EX-10.16



 





Exhibit 10.16




EMPLOYMENT AND NON-COMPETITION AGREEMENT




This Employment and Non-Competition Agreement (this “Agreement”) is made this 12th day of March,
2007 but effective as of January 1, 2007 by and between National Interstate Corporation (“NIC”) and
David W. Michelson (“Michelson”).



In consideration of the mutual covenants set forth in this Agreement, NIC and Michelson agree as
follows:



1. Employment; Term. During the period specified in this Section 1, NIC will employ
Michelson, and Michelson will be employed by NIC, on the terms and subject to the conditions set
forth in this Agreement. The term of Michelson’s employment under this Agreement (the “Term”) will
begin as of January 1, 2007 (the “Effective Date”), and, subject to prior termination as provided
in Section 15, will continue through the close of business on January 2, 2009 (that date being the
end of the “Scheduled Term”).



2. Duties and Responsibilities.




(a) During the Term, Michelson will serve as President and Chief Operating Officer of NIC (or in
such more senior position as the Board of Directors of NIC may determine), and he will perform
such duties and have such responsibilities as may be assigned to him from time to time by NIC’s
Chief Executive Officer and Board of Directors that are consistent with his position as
President and Chief Operating Officer (or such more senior position, if any, as the Board of
Directors of NIC may determine). In addition, during the Term, Michelson will also serve
certain subsidiaries of NIC in such executive capacities as may be mutually agreed upon from
time to time by Michelson and the respective Boards of Directors of those NIC subsidiaries,
consistent with NIC’s past practice with respect to the President serving in such capacities.




(b) At all times during the Term, Michelson will devote his entire business time, energy, and
talent to the business of and to the furtherance of the purposes and objectives of NIC.



3. Compensation. All compensation payable to Michelson under this Agreement will be
subject to such withholding as may be required by applicable law.




(a) Base Salary. NIC will pay base salary to Michelson during the Term, in accordance
with NIC’s normal payroll practices, (i) at the rate of $300,000 per year from the Effective
Date through the day immediately preceding the first to occur of (x) the date, if any, on which
Michelson is promoted to the position of Chief Executive Officer of NIC and (y) January 1, 2008
(that first to occur date being the “Raise Implementation Date”), and (ii) from and after the
Raise Implementation Date, at the rate of $375,000 per year. The rate of Michelson’s base
salary will be subject to review and potential increase, but not decrease, (a) in connection
with annual salary reviews to be conducted in accordance with NIC’s customary practice or (b) at
such other time or times as the Board of Directors of NIC may deem it appropriate to increase
Michelson’s base salary.




(b) Annual Bonus. Michelson will be eligible for a bonus each year, subject to and in
accordance with the rules of NIC’s Management Bonus Plan, with a target bonus for each year
equal to 100% of his base salary for the year.




(c) Stock Grants. Contemporaneously with the execution of this Agreement, NIC is
granting to Michelson (i) pursuant and subject to a separate Stock Bonus Agreement, an award of
a specified
number of Common Shares of NIC without any restrictions plus cash in an amount intended to be



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sufficient to satisfy the withholding obligation with respect to the entire award, and (ii)
pursuant to a separate Restricted Shares Agreement, an award of a specified number of Common
Shares of NIC as Restricted Shares with provision for surrendering a portion of such shares to
satisfy the future tax withholding obligations with respect to Restricted Shares as to which all
restrictions lapse from time to time. Michelson’s rights and obligations with respect to the
Common Shares so granted shall be as set forth in the Stock Bonus Agreement and in the
Restricted Shares Agreement, respectively.



4. Health, Life, and Disability Coverage.




(a) NIC will continue to provide to Michelson, throughout the Term, coverage under NIC’s health
insurance benefits plans, including the Flexible Spending Account program, subject to normal
deductibles, premiums, and co-payments in effect from time to time.




(b) NIC will continue to provide to Michelson, throughout the Term, the maximum levels of
coverage available under NIC’s Basic Life Insurance/Accidental Death and Dismemberment Plan.




(c) NIC will continue to provide to Michelson, throughout the Term, short term and long term
(group and supplemental) disability coverage on substantially the same basis as was provided to
him by NIC during 2006.



5. Savings and Profit Sharing Plan. Michelson will continue to be eligible throughout the
Term to participate in NIC’s Savings and Profit Sharing Plan with payroll deductions and ultimate
distributions to be made in accordance with the provisions of that plan. Michelson will be
eligible for NIC 401(k) profit sharing contributions on the same basis as other senior executive
officers throughout the Term.



