Exhibit 10.1
AMENDED AND RESTATED SERVICES ALLOCATION AGREEMENT
     THIS AMENDED AND RESTATED SERVICES ALLOCATION AGREEMENT (this “Agreement”)
is entered into this 20th day of July 2006 among DONEGAL GROUP INC., a Delaware
corporation (“DGI”), ATLANTIC STATES INSURANCE COMPANY, a Pennsylvania stock
casualty insurance company (“Atlantic States”), SOUTHERN INSURANCE COMPANY OF
VIRGINIA, a Virginia stock casualty insurance company (“Southern”), LE MARS
INSURANCE COMPANY, an Iowa stock casualty insurance company (“Le Mars”), THE
PENINSULA INSURANCE COMPANY, a Maryland stock casualty insurance company
(“Peninsula”), PENINSULA INDEMNITY COMPANY, a Maryland stock casualty insurance
company (“PIC”, and, together with Atlantic States, Southern, Le Mars and
Peninsula, the “Insurance Subsidiaries”) and DONEGAL MUTUAL INSURANCE COMPANY, a
Pennsylvania mutual fire insurance company (“Donegal Mutual”).
WITNESSETH:
     WHEREAS, Donegal Mutual formed DGI in August 1986 as part of a strategy to
utilize a downstream holding company as a means of providing alternative sources
of capital for Donegal Mutual’s insurance business;
     WHEREAS, DGI, Donegal Mutual and Atlantic States, a wholly owned subsidiary
of DGI, are parties to a Services Allocation Agreement dated September 29, 1986
(the “Prior Agreement”);
     WHEREAS, the purpose of the Prior Agreement was to provide for the
allocation of shared costs of certain employees of Donegal Mutual who have
provided certain functions and services to DGI and certain of its subsidiaries
since October 1, 1986 in connection with an intercompany pooling agreement
between Donegal Mutual and Atlantic States;
     WHEREAS, since October 1, 1986, DGI has acquired, and may in the future
acquire, insurance companies for which employees of Donegal Mutual provide
full-time services and Donegal Mutual is reimbursed on a direct basis for such
services;
     WHEREAS, Donegal Mutual has provided such services to DGI and the Insurance
Subsidiaries in an efficient and effective manner;

 

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     WHEREAS, Donegal Mutual and DGI wish to continue a mutually beneficial
relationship among Donegal Mutual and DGI for the respective benefit of Donegal
Mutual and DGI and the Insurance Subsidiaries; and
     WHEREAS, DGI, Atlantic States and Donegal Mutual wish to amend the Prior
Agreement to remove Atlantic States as a party, to reflect developments in the
respective businesses of DGI and the Insurance Subsidiaries and Donegal Mutual
since the date of execution of the Prior Agreement and the interrelated nature
of their businesses as conducted under the name Donegal Insurance Group and to
provide for the appropriate allocation and payment of expenses in accordance
with the current practices of Donegal Mutual, DGI and the Insurance
Subsidiaries;
     NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained and intending to be legally bound hereby, Donegal Mutual, DGI
and the Insurance Subsidiaries agree as follows:
     1. Effective Date. The effective date of this Agreement shall be August 1,
2006 (the “Effective Date”). This Agreement shall continue in effect unless and
until terminated pursuant to Section 5.
     2. Services To Be Provided.
          (a) Donegal Mutual agrees to provide employees who shall perform the
services described in Section 2(d) for and on behalf of and in the name of
Atlantic States, and Donegal Mutual and Atlantic States agree that all of the
costs and expenses of Donegal Mutual in providing those services and employees
to Atlantic States shall be allocated between Donegal Mutual and Atlantic States
in proportion to their respective participation from time to time under the
Proportional Reinsurance Agreement dated as of September 29, 1986 and most
recently amended as of April 20, 2000 between Donegal Mutual and Atlantic
States.
          (b) Donegal Mutual agrees to provide employees who shall, directly or
indirectly, perform the services described in Section 2(d) for and on behalf of
DGI and the Insurance Subsidiaries other than Atlantic States, and DGI and the
Insurance Subsidiaries other than Atlantic States, agree either to reimburse
Donegal Mutual or to allocate among Donegal Mutual, on the one hand, and DGI and
the Insurance Subsidiaries other than Atlantic States, on the other hand, the
costs and expenses of Donegal Mutual in providing such services and employees to
DGI and the Insurance Subsidiaries other than Atlantic States.
          (c) Donegal Mutual, DGI and the Insurance Subsidiaries agree that the
fundamental purposes of this Agreement are (i) to secure the provision of the
services described in Section 2(d) to DGI and the Insurance Subsidiaries and
(ii) to assure that

