<PAGE>   1
[Markel Logo]

     Evanston Insurance Company                       Policy No.      IC-700654
     SHAND MORAHAN PLAZA                              Prev. No.       IC-700549
     EVANSTON, ILLINOIS 60201                         Prod. No.       24769


DECLARATIONS -                INSURANCE COMPANIES PROFESSIONAL AND
                              DIRECTORS & OFFICERS LIABILITY INDEMNITY INSURANCE

Claims Made and Reported Coverage: This insurance is limited to liability for
only those CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED DURING THE POLICY
PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED, AND REPORTED TO THE
INSURER DURING THE POLICY PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED,
OR WITHIN SIXTY (60) DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD OR OPTIONAL
EXTENSION PERIOD, IF PURCHASED.


THIS POLICY CONTAINS PROVISIONS THAT REDUCE THE LIMITS OF LIABILITY STATED IN
THE POLICY BY THE COSTS OF LEGAL DEFENSE AND PERMIT LEGAL DEFENSE COSTS TO BE
APPLIED AGAINST THE DEDUCTIBLE.


1.       Authorized to act on behalf of Insureds in accordance with GENERAL
         CONDITIONS 8, Authorization:


         NAME OF ENTITY:          PHILADELPHIA CONSOLIDATED HOLDING CORPORATION

         PRINCIPAL BUSINESS ADDRESS:   ONE BALA PLAZA, SUITE 100
                                       BALA CYNWYD, PA 19004

2.       POLICY PERIOD: From July 20, 1996 to July 20, 1997
                        12:01 A.M. Standard Time at the address of the named
                        entity stated above.

3.       INSURED ENTITIES AND ADDRESSES

         A.   Coverage A Insured Entities

              PHILADELPHIA CONSOLIDATED HOLDING CORPORATION
              ONE BALA PLAZA, SUITE 100
              BALA CYNWYD, PA 19004

         B.  Coverage B Company Insured Entities:
             N/A

         C.  Coverage C Insured Entities:
             1 .  Employee Benefit Plans:
                  N/A

             2.   Sponsoring Employers:
                  N/A




                                  Page 1 of 3

                                A Markel Company
<PAGE>   2
                                                            Policy No. IC-700654

<TABLE>
<S>                                                                                          <C>
4.       LIMITS OF LIABILITY


         A.       For Coverage A (Errors and Omissions Liability):
                  Insurer"s Participation in Loss:                                                    100%

                  SUBJECT TO: Each Claim Limit:                                               $ 5,000,000
                              Policy Period Aggregate Limit:                                  $ 5,000,000

         B.       For Coverage B (Directors & Officers Liability):
                  Insurer"s Participation in Loss:                                                    N/A

                  SUBJECT TO: Each Claim Limit:                                                       N/A

                              Policy Period Aggregate Limit:                                          N/A

         C.       For Coverage C (Fiduciary Liability):

                  Each Claim Limit:                                                                   N/A

                  Policy Period Aggregate Limit:                                                      N/A

5.       DEDUCTIBLES:

         A.      For Coverage A (Errors and Omissions Liability): Each Claim:                 $   250,000

         B.       For Coverage B (Directors & Officers Liability):

                  1.       Individual Liability Coverage, Section THE COVERAGE
                           2(a): Each Claim-Each Director or Officer:                                 N/A

                           but in no event exceeding in the aggregate Each
                           Claim-All Directors and Officers                                           N/A

                  2.       Company Reimbursement Coverage, Section THE COVERAGE
                           2(b): Each Claim:                                                          N/A


         C.       For Coverage C (Fiduciary Liability): Each Claim:                                   N/A


6.       PREMIUM FOR POLICY PERIOD PAID FOR THE FOLLOWING COVERAGES:

         Errors and Omissions


                                                     PREMIUM:                                 $   157,035.00
                                     Surplus Lines Tax 3.00%:                                 $     4,711.05

                                                       TOTAL:                                 $   161,746.05
</TABLE>




                                  Page 2 of 3

                                A Markel Company
<PAGE>   3
                                                            Policy No. IC-700654


7.       OPTIONAL EXTENSION PERIOD:

         A.       Premium:

                  50.00% of total annual premium as provided in THE COVERAGE 13
                  of the policy, to be paid only if the Insured meets the
                  eligibility requirements and exercises the option. Such
                  premium shall be deemed fully earned at the commencement of
                  the Optional Extension Period.

         B.       Days:

                  60 days of Optional Extension Period as provided in THE
                  COVERAGE 13.


8.       ENDORSEMENTS ATTACHED AT POLICY INCEPTION:

         1.    Insured Entities - Coverage A
         2.    Amendment of Insured - Holding Company
         3.    Pending and Prior Litigation Exclusion
         4.    Insurance Agents, Insurance Brokers/Agency Exclusion
         5.    Amendment of Professional Services
         6.    Amendment of Coverage
         7.    Clarification of Coverage




                                          ALL CLAIMS TO BE REPORTED DIRECTLY TO

                                          Shand Morahan & Company, Inc.
                                          Shand Morahan Plaza
                                          Evanston, Illinois 60201
                                          (847) 866-2800


                                          ---------------------------------
                                          Authorized Representative

Date Printed: August 27, 1996

                                   Page 3 of 3


                                A Markel Company
<PAGE>   4
[Markel Logo]

EVANSTON INSURANCE COMPANY
EVANSTON, ILLINOIS


ENDORSEMENT
Named Insured:                                   Policy No.:  IC-700654
PHILADELPHIA CONSOLIDATED HOLDING           Endorsement No.:  1
CORPORATION                                  Effective Date:  July 20, 1996




                          INSURED ENTITIES - COVERAGE A


It is agreed that Item 3.A. of the Declarations is amended by the addition of
the following:

         3.     INSURED ENTITIES AND ADDRESSES:

                A.     Coverage A Insured Entities:

                       Philadelphia Insurance Companies
                       Philadelphia Insurance Company
                       Philadelphia Indemnity Insurance Company
                       Maguire Insurance Agency
                       J. Maguire Brokerage
                       Maguire Insurance Agency Inc. of Texas



All other terms and conditions remain unchanged.






                                                       -------------------------
                                                       Authorized Representative
<PAGE>   5
               EVANSTON INSURANCE COMPANY
[MARKEL LOGO]  EVANSTON, ILLINOIS

ENDORSEMENT
Named Insured:                                   Policy No.:  IC-700654
PHILADELPHIA CONSOLIDATED HOLDING           Endorsement No.:  2
CORPORATION                                 Effective Date :  July 20, 1996



                     AMENDMENT OF INSURED - HOLDING COMPANY

It is agreed that THE INSURED 1. is amended to include the following:

        1.  The Coverage A Insured, which whenever used in this policy means:

            (f)   the entity(ies) scheduled below and any director, officer or
                  employee thereof, solely for liability imposed by reason of
                  acts, errors and omissions by any entity described in l(a),
                  l(b), l(c) or l(d) above, in the performance of Professional
                  Services for which coverage is afforded under THE COVERAGE 1.,
                  Coverage A, Errors and Omissions Liability and Claims Made and
                  Reported Clause.

                                    SCHEDULE

                  Maguire Holding Corporation




All other terms and conditions remain unchanged.



                                                       -------------------------
                                                       Authorized Representative
<PAGE>   6
               EVANSTON INSURANCE COMPANY
[MARKEL LOGO]  EVANSTON, ILLINOIS

ENDORSEMENT
Named Insured:                                       Policy No.:   IC-700654
PHILADELPHIA CONSOLIDATED HOLDING               Endorsement No.:   3
CORPORATION                                      Effective Date:   July 20, 1996


                     PENDING AND PRIOR LITIGATION EXCLUSION


It is understood and agreed that this Policy shall not apply to any Claim
(including derivative or representative actions) made against the Insured:

         (i)      based upon, arising out of, in consequence of, or in any way
                  involving any prior and/or pending litigation as of June 1,
                  1990; or

         (ii)     any fact, circumstance or situation underlying or alleged in
                  such litigation.





All other terms and conditions remain unchanged.



                                                       -------------------------
                                                       Authorized Representative
<PAGE>   7
               EVANSTON INSURANCE COMPANY
[MARKEL LOGO]  EVANSTON, ILLINOIS

ENDORSEMENT
Named Insured:                                     Policy No.:  IC-700654
PHILADELPHIA CONSOLIDATED HOLDING             Endorsement No.:  4
CORPORATION                                    Effective Date:  July 20, 1996



              INSURANCE AGENTS, INSURANCE BROKERS/AGENCY EXCLUSION


It is agreed that THE EXCLUSIONS 4. is amended by the addition of the following:

         1.       With respect to all Coverages, this policy does not apply to
                  any Claims or portion thereof made against any Insured:

                  (k)      based upon, arising out of, related to, directly or
                           indirectly resulting from or in consequence of, or in
                           any way involving the insolvency, receivership,
                           bankruptcy, liquidation or financial inability to
                           pay, of any insurance company in which any Insured
                           has placed or obtained coverage for a client or
                           account.








All other terms and conditions remain unchanged.

                                                       -------------------------
                                                       Authorized Representative
<PAGE>   8
               EVANSTON INSURANCE COMPANY
[MARKEL LOGO]  EVANSTON, ILLINOIS

ENDORSEMENT
Named Insured:                                       Policy No.:   IC-700654
PHILADELPHIA CONSOLIDATED HOLDING               Endorsement No.:   5
CORPORATION                                      Effective Date:   July 20, 1996



                       AMENDMENT OF PROFESSIONAL SERVICES


In consideration of the premium charged for this policy it is hereby understood
and agreed that THE COVERAGE 6. Professional Services is amended to include the
following:

         policy rescissions, cancellations and credit and investigatory
         activities, insurance agency and insurance brokers activities, tracking
         services





All other terms and conditions remain unchanged.

                                                       -------------------------
                                                       Authorized Representative
<PAGE>   9
               EVANSTON INSURANCE COMPANY
[MARKEL LOGO]  EVANSTON, ILLINOIS

ENDORSEMENT
Named Insured:                                      Policy No.:   IC-700654
PHILADELPHIA CONSOLIDATED HOLDING              Endorsement No.:   6
CORPORATION                                     Effective Date:   July 20, 1996



                              AMENDMENT OF COVERAGE


It is understood and agreed that this policy will respond regardless of the
presence or absence of reinsurance.








All other terms and conditions remain unchanged.





