EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (herein, “Agreement”) is hereby made effective as of
the 23rd day of November 2005, by and between M. Sean McPadden, an individual
resident of Dallas, Texas (the “Executive”), and Affirmative Insurance Holdings,
Inc., a Delaware corporation (the “Company”).
RECITALS:

  A.   The Company is a holding company for a group of insurance agencies and
property and casualty insurance subsidiaries which offer primary insurance
primarily on personal risks;     B.   The Executive serves as Executive Vice
President of the Company responsible for underwriting operations;     C.   The
Company wishes to assure itself of the continued services of the Executive so
that it will have the continued benefit of his ability, experience and services,
and the Executive is willing to enter into an agreement to that end, upon the
terms and conditions hereinafter set forth; and     D.   Certain capitalized
terms used in this Agreement shall have the meanings given them in Section 16
hereof.

                   NOW, THEREFORE, in consideration of the mutual covenants
contained herein, the Company and the Executive hereby agree as follows:
Section 1. Employment

  (a)   The Company hereby agrees to employ the Executive as Executive Vice
President responsible for underwriting operations of the Company with such
authority, duties and responsibilities as are commensurate with such position
and as may be consistent with such position, and any other position agreed upon
by the parties. The Executive shall perform such services and duties as the
Board or the Chief Executive Officer may from time to time designate consistent
with such positions.     (b)   The Executive shall report to the Chief Executive
Officer.     (c)   The Executive shall devote his best efforts and his full
business time to the business affairs of the Company as may be reasonably
necessary for the discharge of his duties as Executive Vice President
responsible for underwriting operations.     (d)   The Company, in its sole
discretion, may require that the Executive be designated an employee of one or
more of the Company’s subsidiaries or affiliates for such purposes as payroll
and benefits administration. The employment of the Executive by any such
subsidiary or affiliate to facilitate the Company’s internal administrative
purposes shall be considered employment by the Company within the meaning of
this Agreement and shall not otherwise affect any of the rights or
responsibilities of the Company or the Executive hereunder.

Section 2. Term.
Unless earlier terminated as provided herein, the Executive’s employment under
this Agreement shall be for a term (the “Term”) of two (2) years from the
Effective Date. The Term shall be automatically extended for an additional
two-year term on each one -year anniversary of the Effective Date (each, a
“Renewal Term”) unless written notice of non-extension is provided by either
party to the other party at least 45 days prior to the end of the Term or any
Renewal Term.

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Employment Agreement (Cont.)
Section 3. Compensation and Benefits.
In consideration of the services rendered by the Executive during the Term, the
Company shall pay or provide to the Executive the amounts and benefits set forth
below.

  (a)   Salary. Executive shall receive an annual base salary of $300,000. The
base salary shall be paid in accordance with the Company’s normal payroll
practices. The Executive’s base salary shall be reviewed at least annually for
consideration of appropriate merit increases and, once established, the base
salary shall not be decreased during the Term without the consent of the
Executive.     (b)   Other Incentive Plans. The Executive shall participate in
all annual and long-term bonus or incentive plans or arrangements in which
substantially all other executives of the Company of a comparable level are
eligible to participate from time to time, subject to the terms and conditions
of the applicable plan. The Executive’s incentive compensation opportunities
under such plans and arrangements shall be determined from time to time by the
Compensation Committee.     (c)   Employee Benefits. Subject to the terms and
conditions of the applicable plan, the Executive shall be entitled to
participate in employee benefit plans, programs, practices or arrangements of
the Company in which substantially all other executives of the Company of a
comparable level are eligible to participate from time to time, including,
without limitation, any qualified or non-qualified pension, profit sharing and
savings plans, any death benefit and disability benefit plans, and any medical,
dental, health and welfare plans. Without limiting the generality of the
foregoing, the Company shall provide the Executive with the following:

  (i)   long-term disability insurance coverage in an amount and on terms
consistent with the coverage in place for other management personnel of the
Company; and     (ii)   continued provision of life insurance coverage in an
amount and on terms consistent with the coverage in place for other management
personnel of the Company.