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Donegal Mutual receives appropriate payments from DGI and the Insurance
Subsidiaries so that Donegal Mutual has no net cost for providing the services
and employees, or, in the case of Atlantic States, for providing Atlantic
States’ proportionate share of such services and employees as described in
Section 2(a), pursuant to this Agreement. Exhibit A to this Agreement provides
specific but non-exclusive guidelines as to how such allocations and
reimbursements shall be calculated and settled, and Exhibit A may be amended
from time to time by the mutual agreement of Donegal Mutual, DGI and the
Insurance Subsidiaries.
          (d) The services are as follows:
               (i) Underwriting — the development, implementation and
administration of policies relating to underwriting and the acceptance of risks,
the maintenance of underwriting manuals and guidelines and services relating to
the development of insurance products and rates, the provision of all actuarial
services necessary or appropriate for the operation of the Insurance
Subsidiaries, the analysis of loss trends and reserve developments and risk
concentrations and the arranging for insurance, loss control and other
reasonable risk management services in the underwriting process to protect the
Insurance Subsidiaries and their respective properties and other assets against
loss, damage and liabilities;
               (ii) Claims — the admitting, adjusting, compromising, rejection
and settlement of claims under insurance policies issued by the Insurance
Subsidiaries and the collection of reinsurance and recoverables;
               (iii) Reinsurance — the review, negotiation, monitoring and
coordination of all reinsurance contracts and placements, including the
determination of the amounts, terms, types and structure of reinsurance to be
obtained and the selection of the reinsurers;
               (iv) Investments — the investment of all available funds in the
name of DGI and the Insurance Subsidiaries pursuant to their respective
investment policies, and the management of the respective investments of DGI and
the Insurance Subsidiaries;
               (v) Information Services — the purchase and maintenance of
computer hardware and software systems and the creation, implementation and
maintenance of computer programs utilized within those systems. Such systems
shall include, but not be limited to, accounting and bookkeeping systems,
automated underwriting and policy issuance systems, claims processing systems,
premium billing systems, electronic imaging systems, Internet web systems and
storage and processing systems for maintaining information to enable the
preparation and analysis of daily, weekly and monthly reports;
               (vi) Personnel and Professional Services — the appointment,
direction, removal and suspension, in the name of DGI and the Insurance
Subsidiaries, of employees

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and agents, including the determination of the appropriate levels thereof, and
the ongoing review and analysis of professional services, including the
retention of counsel, accountants, actuaries and other consultants;
               (vii) Financial Reporting — the analysis and reporting of actual
performance to budgeted performance, including analysis of financial results
through the budgeted period and the preparation of all statements and reports
necessary or appropriate for the respective businesses of DGI and the Insurance
Subsidiaries, including reports to insurance regulatory authorities and the
Securities and Exchange Commission;
               (viii) Tax Administration — the ordinary and necessary tax
administration services for income taxes, premium taxes, sales and use taxes,
franchise and similar taxes and any other taxes incurred;
               (ix) Accounting Services — the providing of routine accounting
and bookkeeping services relating to cash, cash equivalents, receivables,
supplies and other inventory items, fixed assets and other asset accounting,
accounts payable, notes payable, other trade payables, payroll and payroll
taxes, other general ledger items, accounting services relating to investments
and the reconciliation of all bank accounts;
               (x) Policyholder Services — the maintenance of policyholders’
customer relation services and the maintenance of policyholder information,
including names, addresses, policy anniversary dates and premiums due;
               (xi) Internal Audit and Compliance Services — the providing of
internal audit and compliance services to obtain an ongoing independent and
objective evaluation of the internal control systems designed to provide
reasonable assurance regarding the efficiency and effectiveness of operations,
the reliability of financial reporting and compliance with applicable laws and
regulations;
               (xii) Actuarial Services — the providing of actuarial services
including review and analysis of claims reserving assumptions, historical claims
experience and trends such as reserving patterns, loss payments, pending levels
of unpaid claims and product mix, as well as court decisions, economic
conditions and public attitudes; and
               (xiii) Marketing, Sales and Advertising Services — the creation
and development of marketing, sales and advertising programs, media and agency
co-op promotional materials to further increase brand awareness and promote the
sales of insurance products and services.
          (e) Donegal Mutual shall use its best efforts to provide the services
described above and such other or additional services as DGI or the Insurance
Subsidiaries may from time to time request pursuant to this Agreement.
Notwithstanding the foregoing, DGI and the Insurance Subsidiaries agree that
Donegal Mutual shall have no obligation to