6. Office, Auto, and Perquisites. Throughout the Term, Michelson will be entitled to the
continued use of an office and secretarial services appropriate to his position, to the continued
use of an automobile (under NIC’s Company Auto Program for Senior Officers), and to all standard
officer perquisites that are provided to other senior officers of NIC.



7. PTO. Michelson will be entitled to paid time off during each calendar year in
accordance with NIC’s Paid Time Off Policy as applicable to senior executives of NIC and as in
effect from time to time.



8. Reimbursement for Expenses. Subject to such limitations as may be reasonably imposed by
NIC from time to time, NIC will reimburse Michelson for reasonable, ordinary, and necessary
business expenses incurred by him in furtherance of NIC’s business, provided Michelson accounts to
NIC therefore in a manner sufficient to substantiate deductions with respect to those expenses by
NIC for federal income tax purposes.



9. Confidential Information. Notwithstanding any other provision of this Agreement, both
during and after Michelson’s employment with NIC, Michelson will maintain the confidentiality of
Confidential Information and will refrain from using such Confidential Information (except in
connection with Michelson’s job responsibilities) and disclosing it to anyone other than NIC, its
employees, and other entities that have a business relationship with NIC and a need for such
Confidential Information. For purposes of this Agreement, “Confidential Information” is
information of NIC that Michelson would not have acquired but for his employment by NIC and that
NIC endeavors to keep confidential, including without limitation, and regardless of whether such
information is in a tangible medium of expression, accounting information, agency information,
broker-marketing information, claims information, customer service information, employee
information, financial information, information systems information, underwriting information, and
any information provided by a third party to NIC in confidence. At the termination of this
Agreement or otherwise upon NIC’s demand, Michelson will provide to NIC all



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records containing Confidential Information as well as any copies of it, including handwritten
notes made or derived from Confidential Information or records, all of which are the property of
NIC.



10. Activity Restraints. Michelson agrees that he will not, while employed by NIC or at
any time within 12 months after termination of his employment with NIC, whether as an individual
for his own account, or as an employee, officer, director, significant shareholder, partner,
member, agent, independent contractor, or consultant of any person, firm, corporation, or other
entity engage in the following activities:




(a) Enter into or engage in any business that competes, directly or indirectly, with the NIC;




(b) Have any contact, including discussions, negotiations, agreements, or understandings, with
any insured, potential insured, agent, broker, or other entity of NIC with which NIC had
discussions, negotiations, agreements or understandings with at any time during Michelson’s
employment relating in any manner to competing insurance products that are identical to,
substantially the same as, or an adequate substitute for any insurance products of NIC and that
are, or could reasonably be anticipated to be, marketed or distributed in such a manner and in
such a geographic area as to actually compete with such insurance products of NIC.



Nothing in this Section 10 is intended to preclude Michelson from seeking employment in any
capacity (including with any insurance company) that is not in conflict or competition (directly or
indirectly) with the then-current or contemplated business activities of NIC at the time of his
termination. For example, provided he does not violate the provisions of Sections 10 and 11 of
this Agreement, Michelson may be employed by a national insurance company that does not compete
with NIC at the time of his termination.



11. Soliciting NIC Employees. Michelson will not, either while employed by NIC or at any
time within 24 months after termination of his employment with NIC, directly or indirectly, hire or
solicit for hire any of NIC’s employees to work for Michelson or any person or entity with which
Michelson is associated other than NIC and its affiliates.



12. Remedies. Michelson acknowledges that:




(a) The promises in Sections 10 and 11 of this Agreement are reasonably necessary to protect the
goodwill, trade secrets, and other business interests of NIC and will not cause Michelson undue
hardship.




(b) Any breach of these promises will cause NIC immediate irreparable harm for which injunctive
relief, including an ex parte temporary restraining order, may be necessary. Injunctive relief
will not preclude NIC from receiving any other relief to which it might be entitled.




(c) The promises in Sections 10 and 11 of this Agreement are of the essence of this Agreement.
They must be construed as independent of any other provision of this Agreement and the existence
of any claim or cause of action of Michelson against NIC, whether predicated on this Agreement
or otherwise, will not constitute a defense to the enforcement by NIC of these promises.



13. Tolling. If any provisions of this Agreement are violated, then the time limitations
set forth in this Agreement shall be extended for a period of time equal to the period of time
during which such breach occurs, and, in the event the Company is required to seek relief from such
breach before any court, board, or other tribunal, then the time limitation shall be extended for a
period of time equal to the pendency of such proceedings, including all appeals.



