Exhibit 10.9

 

RLI CORP. ANNUAL INCENTIVE COMPENSATION PLAN

EFFECTIVE JANUARY 1, 2010

 

I.                                         ESTABLISHMENT AND PURPOSE

 

RLI Corp. (the “Company”) established the RLI Incentive Compensation Plan (the
“Plan”), effective January 1, 2006, for the benefit of its employees and
employees of its Affiliates.  The Plan was intended to amend, consolidate and
restate certain prior incentive compensation plans established by the Company. 
The terms of the Plan, as set forth herein, shall apply to Awards granted under
the Plan on and after the Effective Date.  Except as otherwise provided, Awards
granted under the Company’s incentive compensation plans in effect prior to the
Effective Date shall be governed by the terms of such plans.  The Company
restated the Plan effective January 1, 2009 (the “Effective Date”)  to comply
with the requirements of the final regulations issued under Section 409A of the
Code (“Section 409A”) on April 10, 2007.  The Company hereby restates the Plan
effective January 1, 2010 to rename it the RLI Corp. Annual Incentive
Compensation Plan to differentiate it from the RLI Long-Term Incentive Plan
(LTIP), to define Retirement as it is defined in the LTIP, to change the term
“Board Approval Limit” to “Committee Approval Limit”, to clarify the application
of the maximum Award provision, and to revise the section on beneficiaries.

 

The Plan is intended to align incentive compensation with achieving the
financial performance factors on which the Company’s market value is driven. 
The Plan is also designed to promote the accomplishment of management’s primary
annual objectives as reflected in the Company’s annual operating plan and in the
objectives established by management for employees, and to recognize the
achievement of management’s objectives through the payment of incentive
compensation.

 

The Plan provides for incentive payments to employees based upon the achievement
of pre-established performance goals.  The performance goals may be annual or
multi-year goals.  Incentive compensation payable under the Plan is intended to
be deductible by the Company in accordance with Section 162(m) of the Internal
Revenue Code of 1986, as amended (the “Code”).  The Company may adopt a variety
of bonus and incentive programs under the Plan provided such programs are based
on the performance goals described herein.

 

II.                                     DEFINITIONS

 

For purposes of the Plan, unless the context otherwise requires, the following
terms shall have the meanings set forth below.

 

2.1                                 “Affiliate” means any corporation that is
part of a controlled group within the meaning of Code Section 414(b) or (c).

 

.2                                       “Award” means an award of incentive
compensation under the Plan to a Participant in accordance with the terms set
forth herein.

 

2.3                                 “Board” means the Board of Directors of the
Company as constituted at the relevant time.

 

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2.4                                 “Bonus Bank” means a deferred payment
arrangement established under Section 6.2.

 

2.5                                 “Bonus Payment Date” means February 1st. 
Any payment that is due to be distributed as of the Bonus Payment Date will be
deemed to be distributed as of that date if it is distributed on such date or,
if later, by the 15th day of March following the date and the Participant is not
permitted, directly or indirectly, to designate the calendar year of payment. 
Further, a payment will be treated as made on the Bonus Payment Date if it is
made no earlier than 30 days before the date, and the Participant is not
permitted, directly or indirectly, to designate the calendar year of payment.

 

2.6                                 “Bonus Pool” means an amount available for
distribution to Participant’s who have been assigned an interest in the Bonus
Pool (e.g. Market Value Potential bonus pool arrangement in effect as of the
Effective Date.). The amount of the Bonus Pool will be determined by the
Committee based on the Performance Goals.

 

2.7                                 “Cause” means termination for reasons
described in Section 6.3.

 

2.8                                 “Code” means the Internal Revenue Code of
1986, as amended.

 

2.9                                 “Committee” means the Executive Resources
Committee of the Board, as constituted at the relevant time, which shall consist
of two or more “outside directors” within the meaning of Section 162(m) of the
Code who are not eligible for participation in the Plan.

 

2.10                           “Committee Approval Limit” means a predetermined
Award level above which the independent directors of the Board approve Awards in
accordance with Section 5.3(c).

 

2.11                           “Company” means RLI Corp., an Illinois
corporation.