                                                       -------------------------
                                                       Authorized Representative
<PAGE>   10
               EVANSTON INSURANCE COMPANY
[MARKEL LOGO]  EVANSTON, ILLINOIS


ENDORSEMENT
Named Insured:                                     Policy No.:   IC-700654
PHILADELPHIA CONSOLIDATED HOLDING             Endorsement No.:   7
CORPORATION                                    Effective Date:   July 20, 1996



                            CLARIFICATION OF COVERAGE


As respects any Claim under this policy and losses as defined by this policy, it
is not our intent to subrogate against reinsurers under any treaty or
facultative insurance utilized by Coverage A. Insureds.








All other terms and conditions remain unchanged.



                                                       -------------------------
                                                       Authorized Representative
<PAGE>   11

[Markel Logo]

     [SHAND MORAHAN & COMPANY, INC. letterhead]
     Shand Morahan Plaza, Evanston, Illinois 60201
     (847) 866-2800 Fax (847) 866-0778
     Underwriting Manager
     A Markel Company

Submitted by                       Agency______________________________________
Surplus Lines License No.          Address_____________________________________
-------------------------          City/State_____________  Zip Code___________

          RENEWAL APPLICATION FOR INSURANCE COMPANIES PROFESSIONAL AND
              DIRECTORS AND OFFICERS LIABILITY INDEMNITY INSURANCE
                        (CLAIMS MADE AND REPORTED BASIS)

1.       This application must be signed and dated, and not completed earlier
         than 45 days before proposed effective date.

2.       Answer all questions. If a questions is not applicable, state NOT
         APPLICABLE. If the answer to any questions is none, state NONE. If
         space is insufficient to answer any question fully, attach a separate
         sheet.

3.       All questions MUST be completed in full with regard to each entity
         sought to be insured.

4.       Complete ONLY those parts of this application applicable to those
         coverages for which the Applicant seeks coverage.

5.       If coverage for Fiduciary Liability (Coverage C) is desired, please
         request application from the Underwriters for completion.

6.       The information disclosed in this application will be held in
         confidence by the Underwriting Manager.

                          (PLEASE TYPE OR PRINT IN INK)
--------------------------------------------------------------------------------

PART I (GENERAL INFORMATION TO BE COMPLETED BY APPLICANT IN ADDITION TO PARTS
FOR COVERAGES SOUGHT)
--------------------------------------------------------------------------------

1. Full name of Applicant: Philadelphia Consolidated Holding Corp. and
                           ----------------------------------------------------
                           Subsidiaries
                           ------------

2. Principal business address: One Bala Plaza Suite 100 Bala Cynwyd PA 19004
                               -------------------------------------------------
                                 (Street)    (City)   (State)       (Zip Code)

3. State of incorporation or charter formation:  Pennsylvania
                                               ---------------------------------

4. Nature of business of Applicant: Property & Casualty Insurers with Direct
                                    --------------------------------------------
                                    Sales Force
                                    -----------

5. Applicant has continuously been in
   business since:                     Agency 1962  / P & C Insurer 1986
                                       -----------------------------------------
                                       (Month)                (Year)

6. Common Stock:

      (a) Total number of shares outstanding:   6,024,657 (as of 6/30/96)
                                              ----------------------------------

      (b) Total number of shareholders:  99 holders of record; 526 beneficial
                                         ---------------------------------------
                                         holders (as of 2/21/96)
                                         -----------------------

      (c)  Total number of shares directly or beneficially owned by its
           directors:  2,220,008
                     -------------

      (d)  Total number of shares owned directly or beneficially by officers
           who are not directors:    93,885
                                 --------------

      (e)  Give names and percentage owned by any shareholder(s) holding
           directly or beneficially 10% or more of the
           common stock (if none, so indicate.):      James J. Maguire -- 32.9%
                                                --------------------------------

      (f)  Is the stock publicly traded?   Yes -- NASDAQ
                                           -------------



                                       1
<PAGE>   12
7.       Total number of subsidiaries more than 50% owned (including
         subsidiaries of subsidiaries):   4 (four)
                                          ---------

8.       Provide the following information on each subsidiary (including
         subsidiaries of subsidiaries): Use separate sheet if necessary. Attach
         a copy of the organization chart.

         (a)      Name of Parent: Philadelphia Consolidated Holding Corp.
                                  ----------------------------------------------

         (b)      Name of Subsidiary: Philadelphia Indemnity Insurance Company,
                                      ------------------------------------------
                                      Philadelphia Insurance Company
                                      ------------------------------------------

         (c)      Percentage of ownership: 100%
                                           -------------------------------------

         (d)      Description of Operations: Property and Casualty Insurance
                                             -----------------------------------
                                             Companies
                                             -----------------------------------

         (e)      Name of parent organization: ------
                                              ----------------------------------


9.       The following officer is designated to give/receive notices to/from the
         insurer as respects notice of cancellation, payment and return of
         premiums and payment of deductibles and other notices as required by
         the policy:

--------------------------------------------------------------------------------
         (Name)                           (Title)               (Entity)

10.      Proposed effective date:
                                 -----------------------------------------------

PART II (TO BE COMPLETED BY APPLICANT FOR COVERAGE "A" ERRORS AND OMISSIONS
LIABILITY INSURANCE)

1. (a) Amount of Insurance desired:
                                   ---------------------------------------------

   (b) Deductible desired:
                          ------------------------------------------------------
       (Should a policy of insurance ultimately be issued, limits and deductible
       in policy will govern coverage.)

<TABLE>
<CAPTION>
                                                                     Last Full Year   Current Year (Estimate)
<S>   <C>                                                            <C>              <C>
2.    Total direct written premium for all entities:                 --------------   -------------

3.    Total net written premium for all entities:                    --------------   -------------

4.    Safety engineering and loss control inspections:
</TABLE>


         A.       Annual number of safety engineering and loss control
                  inspections performed by applicant:

                  --------------------------------------------------------------

         B.       Does the Applicant contract outside safety engineering or loss
                  control inspection services? [ ] Yes [ ] No.

                  If yes, what percentage of such inspections are handled by
                  outside safety engineering and loss control services?

                                Please attach a copy of standard contract.
                  -------------


         C.       Number of safety engineering and loss control personnel
                  employed:
                           -----------------------------------------------------
<PAGE>   13
7.       Total number of subsidiaries more than 50% owned (including
         subsidiaries of subsidiaries):
                                        ---------------------------------------
8.       Provide the following information on each subsidiary (including
         subsidiaries of subsidiaries): Use separate sheet if necessary. Attach
         a copy of the organization chart.


      (a) Name of Parent:       Maguire Insurance Agency
                         -------------------------------------------------------

      (b) Name of Subsidiary:   J. Maguire Brokerage
                             ---------------------------------------------------
      (c) Percentage of ownership:   100%
                                   ---------------------------------------------
      (d) Description of Operations:  Property and Casualty Insurance Broker
                                     -------------------------------------------
      (e) Name of parent organization: Philadelphia Consolidated Holding Corp.
                                       -----------------------------------------

9.       The following officer is designated to give/receive notices to/from the
         insurer as respects notice of cancellation, payment and return of
         premiums and payment of deductibles and other notices as required by
         the policy:


         -----------------------------------------------------------------------
                (Name)              (Title)                  (Entity)

10.      Proposed effective date:
                                   ---------------------------------------------

--------------------------------------------------------------------------------
PART II (TO BE COMPLETED BY APPLICANT FOR COVERAGE "A" ERRORS AND OMISSIONS
LIABILITY INSURANCE)
--------------------------------------------------------------------------------

 1.  (a)  Amount of Insurance desired:
                                      ------------------------------------------

     (b)  Deductible desired:
                             ---------------------------------------------------
          (Should a policy of insurance ultimately be issued, limits and
          deductible in policy will govern coverage.)

<TABLE>
<CAPTION>
<S>                                                   <C>                 <C>
                                                      Last Full Year      Current Year (Estimate)

2.    Total direct written premium for all entities: ---------------      ----------------------

3.    Total net written premium for all entities:   ----------------      ----------------------
</TABLE>

4.    Safety engineering and loss control inspections:

      A.    Annual number of safety engineering and loss control
            inspections performed by applicant:
                                               ---------------------------------
      B.    Does the Applicant contract outside safety engineering or loss
            control inspection services? Yes [ ] No [ ].

            If yes, what percentage of such inspections are handled by outside
            safety engineering and loss control services?


                             Please attach a copy of standard contract.
            -----------------

      C.    Number of safety engineering and loss control personnel employed:

            -------------------
<PAGE>   14
7.       Total number of subsidiaries more than 50% owned (including
         subsidiaries of subsidiaries):
                                        ----------------------------------------

8.       Provide the following information on each subsidiary (including
         subsidiaries of subsidiaries): Use separate sheet if necessary. Attach
         a copy of the organization chart.


        (a) Name of Parent:
                            ---------------------------------------------------
        (b) Name of Subsidiary:
                                ------------------------------------------------
        (c) Percentage of ownership:
                                     -------------------------------------------
        (d) Description of Operations:
                                       -----------------------------------------
        (e) Name of parent organization:
                                       -----------------------------------------

9.       The following officer is designated to give/receive notices to/from the
         insurer as respects notice of cancellation, payment and return of
         premiums and payment of deductibles and other notices as required by
         the policy:

         William J. Benecke    Vice President             Claims
         -----------------------------------------------------------------------
         (Name)                (Title)                  (Entity)

10.      Proposed effective date:  July 20, 1996
                                 -----------------------------------------------

--------------------------------------------------------------------------------
         PART II (TO BE COMPLETED BY APPLICANT FOR COVERAGE "A" ERRORS AND
         OMISSIONS LIABILITY INSURANCE)
--------------------------------------------------------------------------------

 1.      (a)  Amount of Insurance desired:  3,000,000         5,000,000 option
                                          --------------------------------------

         (b)  Deductible desired:             250,000           500,000 option
                                 -----------------------------------------------
(Should a policy of insurance ultimately be issued, limits and deductible in
 policy will govern coverage.)

<TABLE>
<CAPTION>
<S>                                                  <C>                 <C>
                                                      Last Full Year      Current Year (Estimate)
2.    Total direct written premium for all entities:    97,518,561         133,188,000
                                                      --------------      ----------------
3.    Total net written premium for all entities:       62,071,745          85,567,000
                                                      --------------      ----------------
</TABLE>

4.      Safety engineering and loss control inspections:

        A.  Annual number of safety engineering and loss control
            inspections performed by applicant:
                         None
           --------------------------------------------------------------------

        B. Does the Applicant contract outside safety engineering or loss
           control inspection services? Yes [ ] No [ ].

           If yes, what percentage of such inspections are handled by outside
           safety engineering and loss control services?