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provide services to DGI and the Insurance Subsidiaries of a quality greater than
the quality of such services that Donegal Mutual maintains for its own
operations.
          (f) Donegal Mutual shall, within 90 days after the expiration of each
calendar year during the term of this Agreement, furnish the Boards of Directors
of DGI and the Insurance Subsidiaries with a written report as to the
allocations and reimbursements between Donegal Mutual, on the one hand, and DGI
and the Insurance Subsidiaries, on the other hand, during such year as shall be
sufficient, (i) in the discretion of the disinterested members of the Boards of
Directors of DGI and the Insurance Subsidiaries, to provide a commercially
reasonable basis to reach the conclusion that the transactions between Donegal
Mutual, on the one hand, and DGI and the Insurance Subsidiaries, on the other
hand, have been fair to DGI and its stockholders under prevailing circumstances
and (ii) as shall be sufficient in the discretion of the disinterested members
of Donegal Mutual’s Board of Directors, to provide a commercially reasonable
basis to reach the conclusion that the transactions between Donegal Mutual, on
the one hand, and DGI and the Insurance Subsidiaries, on the other hand, have
been fair to Donegal Mutual and its policyholders under prevailing
circumstances.
          (g) Nothing in this Agreement shall constitute or be construed to be
or create a partnership or joint venture relationship between DGI and the
Insurance Subsidiaries, on the one hand and Donegal Mutual, on the other hand,
and Donegal Mutual’s status under this Agreement shall be that of an independent
contractor. In connection with the performance of services under this Agreement,
neither DGI, the Insurance Subsidiaries nor Donegal Mutual shall make any
statement or take any action that is inconsistent with the provisions of this
Section 2(g). It is understood and agreed that the management, control and
direction of the operations and policies of DGI and the Insurance Subsidiaries
shall remain at all times under the exclusive control of the respective boards
of directors of DGI and the Insurance Subsidiaries.
          (h) In the event that an issue or question arises in the future as to
how this Agreement should be interpreted or whether the provisions of this
Agreement should or should not apply in a particular set of circumstances as to
a particular transaction between Donegal Mutual and DGI or one of the Insurance
Subsidiaries, the issue or question shall be referred, upon the request of any
of Donegal Mutual, DGI or the Insurance Subsidiary, for resolution to the
Coordinating Committee maintained by the Boards of Directors of Donegal Mutual
and DGI, and the decision of the Coordinating Committee with respect to such
issue or question shall be final and binding on Donegal Mutual, DGI and the
Insurance Subsidiaries.
     3. Books and Records.
          (a) Donegal Mutual shall keep accurate records and accounts of all
services provided pursuant to this Agreement. Such records and accounts shall be
maintained in

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accordance with sound business practices and shall be subject to such systems of
internal control as are required by law. All records and accounts shall be
available for inspection by DGI, the Insurance Subsidiaries and their respective
representatives, including DGI’s independent registered public accounting firm,
at any time upon request during commercially reasonable hours.
          (b) All such records and accounts shall be the property of Donegal
Mutual, subject to the right of inspection of DGI and the Insurance Subsidiaries
under Section 3(a) of this Agreement and the examination rights of insurance and
other applicable regulatory authorities.
          (c) DGI and the Insurance Subsidiaries, as the case may be, shall be
solely responsible, severally and not jointly, for, and shall hold harmless and
indemnify Donegal Mutual, including its successors, officers, directors,
employees, agents and affiliates, from and against all losses, claims, damages,
liabilities and expenses, including any and all reasonable expenses and
attorneys’ fees and disbursements incurred in investigating, preparing or
defending against any litigation or proceeding, whether commenced or threatened,
or any other claim whatsoever, whether or not resulting in any liability,
suffered, incurred, made, brought or asserted by any person not a party to this
Agreement in connection with Donegal Mutual’s provision of services to DGI and
the Insurance Subsidiaries, unless such loss, claim, damage, liability or
expense results from the negligence, willful misconduct or fraud of Donegal
Mutual or its officers, directors, employees, agents or affiliates or any other
person engaged by Donegal Mutual to provide services to DGI and the Insurance
Subsidiaries.
          (d) Donegal Mutual shall be solely responsible for, and shall hold
harmless and indemnify DGI and the Insurance Subsidiaries, as the case may be,
including their respective successors, officers, directors, employees, agents
and affiliates, from and against all losses, claims, damages, liabilities and
expenses, including any and all reasonable expenses and attorneys’ fees and
disbursements incurred in investigating, preparing or defending against any
litigation or proceeding, whether commenced or threatened, or any other claim
whatsoever, whether or not resulting in any liability, suffered, incurred, made,
brought or asserted by any person not a party to this Agreement resulting from
the negligence, willful misconduct or fraud of Donegal Mutual or its officers,
directors, employees, agents or affiliates or any other person engaged by
Donegal Mutual to provide services to DGI and the Insurance Subsidiaries.
     4. Approval by the Pennsylvania Department of Insurance. Donegal Mutual has
submitted this Agreement to the Pennsylvania Department of Insurance for its
review and approval in accordance with Chapter 14 of the Insurance Company Law
of Pennsylvania, and such approval has been obtained.