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14. Construction of Agreement. Michelson’s promises in Sections 10 through 13 of this
Agreement are separate and independent. If any of these promises is declared invalid or
unenforceable by any court, Michelson’s remaining promises and obligations shall remain in full
force and effect. If any of the provisions contained in Sections 10 through 13 of this Agreement
are held to be unenforceable due to the duration or other aspect of the scope of those provisions,
the parties agree that a court has the power to and should reduce the duration or scope of that
provision and enforce the provision in its reduced form. Sections 10 through 13 shall survive
termination of this Agreement.



15. Termination.




(a) At Expiration of Term. If not earlier terminated, the parties anticipate that
Michelson’s employment with NIC will continue beyond the Scheduled Term pursuant to the terms of
this Agreement. After January 2, 2009, the terms of this Agreement shall remain in effect
unless either party gives 90 days written notice to the other party of a contrary intention.




(b) Death or Disability. Michelson’s employment under this Agreement will terminate
immediately upon Michelson’s death. NIC may terminate Michelson’s employment hereunder
immediately upon giving notice of termination if Michelson is disabled, by reason of physical or
mental impairment, to such an extent that he has been unable to substantially perform his duties
under this Agreement for an aggregate of 90 days (whether business or non-business days and
whether or not consecutive) during any period of twelve consecutive calendar months.




(c) For Cause. NIC may terminate Michelson’s employment under this Agreement for
“Cause” if:




(i) Michelson is convicted of a felony (other than felonious operation of a motor vehicle);




(ii) Michelson commits an act or series of acts of dishonesty or wrongful misconduct in the
course of his employment that are materially injurious to NIC or materially inimical to the
best interests of NIC and, if the act or acts are capable of being cured, Michelson fails to
cure or take all reasonable steps to cure within 30 days of notice from the Board of
Directors to Michelson;




(iii) Michelson continues to violate his obligations under either or both of Sections 10 and
11 of this Agreement after the Board of Directors has advised him in writing to cease those
activities;




(iv) Other than for disability, Michelson abandons or consistently fails to attempt to
perform his duties and responsibilities under this Agreement at any time during the Term, in
either event for 10 consecutive business days after written notice from the Board of
Directors.




(d) Good Reason. Michelson may terminate his employment under this Agreement for “Good
Reason” if:




(i) NIC reduces his base salary below the rate specified in Section 3(a) or below any higher
rate at which base salary is paid to him from time to time under this Agreement;




(ii) NIC fails to continue in effect a management bonus plan that provides Michelson with a
target bonus opportunity equal to at least 100% of his base salary for each year;




(iii) NIC reduces, in any significant manner, Michelson’s duties, responsibilities, or
position with respect to NIC from his duties, responsibilities, or position as President and
Chief Operating Officer of NIC (or from his duties, responsibilities, or position in
connection with such more senior position as the Board of Directors of NIC may determine)
and fails to reverse that reduction within 30 days of notice by Michelson to NIC of his
objection to the reduction; or



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(iv) NIC shifts Michelson’s principal place of employment with NIC to a location that is
more than 25 miles (by straight line measurement) from the site of NIC’s headquarters in
Richfield, Ohio.




For the avoidance of doubt, the failure of the Board of Directors of NIC to promote
Michelson to the position of Chief Executive Officer and/or the hiring by the Board of
Directors of NIC of another individual as Chief Executive Officer will not constitute Good
Reason under this Agreement.



16. Payments Upon Termination.




(a) Upon Termination Without Cause or for Good Reason. If Michelson’s employment under
this Agreement is terminated by NIC without Cause or by Michelson for Good Reason, NIC will pay
and provide to Michelson compensation and benefits as follows:




(i) Base Salary. NIC will continue to pay base salary to Michelson, at the rate in
effect immediately before the date on which his employment is terminated (the “Termination
Date”), through the last to occur of (A) the end of the Scheduled Term (i.e., January 2,
2009), and (b) the first anniversary of the Termination Date.




(ii) Prior Year Bonuses. For purposes of determining Michelson’s right to bonuses
with respect to any year that ends on or before the Termination Date (a “Prior Year”),
Michelson will be deemed to be in the active employ of NIC indefinitely after the
Termination Date. Accordingly, any bonus payments attributable to a Prior Year that would
otherwise be paid to Michelson after the Termination Date (with the original requirement
that he be in the active employ of NIC at the scheduled time of the bonus payment) will be
paid to Michelson or to his estate as if he remained in the employ of NIC through the date
of each scheduled bonus payment.