 

2.12                           “Disability or Disabled,” with respect to a
Participant, means that the Participant satisfies the requirements to receive
long-term disability benefits under the Company-sponsored group long-term
disability plan in which the Participant participates without regard to any
waiting periods, or that the Participant has been determined by the Social
Security Administration to be eligible to receive Social Security disability
benefits.  A Participant shall not be considered to be “Disabled” unless the
Participant furnishes proof of the Disability to the Company in such form and
manner as the Company may require.

 

2.13                           “Eligible Employee,” for any Performance Period,
means a 162(m) Employee and such other employees of the Company and its
Affiliates as may be designated to participate in the Plan for such Performance
Period.  An employee who is designated as eligible to participate in the Plan
for a particular Performance Period is not necessarily eligible to participate
in the Plan for any other Performance Period.

 

2.14                           “Effective Date” means January 1, 2010.

 

2.15                           “Fiscal Year” means the calendar year.

 

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2.16                           “Normal Retirement Date,” of a Participant, means
the date on which the Participant has attained both (i) combined age and years
of service with the Company of seventy-five.  For this purpose, Company service
will be based only on Participant’s actual service with the Company (and not any
other employer that may be acquired by the Company with respect to service prior
to the acquisition) and shall be calculated based on the number of whole
employment years the Participant has completed from the date of Participant’s
initial employment with the Company.  No credit shall be given for fractional
years of service.

 

2.17                           “162(m) Employee,” for any Fiscal Year, means any
employee described in Code Section 162(m)(3).

 

2.18                           “Participant,” for any Performance Period, means
an Eligible Employee and who has commenced participating in the Plan for such
Performance Period.

 

2.19                           “Performance Goals,” of a Participant for a
Performance Period, are the goals established for the Performance Period, the
achievement of which is a condition for receiving an Award under the Plan.

 

In the case of a Participant who is a 162(m) Employee, all Performance Goals
must be pre-established by the Committee, must be objective, and must state, in
terms of an objective formula or standard, the method for computing the amount
of compensation payable if the goal is attained.  A Performance Goal is
considered “pre-established” for purposes of this paragraph if it is established
in writing by the Committee no later than 90 days after the commencement of a
Performance Period, provided that the outcome is substantially uncertain at the
time the Committee actually establishes the goal.  However, in no event will a
Performance Goal be considered to be pre-established if it is established after
25% of a Performance Period has elapsed.  A Performance Goal is considered
“objective” if a third party having knowledge of the relevant facts could
determine whether the goal is met.  A formula or standard is considered
“objective” if a third party having knowledge of the relevant performance
results could calculate the amount to be paid to the Participant.  A Performance
Goal may be adjusted in accordance with Code Section 162(m) during a Performance
Period to prevent dilution or enlargement of an Award as a result of
extraordinary events or circumstances as determined by the Committee or to
exclude the effects of extraordinary, unusual or nonrecurring events, changes in
accounting principles, discontinued operations, acquisitions, divestitures and
material restructuring charges.

 

Performance Goals may be based on one or more of the following criteria and may
be based on attainment of a particular level of, or on a positive change in, a
factor:  revenue, revenue per employee, earnings before income tax (profit
before taxes), earnings before interest and income tax, net earnings (profit
after taxes), earnings per employee, earnings per share, operating income, total
shareholder return, market share, return on equity, before-tax return on net
assets, after-tax return on net assets, economic value added (economic profit),
market value potential, and underwriting profit.  Such criteria may relate to
one or any combination of two or more of Company, Affiliate, division or
individual performance.

 

2.20                           “Performance Period” means, generally, the Fiscal
Year.  However, the Committee may, its discretion, designate a shorter or longer
Performance Period.

 

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2.21                           “Plan Administrative Committee” means the Chief
Executive Officer, Chief Financial Officer, Chief Operating Officer, and Chief
Human Resources Officer of the Company or such other officers as the Committee
may designate from time to time.

 

2.22                           “Retirement,” of a Participant, means the
Participant’s Termination of Employment with the Company and all Affiliates on
or after his Normal Retirement Date.

 

2.23                           “Salary,” of a Participant for a Performance
Period means the annualized base compensation payable to a Participant
determined by the salary rate in effect on the last day of the Performance
Period.  The salary rate shall be determined without regard to reductions or
deferrals of compensation under qualified and nonqualified plan or welfare
benefit plan.  The salary rate shall be determined without regard to fringe
benefits, bonuses or other payments in addition to Participant’s base
compensation.