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     5. Termination. This Agreement shall have a term that initially expires on
December 31, 2011, provided, however, that, on each December 31 after the
Effective Date of this Agreement, the term of this agreement shall be extended
by one year so that at all times this Agreement shall have a then current term
of five years; provided, however, that this Agreement may be terminated at any
time prior to its then termination date in any of the following events, subject,
in all events, to the receipt of any necessary insurance regulatory filings or
actions:
          (a) By Donegal Mutual, upon 180 days prior written notice to DGI and
the Insurance Subsidiaries, if a Change of Control (as defined in this
Agreement) of DGI shall have occurred. As used herein, “Change of Control” shall
mean (i) the acquisition of shares of DGI by any “person” or “group,” as such
terms are used in Rule 13d-3 under the Securities Exchange Act of 1934 as now or
hereafter amended, in a transaction or series of transactions that result in
such person or group directly or indirectly becoming the beneficial owner of 25%
or more of the voting power of DGI’s common stock after the date of this
Agreement, (ii) the consummation of a merger or other business combination after
which the holders of voting common stock of DGI do not collectively own 60% or
more of such voting common stock of the entity surviving such merger or other
business combination, (iii) the sale, lease, exchange or other transfer in a
transaction or series of transactions of all or substantially all of the assets
of DGI, but excluding therefrom the sale and reinvestment of the investment
portfolio of DGI and the Insurance Subsidiaries or (iv) as the result of or in
connection with any cash tender offer or exchange offer, merger or other
business combination, sale of assets or contested election of directors or any
combination of the foregoing transactions specified in clauses (i), (ii),
(iii) and (iv), each, a “Transaction”, the persons who constituted a majority of
the members of the Board of Directors of DGI on the date of this Agreement and
persons whose election as members of the Board of Directors of DGI was approved
by such members then still in office or whose election was previously so
approved after the date of this Agreement but before the event that constitutes
a Change of Control, no longer constitute such a majority of the members of the
Board of Directors of DGI then in office. A Transaction shall be deemed to
constitute a Change in Control only upon the consummation of the Transaction.
          (b) By DGI and the Insurance Subsidiaries, upon 30 days prior written
notice to Donegal Mutual, if Donegal Mutual shall have become insolvent or shall
have become subject to any voluntary or involuntary conservatorship,
receivership, reorganization, liquidation or bankruptcy case or proceeding.
          (c) By Donegal Mutual, DGI and the Insurance Subsidiaries at any time
by mutual written agreement.
          (d) The aforesaid respective rights of termination of DGI, the
Insurance Subsidiaries and Donegal Mutual may be exercised without prejudice to
any other remedy to