  (d)   Fringe Benefits and Perquisites. The Executive shall be entitled to all
fringe benefits and perquisites which are generally made available to executives
of the Company of a comparable level from time to time. Without limiting the
generality of the foregoing, the Company shall provide the Executive with the
following:

  (i)   provision of offices and secretarial staff;     (ii)   vacation in
accordance with the Company’s policy for other executives of a comparable level;
    (iii)   an automobile owned or leased by the Company of a make and model
appropriate for the Executive’s position or, in lieu thereof, provision of a
non-accountable automobile allowance in an amount to be determined from time to
time by the Board or the Compensation Committee; and     (iv)   reimbursement of
all reasonable travel and other business expenses and disbursements incurred by
the Executive in the performance of his duties under this Agreement, including
airline upgrades, if used, upon proper accounting in accordance with the
Company’s normal practices and procedures for reimbursement of business
expenses.

Section 4. Termination.

  (a)   The Executive’s employment under this Agreement may be terminated only
as follows:

  (i)   upon receipt by either party from the other party of a written notice of
non-extension pursuant to the provisions of Section 2 hereof;

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Employment Agreement (Cont.)

  (ii)   upon death of the Executive or upon thirty (30) days prior delivery of
a Notice of Termination of the resignation of the Executive;     (iii)   by the
Company due to the Disability of the Executive upon thirty (30) days prior
delivery of a Notice of Termination to the Executive;     (iv)   by the Company
for Cause or without Cause, in either event upon thirty (30) days prior delivery
of a Notice of Termination to the Executive; or     (v)   by the Executive for
Good Reason upon thirty (30) days prior delivery of a Notice of Termination to
the Company.

  (b)   If the Executive’s employment with the Company is terminated by reason
of the Executive’s death or Disability, the Company shall pay to the Executive
(or in the case of his death, the Executive’s estate) within thirty (30) days
after the Termination Date a lump sum cash payment equal to the Accrued
Compensation and the Pro Rata Bonus. If the Executive’s employment with the
Company is terminated by the Company for Cause or as a result of resignation by
the Executive for other than Good Reason, the Company shall pay to the Executive
within thirty (30) days after the Termination Date a lump sum cash payment equal
to the Accrued Compensation.     (c)   Subject to Section 17 herein, if the
Executive’s employment with the Company is terminated by the Company without
Cause or by the Executive for Good Reason, the Company shall pay the Executive
in cash within thirty (30) days of the Termination Date an amount equal to all
Accrued Compensation and the Pro Rata Bonus; provided, however, that the right
of the Executive to receive any of the payments contemplated by this Section
4(c) shall be subject to the condition that the Executive shall not be in breach
of the Executive’s obligations pursuant to Section 5 hereof.     (d)   Subject
to Section 17 herein, in the event that the Executive’s employment with the
Company is terminated by the Company without Cause or by the Executive for Good
Reason, at the end of each of the twenty-four (24) consecutive 30-day periods
following the Termination Date, the Company shall pay to the Executive in cash
an amount equal to one-twelfth of the sum of the Base Amount (including any
increases in base salary) plus the Bonus Amount (including any increases in
bonus amount); provided, however, that the right of the Executive to receive any
of the payments contemplated by this Section 4(d) shall be subject to the
condition that the Executive shall not be in breach of the Executive’s
obligations pursuant to Section 5 hereof.     (e)   Subject to Section 17
herein, in the event that the Executive’s employment with the Company is
terminated by the Company without Cause or by the Executive for Good Reason, (A)
for a period of twenty-four (24) months following the Termination Date, or
(B) for such longer period as any plan, program, practice or policy may provide,
the Company shall continue benefits to the Executive and/or the Executive’s
family at least equal to those which would have been provided to them in
accordance with the Company’s plans, programs, practices and policies providing
medical, dental, health, death and disability benefits if the Executive’s
employment had not been terminated in accordance with the plans, practices,
programs or policies of the Company and its affiliated companies as in effect
and applicable generally to other peer executives and their families from time
to time; provided, however, that if the Executive becomes reemployed with
another employer and is eligible to receive medical and other welfare benefits
under another employer-provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other plan
during such applicable period of eligibility.     (f)   The Company shall have
the ability, upon delivery of a Notice of Termination to or from Executive, to
terminate the officership positions of Executive.