 

2.24                           “Target Performance Award” means a dollar amount
(which may be expressed as a percentage of Salary) established for a Participant
if the Performance Goal for the Participant is achieved.  The Target Performance
Award may also state the maximum amount that may actually be paid to the
Participant under Section 5.3 (which may be expressed as a percentage of
Salary.)

 

2.25                           “Termination of Employment” with respect to a
Participant, means the Participant’s separation from service with all
Affiliates, within the meaning of Section 409A(a)(2)(A)(i) of the Code and the
regulations under such section.  Solely for this purpose, a Participant who is
an eligible Employee will be considered to have a Termination of Employment when
the Participant dies, retires, or otherwise has a termination of employment with
all Affiliates.  The employment relationship is treated as continuing intact
while the Participant is on military leave, sick leave, or other bona fide leave
of absence if the period of such leave does not exceed six months, or if longer,
so long as the individual retains a right to reemployment with an Affiliate
under an applicable statute or by contract.  For purposes hereof, a leave of
absence constitutes a bona fide leave of absence only if there is a reasonable
expectation that the Participant will return to perform services for an
Affiliate.  If the period of leave exceeds six months and the individual does
not retain a right to reemployment under an applicable statute or by contract,
the employment relationship is deemed to terminate on the first date immediately
following such six-month period.  Notwithstanding the foregoing, where a leave
of absence is due to any medically determinable physical or mental impairment
that can be expected to last for a continuous period of not less than six
months, where such impairment causes the employee to be unable to perform the
duties of such employee’s position of employment or any substantially similar
position of employment, RLI may substitute a 29-month period of absence for such
six-month period.

 

Whether a termination of employment has occurred is determined based on whether
the facts and circumstances indicate that the Affiliate and the Participant
reasonably anticipated that no further services will be performed after a
certain date or that the level of bona fide services the Participant will
perform after such date will permanently decrease to no more than 49 percent of
the average level of bona fide services performed over the immediately preceding
36-month period (or the full period of services if the Participant has been
providing services for less than 36 months).

 

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Notwithstanding anything in Section 2.1.2 to the contrary, in determining
whether a Participant has had a Termination of Employment with an Affiliate, an
entity’s status as an “Affiliate” shall be determined substituting “50 percent”
for “80 percent” each place it appears in Section 1563(a)(1),(2), and (3) and in
Treasury Regulation Section 1.414(c)-2.

 

RLI shall have discretion to determine whether a Participant has experienced a
Termination of Employment in connection with an asset sale transaction entered
into by RLI or an Affiliate, provided that such determination conforms to the
requirements of Section 409A and the regulations and other guidance issued under
such section, in which case RLI’s determination shall be binding on the
Participant.

 

III.                                 ADMINISTRATION

 

3.1                                 Duties of Committee.  The Committee will
administer the Plan.  Any actions taken by the Committee shall be by a majority
vote of all Committee members.  The Committee may establish such rules and
regulations as it deems necessary for the Plan and its interpretation.  In
addition, the Committee may make such determinations and take such actions in
connection with the Plan as it deems necessary.  Each determination made by the
Committee in accordance with the provisions of the Plan will be final, binding
and conclusive. The Committee may rely on the financial statements certified by
the Company’s independent public accountants.

 

3.2                                 Duties of Plan Administrative Committee. 
Except as provided in Section 3.3, the Committee may delegate some or all of its
administrative powers and responsibilities under the Plan to the Plan
Administrative Committee. Unless the Committee determines otherwise, the
Committee shall be treated as delegating its authority to the Plan
Administrative Committee to the full extent permitted hereunder.  The Plan
Administrative Committee may make such determinations and take such actions
within the scope of such delegation and as otherwise provided in the Plan, as it
deems necessary.  The Plan Administrative Committee may further delegate any
duties delegated to it pursuant to this Section 3.2 to other officers or
employees of the Company and any such delegation may allow for further
delegation to other officers or employees.   Each determination made by the Plan
Administrative Committee, or its delegate, will be final, binding and
conclusive. The Plan Administrative Committee and its delegates may rely on the
financial statements certified by the Company’s independent public accountants. 
Notwithstanding any such delegation, the Committee may review and change any
decision made by the Plan Administrative Committee or its delegate.