(iii) Pro Rata Partial Year Bonus. If the Termination Date is not the last day of a
calendar year and NIC determines, in accordance with the terms of the Management Bonus Plan,
to pay bonuses to senior management members with respect to the calendar year in which the
termination occurs, then NIC will pay to Michelson, as a pro rata bonus for the year in
which the termination occurs, an amount equal to (x) the percentage payout of the bonus pool
for such year as confirmed by NIC’s Compensation Committee multiplied by (y) his target
bonus for the entire calendar year multiplied by a fraction, the numerator of which is the
number of months during which he was employed by NIC during the year (rounded up to the next
highest number of months) and the denominator of which is 12. By way of example, if
Michelson is terminated without cause on any date in November, 2008, and NIC meets
applicable underwriting profit and growth targets under the Management Bonus Plan for the
Compensation Committee to approve a 50% payout of the bonus pool for 2008, then Michelson
would be entitled to a pro rata bonus equal to 50% of his 100% target bonus multiplied by
11/12ths. If NIC does not pay bonuses under the Management Bonus Plan to senior management
members for the calendar year in which the termination occurs, NIC will not pay any pro rata
bonus to Michelson for that calendar year. Any pro rata bonus that is payable to Michelson
under this section will be paid at the same time or times and in the same relative
proportions as bonuses for that year are paid to continuing senior management members and
Michelson will be deemed, for these purposes, to be in the active employ of NIC indefinitely
after the Termination Date.




(iv) Benefits. NIC will continue to provide to Michelson through the end of the
Scheduled Term (i.e., through January 2, 2009) all benefits under this Agreement to which he
would be entitled if he had remained in the employ of NIC through the end of the Scheduled
Term.



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(v) Full Vesting of Outstanding Stock Options. All unvested options for the
purchase of Common Shares of NIC that Michelson holds as of the Termination Date will become
fully vested and exercisable as of the Termination Date and Michelson will have a period of
90 days following the Termination Date within which to exercise any and all of those options
that then remain unexercised. NIC will take such steps with respect to Michelson’s
outstanding stock options as are necessary to cause the acceleration of vesting contemplated
by this Section 16(a)(v).




For the avoidance of doubt, if NIC gives 90 days written notice to Michelson of its intention
that the Agreement no longer remain in effect (as contemplated by the last sentence of Section
15(a)), the date on which the Agreement expires pursuant to that notice will be the Termination
Date for purposes of this Section 16(a) and NIC will be deemed to have terminated Michelson’s
employment without Cause as of the Termination Date.




(b) Upon Death or Disability. If (i) Michelson’s employment is terminated upon his
death or disability as provided in Section 15(b) and (ii), at the time of termination, Michelson
is not in breach of his obligations under either of Sections 9 or 10 above, then NIC will pay
and provide to Michelson (or to his successor in interest) the same compensation and benefits to
which he would have been entitled if the termination had been by NIC without Cause, all as
provided in Section 16(a) above.




(c) Upon Any Other Termination. Upon any termination of Michelson’s employment other
than a termination (i) by NIC without Cause, (ii) by Michelson for Good Reason, or (iii) upon
Michelson’s death or disability, NIC will pay to Michelson all unpaid cash compensation accrued
through the effective date of termination but will not be obligated to make any further payment
or to provide any further benefit to Michelson under this Agreement.



17. Arbitration.




(a) Procedures. Except as otherwise provided in Section 17(d) with respect to
injunctive relief, any controversy, claim, or dispute arising out of or relating to this
Agreement, or the breach of any provision of this Agreement, or relating to Michelson’s
employment, will be submitted to binding arbitration in Cleveland, Ohio in accordance with the
Arbitration Rules of the American Arbitration Association. The arbitration will be conducted by
a single arbitrator selected from the list of arbitrators maintained by the American Arbitration
Association under its Employment Program or any successor program as follows: (i) the American
Arbitration Association (at the request of either or both parties) will provide a list of the
names of seven disinterested potential arbitrators, (ii) NIC will delete one name from the list,
(iii) Michelson will delete one name from the shortened list, (iv) the procedure in (ii) and
(iii) will be repeated alternately until only the name of one potential arbitrator remains on
the list and that potential arbitrator will be the arbitrator. If either NIC or Michelson fails
to cooperate reasonably in the selection of a single arbitrator, the other of them may request
that the American Arbitration Association name as the arbitrator any one of the potential
arbitrators (as selected by the party making the request) still remaining on the original list
of seven at the time of the failure to cooperate. The decision by the arbitrator will be final
and binding on the parties to this Agreement. Judgment upon the decision rendered by the
arbitrator may be entered in any court having appropriate jurisdiction.