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Employment Agreement (Cont.)
Section 5. Restrictive Covenants.

  (a)   Confidential Information. During the Term, the Company agrees to provide
Executive with Confidential Information (as defined below). During the Term and
at all times thereafter, the Executive agrees that he will not divulge or
disclose to anyone (other than the Company or any persons employed or designated
by the Company) any Confidential Information. Confidential Information shall
include all information of a confidential nature relating to the business of the
Company or any of its subsidiaries or affiliates, including, without limitation,
customer lists, contract terms, marketing plans, business plans, financial data,
cost information, sales data, or business opportunities whether for existing,
new or developing businesses, and the Executive further agrees not to disclose,
publish or make use of any such knowledge or Confidential Information at any
time, including in any future employment, without the consent of the Company.  
  (b)   Non-Compete. In consideration of the parties various mutual promises
contained herein, including without limitation those involving Confidential
Information, Executive agrees that: upon voluntary termination of Executive’s
employment, including by Executive for Good Reason, upon termination of
Executive’s employment by the Company for Cause, or upon termination of
Executive’s employment without Cause, Executive agrees not to enter into or
engage in any phase of the Business conducted by the Company in any state in
which the Company is conducting business or is planning to conduct business on
the date of termination of Executive’s employment with the Company, either as an
individual for his own account, as a partner or joint venturer, or as an
employee, agent, officer, director, or substantial shareholder of a corporation
or otherwise for a period of two (2) years following the date of Executive’s
termination of his employment with the Company. As of the date of execution of
this Agreement, the Business conducted by the Company is defined as owning and
operating (i) insurance companies providing non-standard automobile insurance
coverage of any type or class, (ii) underwriting agencies (or managing general
agencies) that produce and administer non-standard automobile insurance, and
(iii) retail agencies that sell non-standard automobile insurance policies.
Notwithstanding the foregoing, in the event Executive’s employment is not
terminated for Cause, if Executive reasonably shows that his proposed employment
is not directly competitive with the Company’s business, Executive may enter
into such employment.     (c)   Non-Solicitation. Upon termination or expiration
of his employment, whether voluntary or involuntary, Executive agrees not to
directly or indirectly solicit either (i) any employees of the Company to leave
their employment with the Company in favor of employment with any other entity,
(ii) any person who was an employee of the Company at any time during the six
(6) months prior to the Termination Date and who is not gainfully employed by
any other entity, or (iii) business in the area of non-standard automobile
insurance from any entity, organization or person which has contracted with the
Company, which has been doing business with the Company, from which the Company
was soliciting business at the time of Executive’s termination, or from which
the Executive knew or had reason to know that the Company was going to solicit
business at the time of Executive’s termination, in each case for a two-year
period from the date of Executive’s termination of his employment with the
Company.     (d)   Non-Disparagement. During the term of the Executive’s
employment with the Company and following the Termination Date, the Executive
shall not disparage, discredit or otherwise criticize, directly or indirectly,
verbally or in writing, the Company or any of its subsidiaries, or any of their
respective businesses, products, practices, trademarks, employees, officers, or
directors. Further, during the term of the Executive’s employment with the
Company and following the Termination Date, the Company shall not disparage,
discredit or otherwise criticize, directly or indirectly, verbally or in
writing, the Executive.

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Employment Agreement (Cont.)