               100%     Please attach a copy of standard contract. No Contract
           -----------

        C. Number of safety engineering and loss control personnel employed:
                 None
           ----------------

                                       2
<PAGE>   15
5.    Claim Services:


Approximate total numbers of claims handled annually by line:

<TABLE>
<CAPTION>
                                                      Current Year
                                   Last Full Year     Annualized       Next Year (Est.)
                                   --------------     ----------       ----------------
<S>                                <C>                <C>              <C>
                                       1995              1996             1997

ALBI                                    1782             2020             2222
                                        ----             ----             ----

ALPD                                    1768             1802             1982
                                        ----             ----             ----
ALPHD                                    995             1000             1128
                                        ----             ----             ----
GIL                                      606              620              744
                                        ----             ----             ----
WC                                         0                0                0
                                        ----             ----             ----
Misc. Casualty                          -125              138              165
                                        ----             ----             ----

Fire & Allied Incl. Inland Marine        593              650              715
                                        ----             ----             ----

Life                                       0                0                0
                                        ----             ----             ----

A&H                                        0                0                0
                                        ----             ----             ----

Other (specify)                            0                0                0
                                        ----             ----             ----

     Total                              5863             6230             6956
                                        ----             ----             ----
</TABLE>


B. Please provide percentage of claims handled in home office:  100% ; in field
                                                               ------
   offices:  0 .
            ---

C. Total number of claims handling personnel in home office:  28 ; in field
                                                             ---
   offices: 0 .
           ---

D. Does the Applicant contract outside adjustment services? [X] Yes [ ] No.
   If yes, what percentage of claims are handled by outside adjustment
   services?     N/A    Please attach copy of standard contract.
               --------

     WE USE OUTSIDE ADJUSTMENT SERVICES FOR INVESTIGATIVE PURPOSES ONLY AS
     NEEDED. WE HAVE NO CONTRACT WITH ANY ONE FIRM.

6. Policies in force

   Approximate total number of policies in force by line:

<TABLE>
<CAPTION>
                                                                Current
                                                                 Year
                                             Last Full Year   Annualized    Next Year (Est.)
                                                   1995          1996          1997 (30% growth)
                                                   ----          ----          ----
<S>                                          <C>               <C>           <C>
Fire & Allied Lines Including Inland Marine
                                                   ----          ----          ----
Commercial Multi-Peril                             2781          2845          3699
                                                   ----          ----          ----
Medical Malpractice
                                                   ----          ----          ----
Workers Compensation
                                                   ----          ----          ----
General Liability
                                                   ----          ----          ----
Private Passenger Auto
                                                   ----          ----          ----
Commercial Auto                                    1312           860          1100
                                                   ----          ----          ----
Fidelity/Surety
                                                   ----          ----          ----
Other (Describe)                                   3906          4408          5731
                                                   ----          ----          ----
Umbrella

Professional Liability
</TABLE>


                                       3
<PAGE>   16
Policies in force (cont'd)

<TABLE>
<CAPTION>
                                                                                         Current Year
                                                                   Last Full Year         Annualized         Next Year (Est.)
                                                                   --------------         ----------         ----------------
<S>                                                               <C>                    <C>                  <C>
                                                                        1995                 1996                  1997
                                                                   --------------         ----------            -----------
Life

i. Group
                                                                   --------------         -----------           -----------
ii. Individual
                                                                   --------------         -----------           -----------
iii. Annuities
                                                                   --------------         -----------           -----------
Group Accident & Health
                                                                   --------------         -----------           -----------
All other A&H
                                                                   --------------         -----------           -----------
     TOTAL                                                             7,999                 8,113                10, 530
                                                                   --------------         -----------           -----------
</TABLE>


7.       Professional services performed:

<TABLE>
<CAPTION>
                                                                               Yes     No       Annual Revenue
<S>                                                                            <C>     <C>     <C>
         A.       Agency & brokerage operation                                  [X]    [ ]
                                                                                               ------------------
         B.       Insurance consulting                                          [ ]    [X]
                                                                                               ------------------
         C.       Captive management                                            [ ]    [X]
                                                                                               ------------------
         D        Loss control, safety engineering for non-policyholders        [ ]    [X]
                                                                                               ------------------
         E.       Claims handling for non-policyholders                         [ ]    [X]
                                                                                               ------------------
         F.       Rehabilitation services for non-policyholders                 [ ]    [X]
                                                                                               ------------------
         G.       Insurance pool management                                     [ ]    [X]
                                                                                               ------------------
         H        Premium financing                                             [ ]    [X]
                                                                                               ------------------
         I        Data processing services                                      [ ]    [X]
                                                                                               ------------------
         J        Financial planning                                            [ ]    [X]
                                                                                               ------------------
         K.       Investment advisory activities                                [ ]    [X]
                                                                                               ------------------
         L.       Pension consulting                                            [ ]    [X]
                                                                                               ------------------
         M.       Third party benefit administration                            [ ]    [X]
                                                                                               ------------------
         N        Real estate syndication                                       [ ]    [X]
                                                                                               ------------------
         0.       Property management                                           [ ]    [X]
                                                                                               ------------------
         P.       Stockbroker/broker dealer activities                          [ ]    [X]
                                                                                               ------------------
         Q.       Title agent                                                   [ ]    [X]
                                                                                               ------------------
         R.       Escrow agent                                                  [ ]    [X]
                                                                                               ------------------
</TABLE>


         S.       Please describe any other services performed;
                                                               -----------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                       4
<PAGE>   17
8.       State the following regarding your facultative or treaty reinsurance
         contracts with respect to coverage of punitive and exemplary damages
         with regard to:

         (a) The Applicant:

             (i) Silent                  [ ] Yes [X] No

             (ii) Specifically included  [X] Yes [ ] No

             (iii) Specifically excluded [ ] Yes [X] No

          (b) The Applicant"s Directors
              (i)      Silent                      [X]  Yes    [ ]  No
              (ii)     Specifically included       [ ]  Yes    [ ]  No
              (iii)    Specifically excluded       [ ]  Yes    [ ]  No

9. Claims against Applicant

A.       Are there established procedures for handling claims or suits against
         the Applicant for errors and omissions, extra contractual liability or
         punitive damages?  [X] Yes [ ] No. If so, please describe. (Attach a
         separate sheet if necessary.) See attached. All department managers are
                                       -----------------------------------------
         instructed to report any claim, threatened or actual lawsuit naming the
         -----------------------------------------------------------------------
         company to the Vice President of Claims.
         ---------------------------------------

         1.  When were such procedures established?      1992
                                                   -----------------
         2.  Person responsible for monitoring such claims or suits:

               Name           William J. Benecke
                              ------------------------
               Title          Vice President, Claims
                              ------------------------
               Department     Claims
                              ------------------------

         3.  What are the procedures for branch or field offices to report such
             claims or suits? (Attach a separate sheet if necessary.)

          Same
          ------------------------------------------------------------------
          ------------------------------------------------------------------
          ------------------------------------------------------------------

B.       Is a written company directive for such procedures in effect? [X] Yes
         [ ] No. If so, please attach a copy.

C.       Have all claims (as defined by the policy) known to the applicant been
         reported to Shand Morahan & Company, Inc.? [X] Yes [ ] No. If no,
         please provide details.

10.      The undersigned authorized agent of the person(s) and entity(ies)
         proposed for this insurance for the purpose of this Renewal Application
         declares that to the best of its/his knowledge the statements herein
         are true; and it is understood and agreed that this Renewal Application
         is a supplement to the application (including any supplement[s]
         thereto) dated June 21, 1993, and all prior Renewal Application(s)
         (including any supplements thereto) together with this Renewal
         Application Constitutes the complete application which shall be the
         basis of the policy and which will be attached to and become a part of
         the policy, if issued.


                                        5
<PAGE>   18
11.      Attached and made a part of this application by reference is one copy
         of the Applicant's most recent Annual Report and Statement of Condition
         to Stockholders.


Shand Morahan & Company, Inc., underwriting manager for the insurer, is hereby
authorized to make any investigation and inquiry in connection with this
application as it deems necessary.

The undersigned hereby authorizes the release of claim information from any
prior insurer to Shand Morahan & Company, Inc., underwriting manager for the
insurer.

PLEASE REVIEW THE POLICY CAREFULLY. Except to such extent as may be otherwise in
the policy, the coverage for which application is being made is limited to
liability for only THOSE CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED DURING
THE POLICY PERIOD AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR WITHIN
60 DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD.

                           Signature of Applicant*


                           James J. Maguire
                           ----------------------------------------------------
                           Must be Signed by Chairman of the Board or President
                           (within 45 days of the proposed effective date)

                           Title:  Chairman CEO
                                 ---------------------------------------------

                           Affiliation:  ---
                                       ---------------------------------------

                           Date:       July 12, 1996
                                ---------------------------------------------

*SIGNING THIS FORM DOES NOT BIND THE APPLICANT OR THE INSURER OR THE
UNDERWRITING MANAGER TO COMPLETE THE INSURANCE. Application MUST be currently
signed and dated to be considered for quotation.

                                       6
<PAGE>   19
PART III (To Be Completed By Applicant For COVERAGE "B" DIRECTORS AND OFFICERS
LIABILITY INDEMNITY INSURANCE

1 . (a)  Amount of Insurance desired:
                                     ------------------------------------------

    (b)  Deductible desired:
                            ---------------------------------------------------
         (Should a policy of insurance ultimately be issued, limits and
         deductible in policy will govern coverage.)

2.       Unless such information is contained in the latest Annual Report,
         please submit a list of:

         (a)      Names, dates of election or appointment, and affiliations of
                  all directors of the Applicant;

         (b)      Affiliations of all directors of the Applicant in which said
                  directors directly or indirectly have a 10% or more ownership
                  interest;

         (c)      Names, dates of election or appointment, and official titles
                  of all officers of the Applicant;

         (d)      Retirement Age.

3.       Is the Applicant presently involved in, or is it presently considering
         or contemplating any merger, consolidation, acquisition, tender offer
         or divestment or sale of its stock in excess of 10% of the total stock
         outstanding? [ ] Yes [ ] No. If yes, provide details.

         ----------------------------------------------------------------------
         ----------------------------------------------------------------------

4.       Has the Applicant been involved in any merger, consolidation,
         acquisition, tender offer, or divestment or sale of its stock in excess
         of 10% of the total stock outstanding within the last five years? [ ]
         Yes [ ] No. If yes, provide details.