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which DGI, the Insurance Subsidiaries or Donegal Mutual, as the case may be, is
entitled in law or in equity.
     6. Miscellaneous.
          (a) All notices, communications and deliveries under this Agreement
shall (i) be made in writing, signed by the party making the same to the address
as specified below, (ii) specify the section of this Agreement pursuant to which
such notice is given, (iii) be deemed to be given if delivered in person, on the
date delivered, or if sent by facsimile, on the date sent (if the party giving
the notice, or its employee or agent, has no reason to believe that the
facsimiled notice was not made or received), or if sent by Federal Express or
some other overnight express courier with costs paid, on the date delivered to
such express courier and (iv) be deemed received if delivered in person, on the
date of personal delivery, or if by facsimile, on the first business day after
sent (if the party giving the notice, or its employee or agent, has no reason to
believe that the facsimiled notice was not made or received), or if sent by
Federal Express or some other overnight express courier, on the first business
day after delivered to such overnight express courier:
if to DGI, to:
Donegal Group Inc.
1195 River Road
Marietta, Pennsylvania 17547
Attention: President
Facsimile: 717-426-7009
if to Donegal Mutual, to:
Donegal Mutual Insurance Company
1195 River Road
Marietta, Pennsylvania 17547
Attention: President
Facsimile: 717-426-7009
if to Atlantic States, to:
Atlantic States Insurance Company
1195 River Road
Marietta, Pennsylvania 17547
Attention: Chief Executive Officer
Facsimile: 717-426-7009

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if to Southern, to:
Southern Insurance Company of Virginia
1195 River Road
Marietta, Pennsylvania 17547
Attention: Chief Executive Officer
Facsimile: 717-426-7009
if to Le Mars, to:
Le Mars Insurance Company
1195 River Road
Marietta, Pennsylvania 17547
Attention: Chief Executive Officer
Facsimile: 717-426-7009
if to Peninsula and/or PIC, to:
The Peninsula Insurance Company
1195 River Road
Marietta, Pennsylvania 17547
Attention: Chief Executive Officer
Facsimile: 717-426-7009
Such notice shall be given at such other address or to such other representative
as a party to this Agreement may furnish pursuant to this Section 6(a) to the
other party to this Agreement.
          (b) No assignment, transfer or delegation, whether by merger or other
operation of law or otherwise, of any rights or obligations under this Agreement
shall be made by a party to this Agreement without the prior written consent of
the other party to this Agreement and, if required by applicable law, the
Pennsylvania Commissioner of Insurance and any other insurance regulatory
authority having jurisdiction over this Agreement. This Agreement shall be
binding upon the parties hereto and their respective permitted successors and
assigns.
          (c) This Agreement constitutes the entire agreement of the parties to
this Agreement with respect to its subject matter, supersedes all prior
agreements, including the Prior Agreement, of the parties to this Agreement with
respect to its subject matter and may not be amended except in writing signed by
the party to this Agreement against whom the change is asserted. The failure of
any party to this Agreement at any time or times to require

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the performance of any provision of this Agreement shall in no manner affect the
right to enforce the same and no waiver by any party to this Agreement of any
provision or breach of any provision of this Agreement in any one or more
instances shall be deemed or construed either as a further or continuing waiver
of any such provision or breach or as a waiver of any other provision or breach
of any other provision of this Agreement.
     (d) In case any one or more of the provisions contained herein shall, for
any reason, 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, but this Agreement shall be construed as if such invalid,
illegal or unenforceable provision or provisions had never been contained herein
unless the deletion of such provision or provisions would result in such a
material change as to cause continued performance of this Agreement as
contemplated herein to be unreasonable or materially and adversely frustrate the
objectives of the parties in originally entering into this Agreement as
expressed in the Recitals to this Agreement.
     (e) This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania.
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.

              DONEGAL MUTUAL INSURANCE COMPANY    DONEGAL GROUP INC.   By:   /s/
Jeffrey D. Miller     By:   /s/ Donald H. Nikolaus   Jeffrey D. Miller, Senior
Vice President
and Chief Financial Officer     Donald H. Nikolaus, President
and Chief Executive Officer    ATLANTIC STATES INSURANCE COMPANY   SOUTHERN
INSURANCE COMPANY OF VIRGINIA   By:   /s/ Donald H. Nikolaus     By:   /s/
Donald H. Nikolaus   Donald H. Nikolaus, President
and Chief Executive Officer     Donald H. Nikolaus, President
and Chief Executive Officer   LE MARS INSURANCE COMPANY   THE PENINSULA
INSURANCE COMPANY   By:   /s/ Donald H. Nikolaus     By:   /s/ Donald H.
Nikolaus   Donald H. Nikolaus, President
and Chief Executive Officer     Donald H. Nikolaus, Chief
Executive Officer

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              PENINSULA INDEMNITY COMPANY       By:   /s/ Donald H. Nikolaus    
       Donald H. Nikolaus, Chief
Executive Officer      

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EXHIBIT A
Services Allocation Agreement
Allocation and Reimbursement Guidelines
The following information sets forth allocation and reimbursement guidelines to
be followed for the calculation and settlement of amounts pursuant to the
Agreement.