  (e)   Enforcement. Executive and the Company acknowledge and agree that any of
the covenants contained in this Section 5 may be specifically enforced through
injunctive relief, but such right to injunctive relief shall not preclude
Company from other remedies which may be available to it.     (f)   Reformation.
The Company and the Executive agree and stipulate that the agreements and
covenants not to compete contained in this Section 5 are fair and reasonable in
light of all of the facts and circumstances of the relationship between the
Executive and the Company; however, the Executive and the Company are aware that
in certain circumstances courts have refused to enforce certain terms of
agreements not to compete. Therefore, in furtherance of, and not in derogation
of the provisions of this Section 5, the Company and the Executive agree that in
the event a court should decline to enforce any provision of this Section 5,
that this Section 5 shall be deemed to be modified or reformed to restrict the
Executive’s competition with the Company or its affiliates to the maximum
extent, as to time, geography and business scope, that the court shall find
enforceable; provided, however, in no event shall the provisions of this
Section 5 be deemed to be more restrictive to the Executive than those contained
herein.     (g)   Termination. Notwithstanding any provision to the contrary
otherwise contained in this Agreement, the agreements and covenants contained in
this Section 5 shall not terminate upon Executive’s termination of his
employment with the Company or upon the termination of this Agreement under any
other provision of this Agreement.

Section 6. Successors, Binding Agreement.

  (a)   This Agreement shall be binding upon and shall inure to the benefit of
the Company (including each of its subsidiaries), its successors and assigns and
any person, firm, corporation or other entity which succeeds to all or
substantially all of the business, assets or property of the Company. The
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all or substantially all of the
business, assets or property of the Company, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, the “Company” shall mean the Company as hereinbefore
defined and any successor to its business, assets or property as aforesaid which
executes and delivers an agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.     (b)   This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive’s
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts are due and payable to him hereunder, all such amounts, unless otherwise
provided herein, shall be paid to the Executive’s designated beneficiary or, if
there be no such designated beneficiary, to the legal representatives of the
Executive’s estate.

Section 7. Fees and Expenses.
To induce the Executive to execute this Agreement and to provide the Executive
with reasonable assurance that the purposes of this Agreement will not be
frustrated by the cost of its enforcement should the Company fail to perform its
obligations under this Agreement:

  (a)   In the event that the Executive’s employment is terminated by the
Company either for Cause or without Cause or by the Executive for Good Reason,
the Company shall reimburse the Executive for any reasonable attorneys’ fees,
expenses and court costs actually incurred by the Executive as a result of any
litigation by the Executive regarding the validity, enforceability or
interpretation of

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Employment Agreement (Cont.)

      any provision of this Agreement (including as a result of any litigation
by the Executive regarding the benefits payable to the Executive pursuant to
this Agreement); provided, however, that such reimbursement shall only be
payable by the Company (i) after the Executive prevails on substantially all
issues involved in such litigation and (ii) upon receipt of proof of such actual
expenses.

  (b)   In the event that the Executive’s employment is terminated after a
Change in Control either by the Company either for Cause or without Cause or by
the Executive for Good Reason, the Company shall reimburse the Executive for any
reasonable attorneys’ fees, expenses and court costs actually incurred by the
Executive as a result of any litigation by the Executive regarding the validity,
enforceability or interpretation of any provision of this Agreement (including
as a result of any litigation by the Executive regarding the benefits payable to
the Executive pursuant to this Agreement) upon receipt of proof of such actual
expenses regardless of which party, if any, prevails in the contest.

Section 8. Notice.
All notices and other communications provided for in this Agreement (including
the Notice of Termination) shall be in writing and shall be deemed to have been
duly given upon personal delivery or receipt when sent by certified mail, return
receipt requested, postage prepaid, or by a nationally recognized overnight
courier service that provides written proof of delivery, and shall be addressed
as follows (or to such other address as either party shall have furnished to the
other in writing in accordance herewith):

         
 
  If to the Executive:   M. Sean McPadden
 
      7 Grantley Court
 
      Dallas Texas 75230
 
       
 
  If to the Company:   Affirmative Insurance Holdings, Inc.
 
      4450 Sojourn Drive, Suite 500
 
      Addison, Texas, 75001
 
      Attention: General Counsel

Section 9. Settlement of Claims.
The Company’s obligation to make the payments provided for in this Agreement and
to otherwise perform its obligations hereunder shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right which the Company may have against the
Executive or others. The Company may, however, withhold from any benefits
payable under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
Section 10. Modification and Waiver.
No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing and signed by the
Executive and the Company. No waiver by any party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time.