        ----------------------------------------------------------------------
        ----------------------------------------------------------------------

5.       Has the Applicant ever received a Cease and Desist Order from any
         supervisory authority? [ ] Yes [ ] No. If yes, give details:

        ----------------------------------------------------------------------
        ----------------------------------------------------------------------

         Attach a copy of your latest examination report as performed by State
         Insurance Dept(s).

6.       Has any director or officer in the past 5 years been charged or
         convicted of any criminal act, or is any director or officer presently
         the subject of a pending criminal proceeding? [ ] Yes [ ] No. If yes,
         please provide details.

        ----------------------------------------------------------------------
        ----------------------------------------------------------------------



7.       Has the Applicant during the last five years made any claim in excess
         of $10,000 under its blanket bond and/or excess fidelity policy? [ ]
         Yes [ ] No. If so, provide details.

        ----------------------------------------------------------------------
        ----------------------------------------------------------------------
        ----------------------------------------------------------------------
        ----------------------------------------------------------------------

                                        7
<PAGE>   20
8.       Have there been any changes in senior management (Board Chairman,
         President, Executive Officers or the like) in the last three years? [ ]
         Yes [ ] No. If so, please provide details._____________________________

         _______________________________________________________________________

9.       No fact, circumstance or situation indicating the probability of a
         claim or action against which indemnification would be afforded by the
         proposed insurance is now known by any person(s) or entity(ies)
         proposed for this insurance other than that which is disclosed in this
         application. It is agreed by all concerned that if there be knowledge
         of any fact, circumstance, or situation, any claim subsequently
         emanating therefrom shall be excluded from coverage under the proposed
         insurance.

10.      The undersigned authorized agent of the person(s) and entity(ies)
         proposed for this insurance for the purpose of this Renewal Application
         declares that to the best of its/his knowledge the statements herein
         are true; and it is understood and agreed that this Renewal Application
         is a supplement to the application (including any supplement[s]
         understood thereto) dated___________________, 19__, and all prior
         Renewal Application(s) (including any supplement(s) thereto) together
         with this Renewal Application constitutes the complete application
         which shall be the basis of the policy and which will be attached to
         and become a part of the policy, if issued.

11.      Attached and made a part of this application by reference is one of
         each of the following: Applicant's most recent Annual Report and
         Statement of Condition to Stockholders or Policyholders, certified
         provisions of the Charter or By-laws covering indemnification of
         directors and officers, and Notice to Stockholders or Policyholders,
         and Proxy Statement for either the last or the next annual meeting, and
         latest annual and most recent periodic report(s) filed with the
         Securities and Exchange Commission, if any.



Shand Morahan & Company, Inc., underwriting manager for the insurer, is hereby
authorized to make any investigation and inquiry in connection with the
application as it deems necessary.

The undersigned hereby authorizes the release of claim information from any
prior insurer to Shand Morahan & Company, Inc., underwriting manager for the
insurer.


PLEASE REVIEW THE POLICY CAREFULLY. Except to such extent as may be otherwise in
the policy, the coverage for which application is being made is limited to
liability for only THOSE CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED DURING
THE POLICY PERIOD AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR WITHIN
60 DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD.


                           Signature of Applicant*


                           ____________________________________________________
                           Must be Signed by Chairman of the Board or President
                          (within 45 days of the proposed effective date)

                           Title:___________________________

                           Affiliation:_____________________

                           Date:____________________________


*SIGNING THIS FORM DOES NOT BIND THE APPLICANT OR THE INSURER OR THE
UNDERWRITING MANAGER TO COMPLETE THE INSURANCE. Application MUST be currently
signed and dated to be considered for quotation.


                                        8
<PAGE>   21
                        PHILADELPHIA INSURANCE COMPANIES
                              LITIGATION PROCEDURES


When lawsuits are received in the Claims Department of the Philadelphia
Insurance Companies, the following should occur:

1.       A Claims Assistant should immediately locate the appropriate claim
         file.

2.       If the Claim Assistant cannot locate the appropriate file, the lawsuit
         should immediately be given to a Claims Supervisor.

3.       If the file can be located, the lawsuit should be attached to the file
         and given to a Claims Supervisor.

4.       The Claims Supervisor will immediately review the lawsuit and provide
         written instructions (recommendations) to the Claims Examiner.

5.       The Claims Supervisor will immediately tender the file, suit, and
         recommendations to the Claims Examiner. A claims conference between the
         Supervisor and Examiner, at a minimum, is recommended. Where more
         complex issues or large demands are involved, a conference with the
         Claims Manager is required.

6.       Whenever a lawsuit is served upon the organization, and an entity of
         the organization is named as a defendant, the suit and file must be
         brought to the Manager's immediate attention. No exceptions!

7.       No Claims Examiner has the authority to pursue appearance and answer
         extensions without having first discussed the lawsuit with a Claims
         Supervisor or Manager. (Many jurisdictions are going to fast track suit
         processing. In some of these jurisdictions, a lengthy extension works
         to the benefit of the Plaintiff because it substantially reduces our
         discovery time frame. When an extension is obtained, claim files should
         be put on a tight diary period by both the Claims Examiner and
         Supervisor.)

8.       No Claims Examiner has the authority to assign Defense Counsel until
         the lawsuit is reviewed by a Claims Supervisor. (Should an examiner not
         receive written handling recommendations within a timely manner, (24 to
         48 hours) immediate notification to the Claims Manager is required.)

9.       It is recommended a claims Supervisor offer the Claims Examiner an
         opportunity to provide his/her handling recommendations before written
         instructions/recommendations are provided by the Claims Supervisor.
         This activity promotes learning and growth, but in no way should it
         affect the timely processing of a lawsuit.

10.      The Claims Manager (Claims Supervisors in his/her absence) is the only
         individual with authority to assign a new defense firm to represent the
         interests of the Philadelphia Insurance Companies or its insured.
         (Control of this manner is handled by requiring the "New Lawfirm Cover
         Letter" be signed by the Claims Manager. It is imperative management
         have an opportunity to evaluate perspective lawfirms before they become
         involved in litigation for our organization.)

11.      The appropriate Defense and Billing Guidelines should be distributed to
         all newly selected lawfirms.

12.      The appropriate Defense Budget and Plan forms should be attached to all
         defense assignment letters.
<PAGE>   22
                                                          Phone:  (215) 925-7656
                                                            Fax:  (215) 923-0342

                              PAUL HERTEL & COMPANY
                                  INCORPORATED

                                    INSURANCE
                               243 CHESTNUT STREET
                           PHILADELPHIA, PA 19106-1208


                                    COVER NOTE

                                                          NO.:  Policy IC-700654

                                                             DATE: July 22, 1996


          THIS IS TO STATE THAT INSURANCE HAS BEEN ARRANGED AS FOLLOWS:

INSURED:                 Philadelphia Consolidated Holding Corporation


TERM:                    July 20, 1996 to July 20, 1997

COVERAGE:                Insurance Companies Professional Liability Insurance

LIMITS OF LIABILITY:     $5,000,000 Each Claim/Aggregate

DEDUCTIBLE:              $250,000 Each Claim

CARRIER:                 Evanston Insurance Company

PREMIUM:                 $157,035.00 Annually





                                                     /s/ Paul R. Hertel, Jr.
                                                     ---------------------------
                                                     (Authorized Representative)

Errors & Omissions Excepted
                         PREMIUM PAYABLE ON PRESENTATION
<PAGE>   23
SHAND MORAHAN & COMPANY, INC.

INSURANCE COMPANIES PROFESSIONAL AND
DIRECTORS & OFFICERS LIABILITY INDEMNITY
INSURANCE POLICY

Underwriting Manager: Shand, Morahan & Company, Inc., Shand Morahan Plaza,
Evanston, Illinois 60201




                                                       [Logo]



Insurer:

[MARKEL LOGO] EVANSTON INSURANCE COMPANY

(A stock insurance company, herein called the Insurer, which except in Illinois
is a non-admitted insurer, writing pursuant to the surplus lines laws and not
under the jurisdiction of the Insurance Commissioner.) Shand Morahan Plaza
Evanston, Illinois 60201
<PAGE>   24
CONDITIONS PRECEDENT

As conditions precedent to the availability of any coverage under this policy:
with respect to Coverages A, B, and C, coverage shall be afforded for only those
Coverages listed in Item 6. of the Declarations; the payment of the premium must
be made when due; and the application attached hereto and all information in
whatever form communicated by the Insured to the Insurer must be correct to the
best of the Insured's knowledge, Subject to this policy's Declarations and all
the terms of this insurance, the Insurer and Insured agree as follows:

INTEGRATION OF DOCUMENT

All the provisions of this policy applicable to those Coverages listed in Item
6. of the Declarations are intended to be read together as one integrated
document. No applicable provision nor any part thereof is intended to be
separable from the balance of the applicable policy provisions. The meaning of
each applicable provision of this policy is created by what is written in such
provision and by what is written in the balance of the applicable policy
provisions, and the Insurer issues this policy to the Insured in contemplation
of the foregoing method of giving meaning to the policy.

If any applicable provision of this policy is held to be void by a court of
competent jurisdiction, then the balance of the applicable provisions of this
policy shall still be interpreted in accordance with the preceding paragraph.

USE OF SINGULAR AND PLURAL

In this policy, the use of a defined term in the singular shall be deemed a
proper use even though such term may be referring to more than one of what it
defines. The necessary grammatical changes required to make the defined terms of
this policy apply in the plural sense when such terms are used singularly shall
in all instances be assumed as though in each case fully expressed.

THE INSURED

The unqualified word "Insured," whenever used in this policy, means:

1.    The Coverage A Insured, which whenever used in this policy means:

         (a)      any entity named in Item 3.A. of the Declarations;

         (b)      any insurance entity which is created subsequent to the
                  inception date of this policy by any entity named in Item 3.A.
                  of the Declarations and which is more than fifty (50) percent
                  owned by any entity named in Item 3.A. of the Declarations,
                  PROVIDED:

                  (i)      written notice, together with a completed application
                           and pro forma financial statement for such newly
                           created entity, shall be given to the Insurer within
                           sixty (60) days of the creation of such entity; and

                  (ii)     premium adjustment and coverage revision shall be
                           effected as may be required by the Insurer;

         (c)      any person who was or now is a director and/or officer of any
                  entity described in Item 1(a) or 1(b) hereinabove, solely
                  while acting within the scope of his duties as director and/or
                  officer of any entity described in Item 1(a) or 1(b)
                  hereinabove;

         (d)      any person who was or now is an employee of any entity
                  described in Item 1(a) or 1(b) hereinabove solely while
                  acting within the scope of his duties as employee of any
                  entity described in Item 1(a) or 1(b) hereinabove;

         (e)      any estate, heir, legal representative or assign of any person
                  described in Item 1(c) or 1(d) hereinabove in the event of
                  such person's death, incapacity or bankruptcy but only for
                  such person's liability as is otherwise covered herein.