 

3.3                                 Committee’s Duties with Respect to
162(m) Employees and to Amend or Terminate Plan.  Notwithstanding anything in
the Plan to the contrary:  (a) the Committee shall have sole and exclusive
authority to (i) establish the Performance Goals for all 162(m) Employees,
(ii) determine and certify the achievement of the Performance Goals for all
162(m) Employees, (iii) decrease the amount of Awards payable to all
162(m) Employees pursuant to Section 5.2 and 5.3, and (iv) to modify, suspend,
terminate or reinstate the Plan.

 

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IV.                                 ELIGIBILITY TO PARTICIPATE

 

Participation in the Plan is limited to Eligible Employees.  An employee who is
a 162(m) Employee for a Performance Period shall be eligible to participate in
the Plan for the Performance Period.  Prior to, or within an administratively
reasonable period of time following, the beginning of a Performance Period, the
Plan Administrative Committee, or its delegate, shall determine which other
employees are Eligible Employees for the Performance Period.  The Committee has
final authority to approve or disapprove the selection of any Eligible
Employee.  An Eligible Employee (other than a 162(m) Employee) shall become a
Participant only upon approval by the Plan Administrative Committee or its
delegate and compliance with such terms and conditions as the Committee or Plan
Administrative Committee may from time to time establish for the implementation
of the Plan.

 

V.                                     CALCULATION OF AWARDS

 

A Participant’s Award for a Performance Period is determined as follows:

 

5.1                                 Establishing Performance Goals and Target
Performance Awards and Board Approval Limits.  Prior to the beginning of a
Performance Period or as soon thereafter as administratively reasonable, but no
later than the time permitted under Code Section 162(m), the Committee (in the
case of Participants who are 162(m) Employees) and the Plan Administrative
Committee, or its delegate, (in the case of all other Participants), shall
establish the Performance Goal or Goals and each Participant’s Target
Performance Award.  Alternatively the Committee (in the case of Participants who
are 162(m) Employees) and the Plan Administrative Committee, or its delegate (in
the case of all other Participants), may establish a Bonus Pool for one or more
Participants and assign Participants an interest in the Bonus Pool.  In
addition, the Committee shall establish a Board Approval Limit for each Award
made to a 162(m) Employee.

 

5.2                                 Calculation of Awards. Following the close
of a Performance Period, the Committee (in the case of the 162(m) Employees) and
the Plan Administrative Committee (in the case of all other Participants) shall
determine the actual Award payable to a Participant by (i) multiplying the
percentage achievement of the Performance Goal against the Target Performance
Award to determine the Participant’s Award for the Performance period or
(ii) multiplying the Participant’s interest in any Bonus Pool by the final
amount of the Bonus Pool. No Award will be paid to a Participant if the
percentage achievement of a Performance Goal is below any minimum level of
performance established for such Performance Goal.  In no event shall the
aggregate of all Award payments (including the amount of any Award credited to a
Bonus Bank) with respect to a Participant in any Fiscal Year exceed $7,500,000,
provided, however, that a payout from a bonus bank in a given year representing
a partial payout of the amount of an Award credited to the bonus bank in the
same year, shall not be counted toward the maximum to avoid double counting of
such amount.

 

5.3                                 Adjustments and Certifications of Awards. 
Once the determination in section 5.2 is made, the Committee, in the case of a
Participant who is a 162(m) Employee, and the Plan Administrative Committee or
its delegate in all other cases, shall:

 

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(a)                              Review the amount of each Award and make any
adjustments it, in its sole discretion, deems appropriate to the amount of the
Award.  In general, each Participant’s Award will be the amount pre-established
(when the Performance Goals were established) for achievement of the Performance
Goals at the achievement levels described in Section 5.1.  However, at the
discretion of the Plan Administrative Committee, this amount may be increased
(except in the case of a Participant who is a 162(m) Employee) or decreased
based upon such objective or subjective criteria, as it deems appropriate.  The
Committee, in its discretion, may decrease (but not increase) the amount in the
case of a 162(m) Employee based upon such objective or subjective criteria as it
deems appropriate; and

 

(b)                             In the case of a Participant who is a
162(m) Employee, the Committee shall certify the extent to which the Participant
has satisfied each of the Performance Goals and all other material terms of an
Award.