1.   Personnel Costs.

     Personnel Costs as used in this Exhibit A shall be defined to include
salaries and payroll tax expense. Calculation and settlement of allocations and
reimbursements of personnel costs shall be performed as follows:
     (a) For DGI and the Insurance Subsidiaries other than Atlantic States
receiving services from Donegal Mutual employees, DGI and the Insurance
Subsidiaries shall reimburse Donegal Mutual for the direct costs of the
employees performing such services . Donegal Mutual may also recover an
administration fee to cover its costs of services rendered to maintain records
and process payroll for DGI and the Insurance Subsidiaries.
     (b) Atlantic States shall reimburse Donegal Mutual for its proportionate
share of Donegal Mutual’s personnel costs, after subtracting direct
reimbursements from DGI and the Insurance Subsidiaries other than Atlantic
States as described in Section 1(a), in accordance with the following allocation
methods:

  (i)   Underwriting and general personnel costs shall be allocated in
proportion to Donegal Mutual’s and Atlantic States’ respective participation
under the Proportional Reinsurance Agreement.     (ii)   Claim personnel costs
shall be allocated in proportion to Donegal Mutual’s and Atlantic States’
respective average claim reserves and loss payments     (iii)   Investment
personnel costs shall be allocated in proportion to Donegal Mutual’s and
Atlantic States’ respective average invested assets. Such costs shall include
the proportionate amount of personnel costs for individuals who perform duties
related to Donegal Mutual’s and Atlantic States’ investment portfolios.     (iv)
  Information technology and operational services personnel costs shall be
allocated proportionately to the allocations calculated in (i) through (iii)

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      above to reflect the provision of information technology and operational
services to each of the respective functions.

     (c) Donegal Mutual shall provide to DGI and the Insurance Subsidiaries
periodic calculations of amounts pursuant to Section 1(a) and (b), and DGI and
the Insurance Subsidiaries shall reimburse Donegal Mutual in the normal course
of business, generally within 30 days of receipt of such calculations.

2.   Information Services.

     To the extent that Donegal Mutual purchases and maintains the computer
hardware and software systems required to service the business underwritten by
Donegal Mutual and one or more of the Insurance Subsidiaries, calculation and
settlement of allocations and reimbursements for such services shall be
performed as follows:
     (a) The estimated purchase price and development costs of computer hardware
and software systems required to provide such services shall be divided by the
number of years those systems are reasonably expected to serve the respective
information services requirements of Donegal Mutual, DGI and one or more of the
Insurance Subsidiaries. Such estimated annual cost shall then be allocated to
the respective companies based upon their proportionate net written premiums in
the year prior to the establishment of the allocation amounts.
     (b) The Insurance Subsidiaries shall reimburse Donegal Mutual for the
amounts so allocated on a monthly basis.

3.   Miscellaneous Expenses.

     (a) DGI and the Insurance Subsidiaries other than Atlantic States shall
reimburse Donegal Mutual for miscellaneous direct and allocated expenses
including, but not limited to, postage, in-house printing services and insurance
purchased by Donegal Mutual on their behalf. DGI and the Insurance Subsidiaries
shall reimburse Donegal Mutual such allocation amounts in the normal course of
business, generally within 30 days of receipt of such allocations.
     (b) Atlantic States shall reimburse Donegal Mutual on a monthly basis for
its proportionate share of Donegal Mutual’s expenses other than information
systems depreciation expense, charitable contributions, real estate expenses and
real estate taxes and any other expenses for services solely benefiting Donegal
Mutual and after subtracting direct reimbursements from DGI and the Insurance
Subsidiaries other than Atlantic States as described in Section 3(a) in
accordance with the following allocation methods:

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  (i)   Underwriting and general expenses allocated to the underwriting function
shall be allocated in proportion to the respective participation of Donegal
Mutual and Atlantic States under the Proportional Reinsurance Agreement.    
(ii)   Claim adjusting expenses and general expenses allocated to the claim
function shall be allocated in proportion to the respective average claim
reserves and loss payments of Donegal Mutual and Atlantic States.     (iii)  
General expenses allocated to the investment function shall be allocated in
proportion to the respective average invested assets of Donegal Mutual and
Atlantic States.

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