2.       The Coverage B Company Insured, which whenever used in this policy
         means:

         (a)      any entity named in Item 3.B. of the Declarations;

         (b)      any entity which is created subsequent to the inception date
                  of this policy by any entity named in Item 3.B. of the
                  Declarations and which is more than fifty (50) percent owned
                  by any entity named in Item 3.B. of the Declarations,
                  PROVIDED:

                  (i)      written notice, together with a completed application
                           and pro forma financial statement for such newly
                           created entity, shall be given to the Insurer within
                           sixty (60) days of the creation of such entity; and

                  (ii)     premium adjustment and coverage revision shall be
                           effected as may be required by the Insurer.

3.       The Coverage B Individual Insured, which whenever used in this policy
         means:

         (a)      any person who was or now is a director and/or officer of the
                  Coverage B Company Insured;

         (b)      any estate, heir, legal representative or assign of any person
                  described in Item 3(a) hereinabove in the event of such
                  person's death, incapacity or bankruptcy but only for such
                  person's liability as is otherwise covered herein.

                                       1

<PAGE>   25
4.       The Coverage C Insured, which whenever used in this policy means:

         (a)      any Employee Benefit Plan named in Item 3.C.1. of the
                  Declarations;

         (b)      any sponsoring employer named in Item 3.C.2. of the
                  Declarations;

         (c)      any person who was or now is a director and/or officer, or
                  employee of any entity described in Item 4(b) hereinabove, but
                  only with respect to any such person's acts as a fiduciary of
                  any Coverage C Insured as described in Item 4(a) hereinabove;

         (d)      any estate, heir, legal representative or assign of any person
                  described in Item 4(c) hereinabove in the event of such
                  person's death, incapacity or bankruptcy but only for such
                  person's liability as is otherwise covered herein.

THE COVERAGE

1. COVERAGE A, ERRORS AND OMISSIONS LIABILITY AND CLAIMS MADE AND REPORTED
CLAUSE: The Insurer agrees to indemnify the Coverage A Insured for the amount of
Loss which such Coverage A Insured shall have sustained resulting from any Claim
which alleges any act, error or omission by or on behalf of the Coverage A
Insured in the performance of Professional Services and which is FIRST MADE
AGAINST THE COVERAGE A INSURED DURING THE POLICY PERIOD OR THE OPTIONAL
EXTENSION PERIOD, IF PURCHASED, AND REPORTED TO THE INSURER DURING THE POLICY
PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED, OR WITHIN SIXTY (60) DAYS
AFTER THE EXPIRATION OF THE POLICY PERIOD OR OPTIONAL EXTENSION PERIOD, IF
PURCHASED.

2. COVERAGE B, DIRECTORS' AND OFFICERS' LIABILITY AND CLAIMS MADE AND REPORTED
CLAUSE:

         (a)      Individual Liability Coverage: The Insurer agrees to indemnify
                  the Coverage B Individual Insureds for the amount of Loss,
                  except for the amount of such Loss which the Coverage B
                  Company Insured shall indemnify the Coverage 6 Individual
                  Insureds, which such Coverage B Individual Insureds shall have
                  sustained resulting from any Claim which alleges any act,
                  error, omission, misstatement, misleading statement, or
                  neglect or breach of duty by the Coverage B Individual
                  Insureds solely in their capacities as directors and/or
                  officers of the Coverage B Company Insured and which is FIRST
                  MADE AGAINST THE COVERAGE B INDIVIDUAL INSUREDS DURING THE
                  POLICY PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED,
                  AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR THE
                  OPTIONAL EXTENSION PERIOD, IF PURCHASED, OR WITHIN SIXTY (60)
                  DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD OR OPTIONAL
                  EXTENSION PERIOD, IF PURCHASED.

         (b)      Company Reimbursement Coverage: The Insurer agrees to
                  indemnify the Coverage B Company Insured for the amount of
                  Loss for which the Coverage B Company Insured has lawfully
                  indemnified or was obligated by law to indemnify the Coverage
                  B Individual Insureds resulting from any Claim which alleges
                  any act, error, omission, misstatement, misleading statement,
                  or neglect or breach of duty by the Coverage B Individual
                  Insureds solely in their capacities as directors and/or
                  officers of the Coverage B Company Insured and which is FIRST
                  MADE AGAINST THE COVERAGE B INDIVIDUAL INSUREDS DURING THE
                  POLICY PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED,
                  AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR THE
                  OPTIONAL EXTENSION PERIOD, IF PURCHASED, OR WITHIN SIXTY (60)
                  DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD OR OPTIONAL
                  EXTENSION PERIOD, IF PURCHASED.

3. COVERAGE C, FIDUCIARY LIABILITY AND CLAIMS MADE AND REPORTED CLAUSE: The
Insurer agrees to indemnify the Coverage C Insured for the amount of Loss which
such Coverage C Insured shall have sustained resulting from any Claim which
alleges any breach of responsibility, obligation or duty imposed upon the
Coverage C Insured in connection with the Employee Benefit Plan: (a) under the
Employee Retirement Income Security Act of 1974 (including amendments thereto
and regulations promulgated thereunder); or (b) under statutory or common law of
any state, municipality or any other governmental subdivision, or possession or
territory of the United States of America imposing or imputing comparable
responsibilities, obligations or duties as those imposed under the Employee
Retirement Income Security Act of 1974 (including amendments thereto and
regulations promulgated thereunder) and which is FIRST MADE AGAINST THE COVERAGE
C INSURED DURING THE POLICY PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF
PURCHASED, AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR THE OPTIONAL
EXTENSION PERIOD, IF PURCHASED, OR WITHIN SIXTY (60) DAYS AFTER THE EXPIRATION
OF THE POLICY PERIOD OR OPTIONAL EXTENSION PERIOD, IF PURCHASED.

4. CLAIM (a) means, whenever used in this policy, any adjudicatory proceeding
commenced against the Insured seeking money damages in which the Insured may be
subjected to a binding adjudication of liability for such damages; and (b) is
considered first made under the applicable Coverage when the corresponding
Insured first receives notice of the Claim from a claimant, his legal
representative or agent.

5. EMPLOYEE BENEFIT PLAN means, whenever used in this policy, any pension,
profit sharing, health and welfare or other employee benefit plan or trust
listed in Item 3.C.1. of the Declarations and established for the sole benefit
of the directors, officers and/or employees of any entity named in Item 3.C.2.
of the Declarations.

Employee Benefit Plan shall not mean or include any multi-employer plan or
trust.

6. PROFESSIONAL SERVICES means, whenever used in this policy, claims handling
and adjusting, safety inspections, loss control, safety engineering services,
premium financing operations, insurance consulting, actuarial consulting, risk
management, insurance pool management, personal injury rehabilitation
operations, and subrogation and salvage operations.

7. LOSS means, whenever used in this policy, compensatory damages, punitive
damages except as otherwise provided herein, settlements, Claim Expenses
Incurred by the Insured, and Claim Expenses Incurred by the Insurer, provided
always that Loss shall not include: (a) matters which are uninsurable under the
law pursuant to which this policy shall be construed; (b) under Coverages B and
C, punitive damages and any multiplication, including trebling, of damages; (c)
benefits paid or payable to a participant of or beneficiary of the Employee
Benefit Plan if benefits are or may lawfully be paid by the Employee Benefit
Plan; (d) contributions paid or payable to the Employee Benefit Plan pursuant to
any obligation of the Insured referred to in THE INSURED 4(b) to fund the
Employee Benefit Plan; (e) fines, penalties imposed by law, or taxes; (f) any
obligation assumed by the Insured as an insurer or reinsurer under any policy or
contract or treaty of insurance, reinsurance, suretyship, annuity, or endowment;
and (g) the return or payment of premium or commission monies.

                                        2
<PAGE>   26
8. CLAIM EXPENSES INCURRED BY THE INSURED means, whenever used in this policy,
reasonable amounts paid by the Insured in the defense of that portion of any
Claim for which coverage is afforded under this policy, including costs of
investigation, court costs, costs of attachment and similar bonds and costs of
appeals.  Provided always that Claim Expenses Incurred by the Insured does not
include (a) salary charges of employees or officials of the entities referred to
in THE INSURED, or (b) salary or administration or overhead charges, or charges
of any kind or character whatsoever attributable to any in-house counsel or
captive out of house counsel for the entities referred to in THE INSURED.

9. CLAIM EXPENSES INCURRED BY THE INSURER (IF THE INSURER EXERCISES ITS OPTION
TO DEFEND AS SET FORTH IN THE COVERAGE 11 OF THIS POLICY) means, whenever used
in this policy: (a) fees charged by any lawyer designated by the Insurer; (b)
all other fees and expenses resulting from the investigation, adjustment,
defense and appeal of a Claim and incurred by the Insurer; and (c) premiums on
appeal bonds and premiums on bonds to release attachments in any Claim for an
amount not in excess of the applicable limit of liability of this policy, but
the Insurer shall have no obligation to apply for or furnish any such bonds;
provided always that Claim Expenses Incurred by the Insurer shall not include
salary charges of regular employees or officials of the Insurer or any
supervisory counsel retained by the Insurer.

10. POLICY PERIOD means, whenever used in this policy, the period from the
inception date of this policy to the policy expiration date as set forth in the
Declarations, or its earlier termination date, if any.

11. OPTION TO DEFEND: With respect to Coverages A, B, and C, it shall be the
Insured's duty to defend Claims made against them, provided however that, the
Insurer shall have the option but not the duty to defend Claims made against the
Insured for which insurance is afforded by this policy. If the Insurer exercises
its Option to Defend, the Insurer shall not be obligated to defend or continue
to defend any Claim made against the Insured after the applicable limit of the
Insurer's liability has been exhausted by payment of Loss.

12. DISCOVERY CLAUSE: If prior to the effective date of cancellation or
non-renewal of this policy the Insured first becomes aware of a specific act,
error, omission, misstatement, misleading statement, neglect or breach of duty,
breach of responsibility, obligation or duty which is reasonably expected to
result in a Claim which falls within the scope of coverage of this policy, then
the Insured may provide written notice to the Insurer containing the information
listed below. If such written notice is received by the Insurer prior to the
effective date of cancellation or non-renewal of this policy, then any Claim
subsequently made against the Insured arising out of such conduct shall be
deemed for the purpose of this insurance to have been made on the date on which
such written notice is received by the Insurer. The Insured shall cooperate
fully with the Insurer, and any investigation conducted by the Insurer or its
representatives shall be subject to the terms set forth in this policy as
applicable to a Claim.

