject
to the excise tax Section 409A of the Code imposes or any successor provision of
Section 409A or any interest or penalties, including interest imposed under
Section 409(A)(1)(B)(i)(I) of the Code, the Consultant incurs as a result of the
application of such provision, the Companies, within 30 days of the date of such
impositions, shall pay to the Consultant, in addition to any other payment,
coverage or benefit due and owing under this Agreement, an additional amount
that will result in the Consultant’s net after-tax position, after taking into
account any interest, penalties or taxes

-5-

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

 

imposed on the amounts paid under this paragraph 1(i), being no less
advantageous to the Consultant than the net after-tax position the Consultant
would have obtained had Section 409A of the Code not been applicable to such
payment, coverage or benefits. Except as this Agreement otherwise provides, tax
counsel, whose selection shall be reasonably acceptable to the Consultant and
the Companies, and whose fees and costs the Companies shall pay, shall make all
determinations this paragraph 1(i) require.
          (j) The Companies and the Consultant shall give any notice of
termination of this Agreement to the Consultant or the Companies, as the case
may be, in accordance with the provisions of paragraph 9.
          (k) The Companies agree to reimburse the Consultant for the reasonable
fees and expenses of the Consultant’s attorneys and for court and related costs
in any proceeding to enforce the provisions of this Agreement in which the
Consultant is successful on the merits.
     2. Services of the Consultant.
          (a) The Consultant agrees to provide services to the Companies in
connection with the general operations of the Companies and merger and
acquisition activities, participating in meetings and other activities of the
Insurance Federation of Pennsylvania and such other projects and assignments
upon which the Companies and the Consultant shall from time to time mutually
agree. The Consultant shall report to the Boards of Directors of the Companies.
The Consultant agrees to perform such services faithfully, diligently and in
accordance with the commercially reasonable efforts of the Consultant. The
Consultant shall provide, on an average weekly basis during the course of any
fiscal year of the Companies, up to 20 hours of consulting services per week.
Except for travel normally incidental and reasonably necessary to the business
of the Companies and the duties of the Consultant under this Agreement, the
duties of the Consultant may be performed from his residence in Silver Spring,
Pennsylvania or from an office location the Companies provide that is not more
than 35 miles distance from Silver Spring, Pennsylvania.
          (b) The Companies and the Consultant intend that the Consultant shall
render services under this Agreement as an employee of the Companies, and no one
shall construe this Agreement to be inconsistent with that status. The
Consultant shall be entitled to receive all benefits the Companies provide to
the executive officers of the Companies named in the annual proxy statement of
DGI, including health insurance and such benefits of the Consultant as became
fully vested while serving as President and Chief Executive Officer of the
Companies under the Employment Agreement. The fees, benefits and other
compensation the Consultant receives under this Agreement shall be subject to
and net of any federal, state of local taxes or contributions imposed under any
employment insurance, social security, income tax or other tax law or regulation
with respect to the Consultant’s performance of consulting services under this
Agreement.

-6-

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

 

     3. Fees. For all services the Consultant renders under this Agreement:
          (a) As compensation for the Consultant’s services under this
Agreement, the Companies shall pay the Consultant annual compensation in an
amount equal to the sum of 50% of the Base Salary, as defined in the Employment
Agreement, for the completed last fiscal year of the Companies before the date
the Consultant commences the provision of consulting services pursuant to this
Agreement, but in no event less than $600,000 plus such discretionary incentive
payments as the Companies may from time to time determine.
          (b) From and after the Effective Date and throughout the Term, the
Companies shall provide the Consultant with office facilities and secretarial
services consistent with the Consultant’s stature as the long-term former Chief
Executive Officer of the Companies.
     4. Expenses. The Companies shall promptly reimburse the Consultant for all
reasonable expenses the Consultant pays or incurs in connection with the
performance of the Consultant’s duties and responsibilities under this
Agreement, upon presentation of expense vouchers or other appropriate
documentation therefor.
     5. Indemnification. Notwithstanding anything in the Companies’ respective
certificates or articles of incorporation or their By-laws to the contrary, the
Companies shall at all times indemnify the Consultant during the Consultant’s
retention by the Companies or while the Consultant is providing consulting
services to the Companies, and thereafter, to the fullest extent applicable law
permits for any matter in any way relating to the Consultant’s affiliation with
the Companies or its subsidiaries; provided, however, that if the Companies
shall have terminated the Consultant’s retention under this Agreement for Cause,
then, except to the extent otherwise required by law, the Companies shall have
no obligation whatsoever to indemnify the Consultant for any claim arising out
of the matter for which the Companies have terminated the Consultant’s retention
for Cause.
     6. Confidential Information. The Consultant understands that in the course
of the Consultant’s retention by the Companies the Consultant will receive
confidential information concerning the business of the Companies and that the
Companies desire to protect such confidential information. The Consultant agrees
that the Consultant will not at any time during or after the period of the
Consultant’s retention by the Companies reveal to anyone outside the Companies,
or use for the Consultant’s own benefit, any such information that the Companies
have designated as confidential or that the Consultant understood to be
confidential without specific written designation by the Companies. Upon
termination of the retention of the Consultant under this Agreement, and upon
the request of the Companies, the Consultant shall promptly deliver to the
Companies any and all written materials, records and documents, including all
copies of such written materials, documents and records, the Consultant made or
that come into the Consultant’s possession during the Term and that the
Consultant retained contain or concern confidential information of the