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Employment Agreement (Cont.)
Section 11. Governing Law; Submission to Jurisdiction.
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware without giving effect to the conflict of
laws principles thereof. All actions or proceedings arising in connection with
this Agreement shall be tried and litigated exclusively in the State of
Delaware. The aforementioned choice of venue is intended by the parties to be
mandatory and not permissive in nature, thereby precluding the possibility of
litigation between the parties with respect to or arising out of this Agreement
in any jurisdiction other than that specified in this Section 11. Each party
hereby waives any right it may have to assert the doctrine of forum non
conveniens or similar doctrine or to object to venue with respect to any
proceeding brought in accordance with this paragraph, and stipulates that the
state and federal courts located in the State of Delaware shall have in personam
jurisdiction over each of them for the purpose of litigating any such dispute,
controversy, or proceeding. Each party hereby authorizes and accepts service of
process sufficient for personal jurisdiction in any action against it as
contemplated by Section 8. Nothing herein shall affect the right of any party to
serve process in any other manner permitted by law.
Section 12. Severability.
The provisions of this Agreement shall be deemed severable, and the invalidity
or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
Section 13. Entire Agreement.
This Agreement constitutes the entire agreement between the parties hereto and,
except as provided herein, supersedes all prior agreements, if any,
understandings and arrangements, oral or written, between the parties hereto
(including without limitation the prior employment agreement between the
Executive and the Company, effective as of the consummation of an initial public
offering of securities of the Company), with respect to the subject matter
hereof.
Section 14. Headings.
The headings of Sections herein are included solely for convenience of reference
and shall not control the meaning or interpretation of any of the provisions of
this Agreement.
Section 15. Counterparts.
This Agreement may be executed in one or more counterparts, each shall be deemed
an original but all of which together shall constitute one and the same
instrument.
Section 16. Definitions.
Definitions. For purposes of this Agreement, the following terms shall have the
following meanings:

  (a)   “Accrued Compensation” shall mean an amount which shall include all
amounts earned or accrued through the Termination Date but not paid as of the
Termination Date, including without limitation, (i) base salary, (ii) deferred
compensation accumulated under any plan, arrangement or agreement,
(iii) reimbursement for reasonable and necessary expenses incurred by the
Executive on behalf of the Company prior to Termination Date, and (iv) bonuses
and incentive cash compensation (other than the Pro Rata Bonus).     (b)   “Base
Amount” shall mean the greater of the Executive’s annual base salary (i) at the
rate in effect on the Termination Date or (ii) the highest rate in effect at any
time during the 90-day period prior

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Employment Agreement (Cont.)
to a Change in Control, and shall include all amounts of his base salary that
are deferred under any plans, arrangements or agreements of the Company or any
of its affiliates.

  (c)   “Board” shall mean the Board of Directors of the Company.     (d)  
“Bonus Amount” shall mean the greater of (i) the most recent annual cash bonus
paid or payable to the Executive, or, if greater, the annual cash bonus paid or
payable for the year ended prior to the fiscal year during which a Change in
Control occurred, or (ii) the average of the annual cash bonuses paid or payable
during the two (2) full fiscal years ended prior to the Termination Date, or, if
greater, the two (2) full fiscal years prior to a Change in Control (or, in each
case, such lesser period for which annual bonuses were paid or payable to the
Executive).     (e)   “Cause” shall mean

  (i)   neglect of his material duties or failure to perform his material
obligations under this Agreement that materially causes harm to the Company or
that, in the reasonable judgment of the Company, has materially damaged or
interfered with the Company’s relationships with its customers, suppliers,
employees or other agents; provided, however, that the Company shall give the
Executive written notice of any actions or omissions alleged to constitute Cause
under this subparagraph (i) and the Executive shall have five (5) business days
to cure any such alleged Cause;     (ii)   refusal or failure to follow lawful
directives of the Board or any duly appointed committee of the Board that are
not arbitrary and capricious; provided, however, that the Company shall give the
Executive written notice of any actions or omissions alleged to constitute Cause
under this subparagraph (ii) and the Executive shall have five (5) business days
to cure any such alleged Cause;     (iii)   conviction of, or a plea of nolo
contendere to, or deferred adjudication for (x) any felony or (y) a misdemeanor
involving moral turpitude that causes harm to the Company or that, in the good
faith judgment of the Company, has damaged or interfered with, or could
reasonably be expected to damage or interfere with, the Company’s relationships
with its customers, suppliers, employees or other agents;     (iv)   substance
abuse or illegal use of drugs that impairs Executive’s performance, that
materially causes harm to the Company or that, in the reasonable judgment of the
Company, has damaged or interfered with the Company’s relationships with its
customers, suppliers, employees or other agents;     (v)   commission of an act
of fraud, illegality, theft or intentional dishonesty in the course of
Executive’s employment with the Company and relating to $5,000 or more of the
Company’s assets, or causing $5,000 or more in harm or damages with respect to
the Company’s activities, operations or employees; or     (vi)   breach by
Executive of Section 5 of this Agreement.