It is a condition precedent to the coverage afforded by this Discovery Clause
that written notice be given to the Insurer containing the following
information:

         (a)      the specific act, error, omission, misstatement, misleading
                  statement, neglect or breach of duty, breach of
                  responsibility, obligation or duty;

         (b)      the date(s) of such conduct;

         (c)      the injury or damage which has or may result from such
                  conduct;

         (d)      the identity(ies) of the Insured(s) who may be the subject of
                  the Claim;

         (e)      the identity(ies) of any potential claimant(s);

         (f)      the anticipated location(s) of any such Claim; and

         (g)      the circumstances by which the Insured first became aware of
                  the potential Claim.

13. OPTIONAL EXTENSION PERIOD: If the Insurer cancels or refuses to renew this
policy, for reasons other than non-payment of premium and/or deductible amount
or non-compliance with the terms and conditions of this policy, then the entity
named in Item 1. of the Declarations shall have an option to purchase an
extension of the coverage which is granted by this policy on the day immediately
prior to the commencement of such extension. Upon payment of an additional
premium calculated at that percentage shown in Item 7.A. of the Declarations of
the total annual premium for this policy, the coverage granted by this policy
shall apply to any Claim first made against the Insured during the number of
days as stated in Item 7.B. of the Declarations following immediately upon the
effective date of such cancellation or non-renewal. Any such Claim must be
reported to the Insurer during the period of days as stated in Item 7.B. of the
Declarations or within sixty (60) days after the expiration of such period, AND
any such Claim must arise out of an act, error, omission, misstatement,
misleading statement, neglect or breach of duty, breach of responsibility,
obligation or duty committed before the effective date of such cancellation or
non-renewal and otherwise covered by this policy. This period of days as stated
in Item 7.B. of the Declarations and as described in this paragraph shall be
referred to as the "Optional Extension Period." If, however, this insurance is
succeeded within 30 days of the cancellation or expiration date by similar
CLAIMS MADE insurance coverage for which the prior acts provision has a
retroactive date which is the same as or earlier than that provided under this
policy, the succeeding insurance shall be deemed to be a renewal hereof, and in
consequence, the entity named in Item 1. of the Declarations shall have no right
to purchase an Optional Extension Period.

The quotation of a different premium, deductible(s), limit(s) of liability
and/or renewal terms for this policy or the refusal of the Insurer to offer
terms to effect a premium adjustment and/or coverage revision applicable to any
newly created entity pursuant to THE INSURED 1(b) or 2(b) for this policy does
not constitute a cancellation or refusal to renew for the purposes of this
provision.

As a condition precedent to the right to purchase the Optional Extension Period,
the full premium for this policy and any deductibles that are due must have been
paid when they became due.

The right to purchase the Optional Extension Period shall terminate unless
written notice is given to the Insurer within thirty (30) days after the
effective date of cancellation, or, in the event of a refusal to renew, within
thirty (30) days after the Policy Period ends, together with full payment of the
premium for the Optional Extension Period. If such notice and premium payment
are not so given to the Insurer, the entity named in Item 1. of the Declarations
shall not at a later date be able to exercise the right to purchase the Optional
Extension Period.

In the event of the purchase of the Optional Extension Period, the entire
premium therefor shall be deemed fully earned at its commencement and in the
event the Optional Extension Period is terminated before its term for any
reason, the Insurer shall not be liable to return any portion of the premium
paid for the Optional Extension Period.

The fact that this policy may be extended by virtue of the exercise of the
Optional Extension Period shall not in any way increase the applicable limits of
liability set forth in the Declarations and described in the section LIMITS OF
LIABILITY.

                                        3
<PAGE>   27
14.      WITH RESPECT TO COVERAGES A, B, AND C, CHANGE IN OWNERSHIP OR
AFFILIATION OF ANY INSURED ENTITY:


         (a)      If more than one entity is insured hereunder and if any
                  Insured which is a mutual insurance company, ceases during the
                  Policy Period to be affiliated with the other Insured
                  entity(ies); or

         (b)      If more than one entity is insured hereunder and if any
                  Insured which is a subsidiary of any Insured, ceases during
                  the Policy Period to be such a subsidiary;

Then coverage hereunder shall not apply to any Claim arising out of any act,
error, omission, misstatement, misleading statement, neglect or breach of duty
or breach of responsibility, obligation or duty by or on behalf of such entity
which ceases to be affiliated with the other Insured entity(ies) or which ceases
to be a subsidiary of any Insured, happening subsequent to the events described
in (a) and (b) hereinabove.

The term "subsidiary" used in (b) hereinabove shall mean any entity more than
fifty (50) percent of whose outstanding securities, representing the present
right to vote for the election of directors of such entity, are owned by another
entity alone or by another entity in combination with one or more of its
subsidiaries. The term subsidiary shall include any subsidiary of any subsidiary

THE EXCLUSIONS

1.       WITH RESPECT TO COVERAGE A, THIS POLICY DOES NOT APPLY TO ANY CLAIM OR
PORTION THEREOF MADE AGAINST ANY COVERAGE A INSURED:

         (a)      arising out of or resulting from the financial inability to
                  pay claims or to perform Professional Services;

         (b)      by any pool or association (including any officer, employee or
                  director thereof) in which the Coverage A Insured is a
                  participant or by any participant (including any officer
                  employee or director thereof) in any such pool or association
                  involving the business or operations of such pool or
                  association;

         (c)      for liability assumed under any contract or agreement, except
                  liability which would have attached to the Insured even in the
                  absence of such contract or agreement;

         (d)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  the inadequacy of claim reserves of the Coverage A Insured or
                  of any entity to which the Coverage A Insured provides
                  Professional Services;

         (e)      arising out of express warranties, guarantees or
                  representations made in connection with safety inspections,
                  loss control and/or safety engineering services;

         (f)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  the Employee Retirement Income Security Act of 1974 (or
                  amendments thereto or any regulations promulgated thereunder),
                  or similar provisions of any Federal, State or Local statutory
                  law or common law;

         (g)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  any employee benefit plan established for the benefit of the
                  directors, officers and/or employees of the entity named in
                  Item 1. of the Declarations or of any subsidiary and/or
                  affiliate thereof.

2.       WITH RESPECT TO COVERAGE B, THIS POLICY DOES NOT APPLY TO ANY CLAIM OR
PORTION THEREOF MADE AGAINST ANY COVERAGE B INDIVIDUAL INSURED:

         (a)      based upon, arising out of, related to, directly or
                  indirectly resulting from or in consequence of, or in any way
                  involving Professional Services;

         (b)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  the Employee Retirement Income Security Act of 1974 (or
                  amendments thereto or any regulations promulgated thereunder),
                  or similar provisions of any Federal, State or Local
                  statutory, law or common law;

         (c)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  any employee benefit plan established for the benefit of the
                  directors, officers and/or employees of the entity named in
                  Item 1. of the Declarations or of any subsidiary and/or
                  affiliate thereof;

         (d)      arising out of or in any way involving the conduct of business
                  of any Coverage B Company Insured as:

                  (i)      an investment company; or

                  (ii)     an investment advisor, counselor or manager; or

                  (iii)    a general distributor for any investment company or
                           any real estate investment trust;

         (e)      based upon, arising out of, or in any way involving the
                  Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.,
                  Section 1961, et seq.;

         (f)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  any Coverage B Individual Insured's duties as director,
                  officer, or employee of any entity other than any Coverage B
                  Company Insured, even if directed or requested to serve as
                  director, officer or employee of such other entity.

3.       WITH RESPECT TO COVERAGE C, THIS POLICY DOES NOT APPLY TO ANY CLAIM OR
PORTION THEREOF MADE AGAINST ANY COVERAGE C INSURED:

         (a)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  liability of others assumed by any Coverage C Insured under
                  any contract or agreement, either oral or in writing, except
                  in accordance with the terms of the Instrument or Declaration
                  of Trust pursuant to which the Employee Benefit Plan is
                  established;




                                       4
<PAGE>   28
         (b)      brought pursuant to Title IV, Sub-title D of the Employee
                  Retirement Income Security Act of 1974 (or any amendments
                  thereto), or under statutory or common law of any state,
                  municipality or any other governmental subdivision, or
                  possession, or territory of the United States of America
                  imposing comparable responsibilities, obligations, liabilities
                  or duties as those imposed under Title IV, Sub-title D of the
                  Employee Retirement Income Security Act of 1974 (including
                  amendments thereto and regulations promulgated thereunder);

         (c)      for the return by the Insured of any remuneration paid to them
                  if payment of such remuneration shall be held by the Court to
                  have been illegal.

4.       WITH RESPECT TO ALL COVERAGES, THIS POLICY SHALL NOT APPLY TO ANY
CLAIM OR PORTION THEREOF MADE AGAINST ANY INSURED:

         (a)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  bodily injury, sickness, disease, or death of any person,
                  provided however, this exclusion shall not apply to any Claim
                  based upon or arising out of allegations of negligence against
                  the Coverage A Insured in the performance of Professional
                  Services by the Coverage A Insured;

         (b)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  damage to or destruction of any tangible property including
                  loss of use thereof, provided however, this exclusion shall
                  not apply to any Claim based upon or arising out of
                  allegations of negligence against the Coverage A Insured in
                  the performance of Professional Services by the Coverage A
                  Insured;

         (c)      based upon or attributable to the Insured gaining any personal
                  profit or advantage to which he/she was not legally entitled;

         (d)      by reason of any criminal act;

         (e)      by reason of any dishonest or fraudulent act or omission,
                  provided, however, that this exclusion shall not apply to any
                  Claim seeking both compensatory and punitive damages based
                  upon or arising out of allegations of both fraud and bad faith
                  in the performance of Professional Services;

         (f)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving:

                  (i)      any subject of any notice given prior to the
                           effective date of this policy under any other policy;
                           or

                  (ii)     any act, error, omission, misstatement, misleading
                           statement, neglect or breach of duty or breach of
                           responsibility, obligation or duty, matter, fact,
                           circumstance, situation, transaction, casualty, or
                           event which in any way involves or is in any way
                           related to any subject of any notice given prior to
                           the effective date of this policy under any other
                           policy;

         (g)      based upon, arising out of, related to, directly or indirectly
                  resulting from or in consequence of, or in any way involving
                  libel), slander or defamation, however, this exclusion shall
                  not apply to Coverage A;

         (h)      by or in the right of any other Insured under this policy,
                  provided however, this exclusion shall not apply:

                  (i)      to any Claim made by any Coverage B Individual
                           Insured against any other Coverage B Individual
                           Insured; or

                  (ii)     to any Claim made derivatively by any shareholder
                           (other than an Insured under this policy) or
                           policyholder (other than an Insured under this
                           policy) for the benefit of such entity where such
                           shareholder or policyholder is acting totally without
                           the solicitation or assistance of, or participation
                           of, or intervention of:

                           (aa)     any Insured under this policy; or

                           (bb)     any affiliate of any Insured under this
                                    policy; or

                           (cc)     any regulatory or supervisory agency or
                                    authority; or

                           (dd)     any insolvency fund; or

                           (ee)     any receiver, conservator, trustee,
                                    liquidator, rehabilitator or any similar
                                    official of the Insured;

         (i)      by or in the right of any person or entity whose actual or
                  alleged, direct or indirect injury and/or damage is based
                  upon, arises out of, is related to, directly or indirectly
                  results from or in consequence of, or in any way involves the
                  toxic nature of any substance or of any seepage, pollutant,
                  contaminant or waste material of any kind, nature or quantity;

         (j)      by, for, or on behalf of, either directly or indirectly, any
                  reinsurer of any contract, risk or program of the Insured.