(b) Fees and Expenses. The expenses of the arbitration and any related proceedings of
the type referred to in Section 17(d) (other than the legal fees and expenses incurred by
Michelson in connection with the arbitration and related proceedings) will be paid by NIC. The
reasonable legal fees and expenses incurred by Michelson in connection with the arbitration and
related proceedings will also be paid by NIC unless the arbitrator rules that Michelson had no
reasonable grounds for the



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position propounded by him in the arbitration (which determination need not be made simply
because Michelson fails to succeed in the arbitration and related proceedings).




(c) Interest. If the arbitrator determines that NIC has failed to timely pay any amount
or provide any benefit to Michelson, Michelson will be entitled to receive, in addition to the
payment or benefit itself, interest on the unpaid amount or on the value of the benefit not
provided, at a rate to be determined by the arbitrator, from the date on which the payment or
benefit should have been made or provided to the date on which the payment or benefit is made or
provided.




(d) Injunctive Relief. Any party to a dispute, claim, or controversy described in
Section 17(a) will be entitled to apply to any court of competent jurisdiction for injunctive
relief at any time before the arbitrator has been appointed and has affirmatively accepted the
obligation to determine the extent to which injunctive relief should be continued or granted.
Any injunctive relief granted by a court of competent jurisdiction will be subject to
modification or termination by the arbitrator once the arbitrator has affirmatively accepted
that obligation.



18. Notices. Any notice, request or instruction to be given hereunder by either party to
the other will be in writing and will be deemed to have been given (a) when it is delivered in
person to Michelson or to the individual to whose attention notices to NIC are to be given, as the
case may be, or (b) the first business day after it is sent by nationally recognized overnight
courier, addressed as provided below, or to such other addresses as may be designated by written
notice to the other party:



	 	 	 	 	 
	 

	 	If to NIC:
	 	National Interstate Corporation
	 

	 	 	 	3250 Interstate Drive
	 

	 	 	 	Richfield, OH 44286
	 

	 	 	 	Attention: General Counsel
	 
	 	 	 	 
	 

	 	If to Michelson:
	 	David W. Michelson
	 

	 	 	 	78 Cohasset Drive
	 

	 	 	 	Hudson, Ohio 44236
	 
	 	 	 	 
	 

	 	With a copy to:
	 	Gregory M. Nolfi
	 

	 	 	 	Hahn Loeser & Parks LLP
	 

	 	 	 	3300 BP Tower
	 

	 	 	 	Cleveland, Ohio 44114






19. Assignment and Binding Effect. The obligations of the parties hereunder may not be
assigned or transferred, except upon the written consent of the other party hereto; except that NIC
may assign the benefit of this Agreement to any of its affiliates. This Agreement will be binding
upon and inure to the benefit of Michelson and NIC and their permitted assigns.



20. Entire Agreement. This Agreement supersedes all prior agreements between the parties
relating to the subject matter discussed herein, specifically including the Confidentiality and
Non-Competition Agreement dated January 5, 1995, and constitutes the entire Agreement between the
parties as respects the rights and duties of the parties to this Agreement with respect to that
subject matter. There are no other promises or obligations relating to those rights and duties
except as contained in this Agreement. Nothing in this Agreement is intended to or will limit
Michelson’s rights under either the Stock Bonus Agreement or the Restricted Share Agreement
referred to in Section 3(c) above or under the Employee Retention Agreement entered into between
Michelson, NIC and National Interstate Insurance Agency, Inc. originally effective January 1, 1997
as amended effective February 8, 2006.



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21. Governing Law, Venue. The provisions of this Agreement will be governed by and
construed in accordance with the laws of the State of Ohio applicable to contracts made in and to
be performed exclusively within that State, notwithstanding any conflict of law provision to the
contrary. Subject to the mandatory arbitration provisions of Section 17, the parties consent to
venue and personal jurisdiction over them in the courts of the State of Ohio and federal courts
sitting in the State of Ohio, for purposes of construing and enforcing this Agreement.



In witness whereof, the parties have executed this Agreement as of the date first written above.



	 	 	 	 	 
	 	NATIONAL INTERSTATE CORPORATION

 	 
	 	By:  	/s/ Alan R. Spachman
 	 
	 	 	Alan R. Spachman, Chief Executive Officer 	 
	 	 	 	 
	 
	 	 	 
	 	/s/ David W. Michelson
 	 
	 	DAVID W. MICHELSON 	 
	 	 	 
	 




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