 

(c)                              In the case of any Award subject to a Committee
Approval Limit, the independent directors serving on the Board may reduce the
actual Award, but not below the Committee Approval Limit.

 

VI.                                 PAYMENT OF AWARDS

 

6.1                                 Timing of Award Payment.  Except as provided
in Section 6.2, a Participant’s Award for a Performance Period shall be paid in
a cash lump sum to him or her no later March 15 following the end of the Fiscal
Year in which the Performance Period ends.  A Participant who is also eligible
to Participate in the RLI Corp. Executive Deferred Compensation Plan may elect
to defer some or all of any amount otherwise payable to him or her under this
Section 6.2 to the extent permitted by such plan.

 

6.2                                 Bonus Bank.  The Committee may specify that
a portion of an Award will be credited to a Bonus Bank immediately prior to the
beginning of a Performance Period. Any such Award will be in writing and shall
specify a fixed schedule of payments and such other terms and conditions as the
Committee or Plan Administrative Committee may choose.  The terms of the Award
may provide that amounts credited to the Bonus Bank may be reduced if
Performance Goals in a subsequent Performance Period are not met.  Amounts
deposited to the Bonus Bank will be credited with interest equivalent to the
interest rate on three year U.S. Government Treasury Bills in effect at the
beginning of the fiscal year.

 

6.3                                 Change in Employment Status During
Performance Period.  In general, in order to receive a payment a Participant
must be employed by the Company or Affiliate on (i) the date of actual payment
with respect to an Award that is not held under a Bonus Bank and (ii) the date
of actual payouts from a Bonus Bank arrangement.  If the Participant’s
employment is terminated during a Performance Period due to death, Retirement,
or Disability, the Participant (or the Participant’s beneficiary in the case of
the Participant’s death) will be entitled to receive a pro rata portion of the
Award only if the Award expressly provides for such payment.  If the
Participant’s employment is terminated at a time when a Participant has a
balance in a Bonus Bank due to death or Disability, the Participant (or the
Participant’s beneficiary in the case of the Participant’s

 

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death) will be entitled to receive a payment equal to the balance of the Bonus
Bank adjusted for interest through the end of the preceding quarter within 30
days of termination.  Notwithstanding anything in this Section 6.3 to the
contrary, a Participant shall not be entitled to any Award for a Performance
period if the Participant’s employment is terminated by the Company or Affiliate
for “Cause” during the Performance Period.  For these purposes “Cause” shall
mean the Participant’s:  (a) failure to comply with any material policies and
procedures of the Company or Affiliate; (b) conduct reflecting dishonesty or
disloyalty to the Company or Affiliate, or which may have a negative impact on
the reputation of the Company or Affiliate; (c) commission of a felony, theft or
fraud, or violations of law involving moral turpitude; (d) failure to perform
the material duties of his or her employment; (e) excessive absenteeism;
(f) unethical behavior; or (g) violation of a material policy of the Company. 
If a Participant’s employment is terminated for “Cause,” the date on which the
Participant’s employment is considered to be terminated, for purposes of this
Section 6.3, shall be the time at which such Participant is instructed or
notified to cease performing job responsibilities for the Company or any
Affiliate, whether or not for other reasons, such as payroll, benefits or
compliance with legal procedures or requirements, he or she may still have other
attributes of an employee.

 

6.4                                 Beneficiary.  In the event that any amount
becomes payable under the Plan by reason of the Participant’s death, such amount
shall be paid to the beneficiary or beneficiaries designated by the Participant.
Such amount shall be paid to the beneficiary or beneficiaries at the same time
such amount would have been paid to the Participant had he or she survived.  In
order for such designation to be valid for purposes of the Plan, it must be
completed and filed with the Company according to the rules established by the
Company.  If the Participant has not completed a beneficiary designation, or all
such beneficiaries have predeceased the Participant, then any amount that
becomes payable under the Plan by reason of the Participant’s death shall be
paid to the personal representative of the Participant’s estate.  If there is
any question as to the legal right of any person to receive a distribution under
the Plan by reason of the Participant’s death, the amount in question may, at
the discretion of the Committee, be paid to the personal representative of the
Participant’s estate, in which event the Company shall have no further liability
to anyone with respect to such amount.  This section 6.4 shall apply to all
Awards granted under the Plan.