Any fact pertaining to any person or entity insured under this policy shall not
be imputed to any other person or entity insured under this policy for the
purpose of determining the applicability of Exclusions 4(c), (d) and (e)
hereinabove.

THE TERRITORY

The insurance afforded by this policy applies worldwide, provided that Claim is
made within the United States, its territories and possessions, Canada or Puerto
Rico.


LIMITS OF LIABILITY

  1.    LIMIT OF LIABILITY - EACH CLAIM:

         (a)      With respect to Coverage A and Coverage B individually, the
                  Insurer shall be liable to pay the applicable percentage of
                  participation in Loss as stated in Item 4. of the
                  Declarations, in excess of the amount of the applicable
                  deductible as stated in Item 5. of the Declarations, up to the
                  applicable limit of liability as stated in Item 4. of the
                  Declarations for each Claim first made during the Policy
                  Period or the Optional Extension Period, if purchased, and
                  reported to the Insurer during the Policy Period or the
                  Optional Extension Period, if purchased, or within sixty (60)
                  days after the expiration of the Policy Period or the Optional
                  Extension Period, if purchased.

         (b)      With respect to Coverage C, the Insurer shall be liable to pay
                  100% of Loss in excess of the amount of the applicable
                  deductible set forth in Item 5. of the Declarations, up to the
                  applicable limit of liability set forth in Item 4. of the
                  Declarations for each Claim first made during the Policy
                  Period or Optional Extension Period, if purchased, and
                  reported to the Insurer during the Policy Period or the
                  Optional Extension Period, if purchased, or within sixty (60)
                  days after the expiration of the Policy Period or Optional
                  Extension Period, if purchased.

                                        5
<PAGE>   29
2.       LIMIT OF LIABILITY - AGGREGATE:

         (a)      With respect to Coverage A and Coverage B individually,
                  subject to Item 1. hereinabove, Limit of Liability - Each
                  Claim, the total liability of the Insurer for Loss shall not
                  exceed the applicable aggregate limit of liability as stated
                  in Item 4. of the Declarations as a result of all Claims first
                  made during the Policy Period and the Optional Extension
                  Period, if purchased, and reported to the Insurer during the
                  Policy Period and the Optional Extension Period, if purchased,
                  or within sixty (60) days after the expiration of the Policy
                  Period or the Optional Extension Period, if purchased.

         (b)      With respect to Coverage C, subject to Item 1. hereinabove,
                  Limit of Liability - Each Claim, the total liability of the
                  Insurer for all Loss shall not exceed the applicable amount
                  set forth in Item 4. of the Declarations as aggregate as a
                  result of all Claims first made during the Policy Period and
                  the Optional Extension Period, if purchased, and reported to
                  the Insurer during the Policy Period and the Optional
                  Extension Period, if purchased, or within sixty (60) days
                  after the expiration of the Policy Period or Optional
                  Extension Period, if purchased.

3.       DEDUCTIBLE:

         (a)      With respect to Coverage A and Coverage C individually, the
                  applicable deductible amount set forth in the Declarations
                  shall be paid by the Insured and shall be applicable to each
                  Claim and shall include all Loss.

         (b)      With respect to Coverage B, the applicable deductible amounts
                  set forth in Item 5.B. of the Declarations shall be applicable
                  to each Claim subject to Coverage under the specific
                  provisions of THE COVERAGE section referenced in Item 5.B. of
                  the Declarations. With respect to the Individual Liability
                  Coverage referenced in Item 5.B.1. of the Declarations, the
                  deductible shall apply to each Claim and each director or
                  officer and shall be subject to the amount stated in the
                  Declarations to apply as "aggregate Each Claim-All Directors
                  and Officers." Such deductible shall include all Loss.

         (c)      With respect to Coverages A, B, and C, it is agreed that the
                  applicable deductible amount(s) shall be retained net by the
                  Insured for its own account.

4. LIMIT OF LIABILITY AND DEDUCTIBLE - ALL COVERAGES: With respect to Coverages
A, B, and C, it is the intent of the Insurer that such Coverages be mutually
exclusive. If, however, it is determined that more than one purchased Coverage
applies to any one Claim, then the limit of liability with respect to such Claim
shall be that each-Claim-limit-of-liability available under the single,
purchased, applicable Coverage having the higher(est) limit of liability
available for such Claim and not the sum of the available each Claim limits of
liability. Only the deductible applicable to the Coverage having the higher(est)
limit of liability available for such Claim shall be applicable to such Claim.
In the event that each of two or more purchased, applicable Coverages has the
same limit of liability available for such Claim which limit is an amount higher
than that available under any other purchased, applicable Coverage, the limit of
liability of only one applicable, purchased Coverage shall apply and not the sum
of the limits of the purchased, applicable Coverages; and in such event only the
deductible of one Coverage shall apply which shall not be a larger amount than
the lower(est) of the deductibles applicable to the purchased, applicable
Coverages having the same available limits.

In such event the amount of Loss incurred for such Claim shall be applied to
reduce the available aggregate limits of liability of the applicable, purchased
Coverages in proportion to the amount of the available aggregate limit of
liability for each applicable, purchased Coverage relative to the sum of the
available aggregate limits of liability for all applicable, purchased Coverages.

5.       CONSENT TO SETTLEMENTS AND CLAIM EXPENSES INCURRED BY THE INSURED:

         (a)      The Insurer shall not settle any Claim without the consent of
                  the Insured, but the Insurer shall have, at all times, the
                  right to recommend a settlement of any Claim, whether or not
                  it exercises the Option to Defend. If the Insured shall
                  unreasonably refuse to settle such Claim pursuant to the
                  Insurer's recommendations, then the Insurer's liability in
                  regard to such Claim shall be subject to the limits of
                  liability and shall not exceed the amount for which the Claim
                  could have been settled and any Claim Expenses Incurred by the
                  Insured and any Claim Expenses Incurred by the Insurer, both
                  up to the date of the Insured's refusal to settle the Claim;

         (b)      Subject to item (c) below, the Insured shall not settle any
                  Claim or incur any Claim expenses without the Insurer's
                  consent; such consent not to be unreasonably withheld;

         (c)      The Insured may settle without the Insurer's consent any Claim
                  for any amount within the applicable deductible amount set
                  forth in the Declarations, provided however, that the
                  settlement amount and the Claim Expenses Incurred by the
                  Insured and/or the Claim Expenses Incurred by the Insurer (if
                  the defense option is exercised by the Insurer) do not exceed
                  the amount of the applicable deductible set forth in the
                  Declarations.

6.       MULTIPLE INSUREDS, CLAIMS AND CLAIMANTS: The inclusion herein of more
than one Insured or the making of Claims by more than one person or organization
shall not operate to increase the Insurer's limit of liability as to each
Coverage listed in Item 6. of the Declarations. Furthermore, as to the
Coverage(s) listed in Item 6. of the Declarations, two or more Claims arising
out of the same act, error, omission, misstatement, misleading statement,
neglect or breach of duty or breach of responsibility, obligation or duty or a
series of related acts, errors, omissions, misstatements, misleading statements,
neglects or breaches of duty or breaches of responsibility, obligation or duty
shall be treated as a single Claim. All such Claims whenever made, shall be
considered first made on the date on which the earliest Claim arising out of
such act, error, omission, misstatement, misleading statement, neglect or breach
of duty or breach of responsibility, obligation or duty was first made, and all
such Claims shall be subject and limited to the same limit of liability.

7.       LIMIT OF LIABILITY FOR CLAIM EXPENSES INCURRED BY THE INSURER AND FOR
CLAIM EXPENSES INCURRED BY THE INSURED: Subject to THE COVERAGE 11, and to the
Insured's obligation to pay the deductible as set forth in Item 3 hereinabove,
all Claim Expenses Incurred by the Insurer subsequent to the exercise of its
Option to Defend the Insured and all Claim Expenses Incurred by the Insured
prior to the Insurer's exercise of its Option to Defend the Insured shall be a
part of and shall not be in addition to the applicable limit of liability.




                                        6
<PAGE>   30
CLAIMS

1. NOTICE OF CLAIM: If a Claim is made against the Insured, then the Insured
shall immediately forward to the Insurer every demand, notice, summons or other
process received by the Insured or by their representatives. In any event,
within sixty (60) days after the expiration of the Policy Period or the Optional
Extension Period, if purchased, such Claim must be reported to the Insurer or to
SHAND, MORAHAN & COMPANY, INC., Shand Morahan Plaza, Evanston, Illinois 60201,
on behalf of the Insurer.

2. ASSISTANCE AND COOPERATION OF THE INSURED: The Insured shall cooperate with
the Insurer in providing information requested by the Insurer with regard to any
Claim reported under this policy. Where the Insurer has NOT exercised its Option
to Defend pursuant to THE COVERAGE 11, the Insured shall, on request of the
Insurer, permit counsel designated by the Insurer at its own expense to
participate on its own behalf in the investigation, settlement and/or defense of
any Claim. Where the Insurer has exercised its Option to Defend, the Insured
shall cooperate with the Insurer in the investigation, settlement and defense of
any Claim.

3. SUBROGATION: In the event of any payment under this policy, the Insurer shall
be subrogated to the extent of such payment to all the Insured's rights of
recovery therefor against any person or organization and the Insured shall
execute and deliver instruments and papers and do whatever else is necessary to
secure such rights. The Insured shall do nothing after the Claim to prejudice
such rights.