  (f)   A “Change in Control” shall mean the happening during the Term of any of
the following:

  (i)   when any “person” as such term is used in Section 13(d) and 14(d) of the
Exchange Act (other than any Excluded Person, the Company or any Company
employee benefit plan, including its trustees) is or becomes the “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly
of securities of the Company representing twenty percent (20%) or more of the
combined voting power of the Company’s then outstanding securities; provided,
however, that in no event shall the distribution of securities of the

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Employment Agreement (Cont.)
Company held by New Affirmative LLC (or any successor thereof) to any Excluded
Person trigger a “Change in Control”; or

  (ii)   the occurrence of a transaction requiring stockholder approval for the
acquisition of the Company by an entity other than the Company through purchase
of assets, or by merger, reorganization or otherwise; provided, however, a
“Change in Control” shall not have occurred in the event that, immediately
following such acquisition, at least fifty percent (50%) of the combined voting
power of the voting securities of the entity effecting or surviving any such
acquisition are owned by stockholders of the Company in substantially the same
proportions as their ownership of the Company immediately prior to such
acquisition.

  (g)   “Compensation Committee” shall mean the Compensation Committee of the
Board.     (h)   “Disability” shall mean the inability of the Executive to
perform his duties to the Company on account of physical or mental illness for a
period of six consecutive full months, or for a period of eight full months
during any 12-month period. The Executive’s employment shall terminate in such a
case on the last day of the applicable period; provided, however, in no event
shall the Executive be terminated by reason of Disability unless (i) the
Executive is eligible for the long-term disability benefits set forth in
Section 3(c)(i) hereof and (ii) the Executive receives written notice from the
Company, at least 30 days in advance of such termination, stating its intention
to terminate the Executive for reason of Disability and setting forth in
reasonable detail the facts and circumstances claimed to provide a basis for
such termination.     (i)   “Effective Date” shall mean the day and year first
above written.     (j)   “Exchange Act” shall mean the Securities Exchange Act
of 1934, as amended.     (k)   “Excluded Person” shall mean any of New
Affirmative LLC, DSC AFFM, LLC, Affirmative Investment LLC, The Enstar Group,
Inc. and any of their respective shareholders, members or affiliates.     (l)  
“Good Reason” shall mean the occurrence at any time of any of the events or
conditions described in subsections (i) through (viii) hereof:

  (i)   without the Executive’s written consent: (A) a change in the Executive’s
status, office, title, position or responsibilities (including reporting
responsibilities) which represents a material adverse change from his status,
office, title, position or responsibilities as in effect at any time from and
after the Effective Date; (B) the assignment to the Executive of any duties or
responsibilities which are materially inconsistent with his status, office,
title, position or responsibilities as in effect at any time from and after the
Effective Date; or (C) any removal of the Executive from, or failure to
reappoint or reelect him to, any such status, office, title, position or
responsibility;     (ii)   without the Executive’s written consent, a reduction
in the Executive’s base salary or any failure to pay the Executive any
compensation or benefits to which he is entitled within five days of the date
due; provided, however, that the Executive shall give the Company written notice
of any actions or omissions alleged to constitute Good Reason under this
subparagraph (ii) and the Company shall have five (5) business days to cure any
such alleged Good Reason;     (iii)   the Company’s requiring the Executive,
without his written consent, to be based at any place outside a 30-mile radius
from the executive offices occupied by the Executive from time to time after the
Effective Date, except for reasonably required travel on the Company’s business
which is not materially greater than such travel requirements prior to the
Change in Control;

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Employment Agreement (Cont.)