 

6.5                                 Forfeiture.  All Awards paid to the Chief
Executive Officer and Chief Financial Officer of the Company under this Plan are
subject to forfeiture as provided in Section 304 of the Sarbanes-Oxley Act of
2002, and the implementing rules and regulations.

 

VII.                             MISCELLANEOUS

 

7.1                                 No Guaranty of Employment.  Neither the
adoption nor maintenance of the Plan, the designation of an employee as an
Eligible Employee, the setting of Performance Goals, nor the provision of any
Award under the Plan shall be deemed to be a contract of employment between the
Company or an Affiliate and any employee.  Nothing contained in the Plan shall
give any employee the right to be retained in the employ of the Company or an
Affiliate or to interfere with the right of the Company or an Affiliate to
discharge any employee at any time, nor shall it give the Company or an
Affiliate the right to require any employee to remain in its employ or to
interfere with the employee’s right to terminate employment at any time.

 

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7.2                                 Release.  Any payment of an Award to or for
the benefit of a Participant or beneficiary that is made in good faith by the
Company in accordance with the Company’s interpretation of its obligations
hereunder shall be in full satisfaction of all claims against the Company for
payments under the Plan to the extent of such payment.

 

7.3                                 Notices.  Any notice provided by the Company
under the Plan may be posted to a Company-designated web-site.

 

7.4                                 Nonalienation.  No benefit payable at any
time under the Plan shall be subject in any manner to alienation, sale,
transfer, assignment, pledge, levy, attachment, or encumbrance of any kind by
any Participant or beneficiary.

 

7.5                                 Plan is Unfunded.  All Awards under the Plan
shall be paid from the general assets of the Company.  No Participant shall be
deemed to have, by virtue of being a Participant in the Plan, any claim on any
specific assets of the Company such that the Participant would be subject to
income taxation on any Award prior to distribution to him or her, and the rights
of a Participant or beneficiary to any payment to which he or she is otherwise
entitled under the Plan shall be those of an unsecured general creditor of the
Company.

 

7.6                                 Tax Liability.  The Company may withhold
from any payment of Awards or other compensation payable to or on behalf of a
Participant or beneficiary such amounts as the Company determines are reasonably
necessary to pay any taxes required to be withheld under applicable law.

 

7.7                                 Captions.  Article and section headings and
captions are provided for purposes of reference and convenience only and shall
not be relied upon in any way to construe, define, modify, limit, or extend the
scope of any provision of the Plan.

 

7.8                                 Invalidity of Certain Plan Provisions.  If
any provision of the Plan is held invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision of the Plan and the Plan
shall be construed and enforced as if such provision had not been included.

 

7.9                                 Venue.  As a substantial portion of the
duties and obligations of the parties created by the Plan will be performed in
Peoria, Illinois, it shall be the sole and exclusive venue for any arbitration,
litigation, special proceedings, or other proceedings between the parties in
connection with the Plan.

 

7.10                           Hold Harmless.  A Participant shall hold the
Company harmless from and pay any cost, expense or fee (not to exceed the bank
balance) incurred by the Company with respect to any claim, due or demand
asserted by any person, except the Company against any amounts due Participant
under the Plan.

 

7.11                           No Other Agreements.  The terms and conditions
set forth herein constitute the entire understanding of the Company and the
Participants with respect to the matters addressed herein.

 

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7.12                           Incapacity.  In the event that any Participant is
unable to care for the Participant’s affairs because of illness or accident, any
payment due may be paid to the Participant’s duly qualified guardian or other
appointed legal representative.

 

7.13                           Applicable Law.  The Plan and all rights under it
shall be governed by and construed according to the laws of the State of
Illinois.

 

 

Date: February 5, 2010

RLI CORP.

 

 

 

By:

/s/Jonathan E. Michael

 

Chief Executive Officer

 

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