MANAGEMENT AND CONSULTING AGREEMENT
                           RELIANCE INSURANCE COMPANY
                                  4 Penn Plaza
                        Philadelphia Pennsylvania 19103

                                October 4, 1996

Home State Holdings, Inc.
Three South Revmont Drive
Shrewsbury, New Jersey 07702

Re: Management Services


Gentlemen:

        This letter will confirm the agreement between Reliance Insurance
Company, a Pennsylvania corporation ("Reliance"), and Home State Holdings, Inc.,
a Delaware corporation (the "Company"), and the Company's insurance
subsidiaries, Home State Insurance Company, New York Merchant Bakers Insurance
Company, Pinnacle Insurance Company, Quaker City Insurance Company and Westbrook
Insurance Company (collectively the "Insurance Subs"), pursuant to which
Reliance will render to the Company and the Insurance Subs certain management
and consulting services in connection with the operation and conduct of the
Company's and the Insurance Subs' business, including reinsurance programs.
Reliance shall commence providing these services as of the date of this letter
agreement (this "Agreement"). Reliance the Company and the Insurance Subs shall
agree from time to time, on the specific type and extent of services to be
provided pursuant to this Agreement

        As consideration for the management and consulting services to be
provided to it by Reliance, the Company and the Insurance Subs shall pay
Reliance a minimum monthly (each calendar month being a "Payment Period")
retainer fee of $8,333.33, which payment shall be made on the first day of each
such Payment Period with the first such payment to be made on October 4, 1996.
The retainer fee is a minimum fee for services to be rendered regardless of the
amount of services requested and rendered.

        Reliance shall also be entitled to receive (or be reimbursed for) its
reasonable out-of-pocket expenses incurred in connection with its services
performed hereunder, upon submission of appropriate receipts and documentation
in support thereof.


In addition to its agreements and obligations under this Agreement, the Company
and the Insurance Subs agree to indemnify and hold harmless Reliance ant its
affiliates (including its and their officers, directors, stockholders, partners,
employees and agents) from and against any and all claims, liabilities, losses
and damages (or actions in respect thereof), in any way related to or arising
out of the performance by Reliance of services under this Agreement, and to
reimburse Reliance and any other such indemnified person for reasonable
out-of-pocket legal and other expenses incurred by it in connection with or
relating to investigating, preparing to defend, or

<PAGE>

expenses incurred by it in connection with or relating to investigating,
preparing to defend, or defending any actions, claims or other proceedings
(including any investigation or inquiry) arising in any manner out of or in
connection with Reliance's performance under this Agreement (whether or not such
indemnified person is a named party in such proceedings); provided, however,
that the Company and the Insurance Subs shall not be responsible under this
paragraph for any claims, liabilities, losses, damages or expenses to the extent
that they are finally judicially determined to result from actions taken by
Reliance (or such other indemnified person) which constitute gross negligence or
willful misconduct.

        In the event the Company or the Insurance Subs shall fall to any payment
due when due under this agreement to Reliance, interest shall accrue and the
Company and the Insurance Subs shall be obligated to pay interest on any overdue
amount from the date due at the rate of 1.5% per month on the unpaid balance of
principal and interest (compounded monthly).

        In the event the Company or the Insurance Subs fail to make payment when
due and Reliance refers the balance due to an attorney for collection, the
Company and the Insurance Subs shall reimburse Reliance for reasonable
attorney's fees.

        This Agreement shall terminate on the earlier of (i) September 30, 2010
or (ii) the date on which Reliance neither provides reinsurance to the company
or any of the Insurance Subs nor holds, directly or indirectly, any shares of
the Company's Shares A Cumulative Voting Preferred Stock which is being acquired
by Reliance on the date hereof pursuant to a Securities Purchase Agreement
between inter alia Reliance and the Company.

        This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their legal representatives, sucessors and assigns. This
Agreement and its performance shall be governed by the internal laws (and not
the laws of conflicts) of the State of New Tork.

        If the foregoing is acceptable to you, please sign this letter in the
space provided below and return it to the undersigned.

                                             Very truly yours,

                                             RELIANCE INSURANCE COMPANY

                                             By: /s/ Albert A. Benchimol
                                                 --------------------------
                                             Name: Albert A. Benchimol
                                             Title: Vice President


<PAGE>

ACCEPTED AND AGREED TO:

HOME STATE HOLDINGS, INC.

By: /s/ Mark Vaughn
    -----------------------
    Title: Acting President

HOME STATE INSURANCE COMPANY


By: /s/ Mark Vaughn
    -----------------------
    Title: Chief Executive Officer

NEW YORK MERCHANT BAKERS INSURANCE

BY: /s/ Mark Vaughn
    -----------------------
    Title: Chief Executive Officer


PINNACLE INSURANCE COMPANY

By: /s/ Mark Vaughn
    -----------------------
    Title: Chief Executive Officer



QUAKER CITY INSURANCE COMPANY

By: /s/ Mark Vaughn
    -----------------------
    Title: Chief Executive Officer

WESTBROOK INSURANCE COMPANY

By: /s/ Mark Vaughn
    -----------------------
    Title: Chief Executive Officer