  (iv)   the failure by the Company to (A) continue in effect (without reduction
in benefit level and/or reward opportunities) any material compensation or
employee benefit plan in which the Executive was participating at any time from
and after the Effective Date, unless such plan is replaced with a plan that
provides substantially equivalent compensation or benefits to the Executive or
(B) provide the Executive with compensation and benefits, in the aggregate, at
least equal (in terms of benefit levels and/or reward opportunities) to those
provided for under each other employee benefit plan, program and practice in
which the Executive was participating at any time from and after the Effective
Date;     (v)   any material breach by the Company of this Agreement; provided,
however, that the Executive shall give the Company written notice of any actions
or omissions alleged to constitute any material breach under this subparagraph
(ii) and the Company shall have five (5) business days to cure any such alleged
material breach;     (vi)   any purported termination of the Executive’s
employment for Cause by the Company which does not comply with the terms of this
Agreement; or     (vii)   the failure of the Company to comply with and satisfy
its obligations under Section 6(a) hereof.

The Executive’s right to terminate his employment for Good Reason shall not be
affected by his incapacity due to physical or mental illness. For the avoidance
of doubt, the expiration of the Term of this Agreement, any Renewal Term of this
Agreement, and/or any failure to extend the Term or any Renewal Term of this
Agreement shall not be deemed to be Good Reason.

  (m)   “Notice of Termination” shall mean a written notice of termination from
the Company or the Executive which specifies an effective date of termination,
and which specifies the termination provision in this Agreement upon which the
Company or the Executive, as the case may be, is relying.     (n)   “Pro Rata
Bonus” shall mean an amount equal to the Bonus Amount multiplied by a fraction
the numerator of which is the number of days in the applicable year through the
Termination Date and the denominator of which is 365.     (o)   “Termination
Date” shall mean, in the case of the Executive’s death, his date of death, and
in all other cases, the date specified in the Notice of Termination.

Section 17. Free-Look Period
Prior to the Effective Date, Company commenced the search for a Chief Executive
Officer. Upon conclusion of such search, the first day of employment of the
permanent Chief Executive Officer shall be defined herein as the “Free-Look
Commencement Date”. Notwithstanding the foregoing, Company hereby acknowledges
and agrees that Executive shall, commencing on the Free-Look Commencement Date
through, to, and including a five-week period thereafter (herein, “Free-Look
Period”),acquire any and all rights, interests, and benefits in connection with
termination by the Executive for Good Reason-Free Look, as such term is defined
in this Section 17.
For purposes of this Section 17:

  (a)   “Good Reason-Free Look” shall mean the occurrence at any time during the
Free-Look Period of any of the events or conditions described in subsections
(i) through (viii) hereof:

  (i)   (A) a change in the Executive’s status, office, title, position or
responsibilities (including reporting responsibilities) which, in the
Executive’s reasonable judgment, represents an adverse change from his status,
office, title, position or responsibilities as in effect on the

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Employment Agreement (Cont.)
Free-Look Commencement Date; (B) the assignment to the Executive of any duties
or responsibilities which, in the Executive’s reasonable judgment, are
inconsistent with his status, office, title, position or responsibilities as in
effect on the Free-Look Commencement Date; (C) any removal of the Executive
from, or failure to reappoint or reelect him to, any such status, office, title,
position or responsibility; or (D) any other change in condition or
circumstances that in the Executive’s reasonable judgment makes it materially
more difficult for the Executive to carry out the duties and responsibilities of
his office that existed on the Free-Look Commencement Date;