-7-

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

 

Companies and all other written materials the Companies furnished to the
Consultant for the Consultant’s use during the Term, including all copies of
such written materials, documents and records, whether of a confidential nature
or otherwise.
     7. Non-Competition.
          (a) For the purposes of this Agreement, the term “Competitive
Enterprise” shall mean any insurance company, insurance holding company, federal
or state-chartered bank, savings and loan association, savings bank, credit
union, consumer finance company, bank holding company, savings and loan holding
company, unitary holding company, financial holding company or any of the
foregoing types of entities in the process of organization or application for
federal or state regulatory approval and shall also include other providers of
financial services and entities that offer financial services or products with
which the Companies or their respective subsidiaries or affiliates currently
offer or may in the future offer.
          (b) For a period of two years (the “Restricted Period”) immediately
following the Companies’ termination of the Consultant’s retention under this
Agreement for Cause or the Consultant’s termination of his consulting services
under this Agreement for other than Good Reason, the Consultant shall not,
provided that the Companies remain in compliance with their respective
obligations under this Agreement:
               (i) serve as a director, officer, employee or agent of, or act as
a consultant or advisor to, any Competitive Enterprise in any city or county in
which the Companies or their respective subsidiaries or affiliates are then
conducting business or maintain an office or have publicly announced their
intention to conduct business or maintain an office;
               (ii) in any way, directly or indirectly, solicit, divert or
contact any existing or potential customer or business of the Companies or any
of their respective subsidiaries or affiliates that the Consultant solicited,
became aware of or transacted business with during the Companies’ retention the
Consultant for the purpose of selling any financial services or products that
compete with the financial services or products the Companies or their
respective subsidiaries and affiliates currently offer or in the future, may
offer or solicit or assist in the employment of any employee of the Companies or
their respective subsidiaries or affiliates for the purpose of becoming an
employee of or otherwise provide services for any Competitive Enterprise.
     8. Entire Agreement; Amendment. This Agreement and the Employment Agreement
contain the entire agreement between the Companies and the Consultant with
respect to the subject matter of this Agreement, and may not be amended, waived,
changed, modified or discharged except by an instrument in writing executed by
the Companies and the Consultant.

-8-

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

 

     9. Notice. Any notice that a party to this Agreement may give under this
Agreement shall be in writing and be deemed given when hand delivered and
acknowledged or, if mailed, one day after mailing by registered or certified
mail, return receipt requested, or if delivered by an overnight delivery
service, one day after the notice is delivered to such service, to the Companies
or the Consultant at their respective addresses stated in the preamble to this
Agreement, or at such other address as either party may by similar notice
designate.
     10. Specific Performance. The Companies and the Consultant agree that
irreparable damage would occur in the event that any of the provisions of
paragraphs 6 or 7 of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
Companies and the Consultant shall have the right to an injunction or
injunctions to prevent breaches of such paragraphs 6 or 7 and to enforce
specifically the terms and provisions of such paragraphs 6 or 7, this being in
addition to any other remedy to which the Companies or the Consultant are
entitled at law or in equity.
     11. No Third Party Beneficiaries. Nothing in this Agreement, express or
implied, shall confer upon any person or entity other than the Companies and the
Consultant, and the Consultant’s heirs, executors, administrators and personal
representatives, any rights or remedies of any nature under or by reason of this
Agreement.
     12. Successor Liability. The Companies shall require any successor, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all of the business or assets of the Companies to assume expressly
and agree to perform this Agreement in the same manner and to the same extent
that the Companies would be required to perform it if no such succession had
taken place.
     13. No Attachment. Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect; provided, however, that nothing in this paragraph 13 shall
preclude the assumption of such rights by executors, administrators or other
legal representatives of the Consultant or the Consultant’s estate and their
assigning any rights under this Agreement to the person or persons entitled to
such rights.
     14. Severability. The invalidity or unenforceability of any term, phrase,
clause, paragraph, restriction, covenant, agreement or other provision of this
Agreement shall in no way affect the validity or enforceability of any other
provision, or any part of this Agreement, but this Agreement shall be construed
as if such invalid or unenforceable term, phrase, clause, paragraph,
restriction, covenant, agreement or other provision had never been contained in
this Agreement unless the deletion of such term, phrase, clause, paragraph,

-9-

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

 

restriction, covenant, agreement or other provision would result in such a
material change as to cause the covenants and agreements contained in this
Agreement to be unreasonable or would materially and adversely frustrate the
objectives of the Companies and the Consultant as expressed in this Agreement.
     15. Construction. This Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Pennsylvania, without
giving effect to principles of conflict of laws. All headings in this Agreement
have been inserted solely for convenience of reference only, are not to be
considered a part of this Agreement and shall not affect the interpretation of
any of the provisions of this Agreement.
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.

            DONEGAL MUTUAL INSURANCE COMPANY
      By:   /s/ Kevin G. Burke         Kevin G. Burke, Senior Vice President,   
    Human Resources        DONEGAL GROUP INC.
      By:   /s/ Jeffrey D. Miller         Jeffrey D. Miller, Senior Vice
President and        Chief Financial Officer              /s/ Donald H. Nikolaus
      Donald H. Nikolaus           

-10-