  (ii)   a reduction in the Executive’s base salary or any failure to pay the
Executive any compensation or benefits to which he is entitled within five days
of the date due;     (iii)   the Company’s requiring the Executive to be based
at any place outside a 30-mile radius from the executive offices occupied by the
Executive on the Free-Look Commencement Date, except for reasonably required
travel on the Company’s business which is not materially greater than such
travel requirements prior to the Free-Look Commencement Date;     (iv)   the
failure by the Company to (A) continue in effect (without reduction in benefit
level and/or reward opportunities) any material compensation or employee benefit
plan in which the Executive was participating on the Free-Look Commencement
Date, unless such plan is replaced with a plan that provides substantially
equivalent compensation or benefits to the Executive or (B) provide the
Executive with compensation and benefits, in the aggregate, at least equal (in
terms of benefit levels and/or reward opportunities) to those provided for under
each other employee benefit plan, program and practice in which the Executive
was participating on the Free-Look Commencement Date;     (v)   the insolvency
of the Company, or the filing by any person or entity, including the Company or
any of its subsidiaries, of a petition for bankruptcy of the Company, or other
relief under any other moratorium or similar law, which petition is not
dismissed within 60 days;     (vi)   any material breach by the Company of this
Agreement;     (vii)   any purported termination of the Executive’s employment
for Cause by the Company which does not comply with the terms of this Agreement;
or     (viii)   the failure of the Company to comply with and satisfy its
obligations under Section 6(a) hereof.

The Executive’s right to terminate his employment for Good Reason-Free Look
shall not be affected by his incapacity due to physical or mental illness.

  (b)   If the Executive’s employment with the Company is terminated by the
Executive for Good Reason-Free Look, the Executive shall be entitled to the
following:

  (i)   the Company shall pay the Executive in cash within thirty (30) days of
the Termination Date an amount equal to all Accrued Compensation and the Pro
Rata Bonus-Free Look. “Pro Rata Bonus-Free Look” shall mean an amount equal to
$160,000.00 multiplied by a fraction the numerator of which is the number of
days in the applicable year through the Termination Date and the denominator of
which is 365;     (ii)   at the end of each of the twenty-four (24) consecutive
30-day periods following the Termination Date, the Company shall pay to the
Executive in cash an amount equal to $35,833.33; or, in the alternative, the
Executive may elect to receive a lump sum equal to the present value of the
amount of $860,000.00, to be payable within thirty (30) days of such election;
provided, however, that such lump sum amount shall be reduced to its net present
value assuming an interest rate equal to six percent (6%) and the applicable
number of equal

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Employment Agreement (Cont.)
monthly payments commencing on the Termination Date, collectively; and,
provided, further, that the right of the Executive to receive any of the
payments contemplated by this Section 17(b)(ii) shall be subject to the
condition that the Executive shall not be in breach of the Executive’s
obligations pursuant to Section 5 hereof; and

  (iii)   (A) for a period of twenty-four (24) months following the Termination
Date or (B) for such longer period as any plan, program, practice or policy may
provide, the Company shall continue benefits to the Executive and/or the
Executive’s family at least equal to those which would have been provided to
them in accordance with the Company’s plans, programs, practices and policies
providing medical, dental, health, death and disability benefits if the
Executive’s employment had not been terminated in accordance with the plans,
practices, programs or policies of the Company and its affiliated companies as
in effect and applicable generally to other peer executives and their families
from time to time; provided, however, that if the Executive becomes reemployed
with another employer and is eligible to receive medical and other welfare
benefits under another employer-provided plan, the medical and other welfare
benefits described herein shall be secondary to those provided under such other
plan during such applicable period of eligibility.

Immediately subsequent to the end of the Free-Look Period, any termination by
the Executive for Good Reason shall revert to the terms and conditions of such
termination method as provided in this Agreement.
[SIGNATURES ON FOLLOWING PAGE]

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Employment Agreement (Cont.)
     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its officer thereunto duly authorized, and the Executive has signed this
Agreement, effective as of the date first above written.

         
 
  AFFIRMATIVE INSURANCE HOLDINGS, INC.    
 
       
 
  /s/ DAVID B. SNYDER     
 
 
 
By: David B. Snyder    
 
  Its: Senior Vice President    
 
       
 
  EXECUTIVE:    
 
       
 
  /s/ M. SEAN MCPADDEN     
 
 
 
M. Sean McPadden    

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