Any amount so recovered, whether effected by the Insurer or by the Insured,
shall be applied net of the expense of such recovery as follows: (a) first, to
the satisfaction of the Insured's Loss (including Claim Expenses Incurred by the
Insured) which is in excess of the amount of the limit of liability under this
policy and which is in excess of any amount paid by any insurer under any other
policy; (b) second, to the Insurer as reimbursement of amounts paid under this
policy; (c) third, to any insurer under any other policy as reimbursement of
amounts paid under any such policy: and (d) fourth, to the Insured in
satisfaction of any applicable deductible and any percentage of Loss paid by the
Insured.

4. ACTION AGAINST THE INSURER: No action shall lie against the Insurer unless,
as a condition precedent thereto, the Insured shall have fully complied with all
the terms of this policy, nor until the amount of the Insured's obligation to
pay shall have been fully and finally determined either by judgment against the
Insured after actual trial or by written agreement of the Insured, the claimant
and the Insurer.

Any person or organization or the legal representative thereof who has secured
such judgment or written agreement shall thereafter be entitled to recover under
this policy to the extent of the insurance afforded by this policy.

Nothing contained in this policy shall give any person or organization any right
to join the Insurer as a co-defendant in any Claim against the Insured to
determine the Insured's liability.  Bankruptcy or insolvency of the Insured or
of the Insured's estate shall not relieve the Insurer of any of its obligations
hereunder.

5. FALSE OR FRAUDULENT CLAIMS: If any Insured shall commit fraud in proffering
any Claim as regards amount or otherwise, this insurance shall become void as to
such Insured from the date such fraudulent Claim is proffered.

GENERAL CONDITIONS

1. NOTICES TO THE INSURER: All notices to be given to the Insurer as provided
for in THE INSURED 1(b) and 2(b); THE COVERAGE 12, 13, and 14; and CLAIMS 1 of
this policy shall be directed to SHAND, MORAHAN & COMPANY INC., Shand Morahan
Plaza, Evanston, Illinois 60201.

2.        CANCELLATION:

         (a)      This policy may be cancelled as an entirety by the entity
                  named in Item 1. of the Declarations by surrender thereof to
                  the Insurer or to SHAND, MORAHAN & COMPANY, INC., Shand
                  Morahan Plaza, Evanston, Illinois 60201, or by mailing to the
                  aforementioned, written notice stating when thereafter such
                  cancellation shall be effective. The mailing of notice as
                  aforesaid shall be sufficient notice and the effective date of
                  cancellation stated in the notice shall become the end of the
                  Policy Period. Delivery of such written notice shall be
                  equivalent to mailing.

         (b)      This policy may be cancelled as an entirety by the Insurer or
                  by SHAND, MORAHAN & COMPANY, INC., by mailing to the entity
                  named in Item 1. of the Declarations, at the address stated in
                  the Declarations, written notice stating when, not less than
                  sixty (60) days thereafter, such cancellation shall be
                  effective. However, if the Insurer cancels the policy because
                  the Insured has failed to pay a premium or deductible when
                  due, this policy may be cancelled by the Insurer by mailing a
                  written notice of cancellation to such entity stating when,
                  not less than ten (10) days thereafter, such cancellation
                  shall be effective. The mailing of notice as aforementioned
                  shall be sufficient notice and the effective date of
                  cancellation stated in the notice shall become the end of the
                  Policy Period. Delivery of such written notice by the Insurer,
                  or SHAND, MORAHAN & COMPANY, INC., shall be equivalent to
                  mailing.

If this policy is cancelled pursuant to item (a) above, the earned premium shall
be computed at the customary short rate. If this policy is cancelled pursuant to
item (b) above, earned premium shall be computed pro rata. Premium adjustment
may be made either at the time cancellation is effected or as soon as
practicable thereafter, but payment or tender of unearned premium is not a
condition precedent to cancellation.

3.        APPLICATION.  By acceptance of this policy, the Insureds agree as
                        follows:

         (a)      that the particulars and statements contained in the
                  application, a copy of which is attached hereto, and any
                  material submitted therewith (which shall be on file with the
                  Insurer and be deemed attached hereto, as if physically
                  attached hereto), are true and are the basis of this policy
                  and are to be considered as incorporated into and constituting
                  a part of this policy;

         (b)      that the statements in the application or in any materials
                  submitted therewith are their representations, that they shall
                  be deemed material to the acceptance of the risk or the hazard
                  assumed by the Insurer under this policy, and that this policy
                  is issued in reliance upon the truth of such representations;
                  and

         (c)      that in the event that the application, including materials
                  submitted therewith, contains misrepresentations made with the
                  actual intent to deceive, or contains misrepresentations which
                  materially affect either the acceptance of the risk or the
                  hazard assumed by the Insurer under this policy, this policy
                  in its entirety shall be void and of no effect whatsoever.

                                        7
<PAGE>   31
4. NONSEVERABILITY OF CONTRACT: Other than as provided in the exception
applicable to Exclusions 4(c), (d) and (e), this policy shall be deemed to be a
single unitary contract and not a severable contract of insurance or a series of
individual contracts of insurance with each Insured.

5. CHANGES: Notice to any agent or knowledge possessed by any agent or other
person acting on behalf of the Insurer shall not effect a waiver or a change in
any part of this policy or estop the Insurer from asserting any right under the
terms of the policy. The terms of this policy shall not be waived or changed,
except by written endorsement issued to form a part of this policy, and this
policy embodies all agreements existing between the Insureds and the Insurer or
any of its agents relating to this insurance.

6. OTHER INSURANCE: This insurance shall be in excess of the amount of the
deductible and any other valid and collectible insurance available to the
Insured whether the other insurance is stated to be primary, pro rata,
contributory, excess, contingent or otherwise, unless the other insurance is
written only as specific excess insurance over the limits of liability provided
by this policy.

7. ASSIGNMENT OF INTEREST: Assignment of interest under this policy shall not
bind the Insurer unless its consent is endorsed hereon.

8. AUTHORIZATION: By acceptance of this policy, the entity named in Item 1. of
the Declarations agrees to act on behalf of all Insureds with respect to the
giving of all notice to and from the Insurer as provided herein: the exercise of
the Optional Extension Period; the cancellation of this policy, in whole or in
part; the payment of premiums and deductibles when due; and the receiving of any
return premiums that may become due under this policy; and the Insureds agree
that such entity shall act on their behalf.

9. AUDIT: The Insurer may examine and audit the Insured's books and records at
any time during the Policy Period and within three years after the final
termination of this policy, as far as they relate to the subject matter of this
policy.

10. SERVICE OF SUIT: Except with respect to any policy issued in Illinois or
Washington, D.C., it is agreed that in the event of the failure of the Insurer
to pay any amount claimed to be due hereunder, the Insurer at the request of the
Insured will submit to the jurisdiction of any court of competent jurisdiction
within the United States and will comply with all requirements necessary to give
such court jurisdiction, and all matters arising hereunder shall be determined
in accordance with the law and practice of such court, It is further agreed that
service of process in such suit may be made upon PETERSON, ROSS, SCHLOERB &
SEIDEL, Suite 7300, 200 East Randolph Drive, Chicago, Illinois 60601, and that
in any suit instituted against it upon this contract, the Insurer will abide by
the final decision of such court or of any appellate court in the event of an
appeal.

The above named are authorized and directed to accept service of process on
behalf of the Insurer in any such suit and/or upon the request of the Insured
that they will enter a general appearance upon the Insurer's behalf in the event
such a suit shall be instituted.

Further, pursuant to any state, territory or district of the United States which
makes provision therefor, the Insurer hereon hereby designates the
Superintendent, Commissioner or Director of Insurance or other officer specified
for that purpose in the statute, or his successor or successors in office, as
their true and lawful attorney, upon whom may be served any lawful process in
any action, suit or proceeding instituted by or on behalf of the Insured or any
beneficiary hereunder arising out of this contract of insurance, and hereby
designates the above-named person to whom the said officer is authorized to mail
such process or a true copy thereof.

IN WITNESS WHEREOF, the Insurer has caused this policy to be signed by its
President and Secretary, but this policy shall not be valid unless countersigned
on the Declarations page by a duly authorized representative of the Insurer.






/s/ Edgar W. Phoebus
---------------------                                       -------------------
      Secretary                                                   President








                                        8
<PAGE>   32
NUCLEAR ENERGY LIABILITY
EXCLUSION ENDORSEMENT (BROAD FORM)

This endorsement modifies the provisions of this policy.

It is agreed that:

1.    THIS POLICY DOES NOT APPLY:

      A.   Under any Liability Coverage, to bodily injury or property damage:

         (1)      with respect to which an Insured under this policy is also an
                  Insured under a nuclear energy liability policy issued by
                  Nuclear Energy Liability Insurance Association, Mutual Atomic
                  Energy Liability Underwriters or Nuclear Insurance Association
                  of Canada, or would be an Insured under any such policy but
                  for its termination upon exhaustion of its limit of liability;
                  or

         (2)      resulting from the hazardous properties of nuclear material
                  and with respect to which (a) any person or organization is
                  required to maintain financial protection pursuant to the
                  Atomic Energy Act of 1954, or any law amendatory thereof, or
                  (b) the Insured is, or had this policy not been issued would
                  be, entitled to indemnity from the United States of America,
                  or any agency thereof, under any agreement entered into by the
                  United States of America, or any agency thereof, with any
                  person or organization.

B.       Under any Medical Payments Coverage, or any Supplementary Payments
         provision relating to first aid, to expenses incurred with respect to
         bodily injury resulting from the hazardous properties of nuclear
         material and arising out of the operation of a nuclear facility by any
         person or organization.

C.       Under any Liability Coverage, to bodily injury or property damage
         resulting from the hazardous properties of nuclear material, if:

         (1)      the nuclear material (a) is at any nuclear facility owned by,
                  or operated by or on behalf of, an Insured or (b) has been
                  discharged or dispersed therefrom;

         (2)      the nuclear material is contained in spent fuel or waste at
                  any time possessed, handled, used, processed, stored,
                  transported or disposed of by or on behalf of an Insured; or

         (3)      the bodily injury or property damage arises out of the
                  furnishing by an Insured of services, materials, parts or
                  equipment in connection with the planning, construction,
                  maintenance, operation or use of any nuclear facility, but if
                  such facility is located within the United States of America,
                  its territories or possessions, or Canada, this exclusion (3)
                  applies only to property damage to such nuclear facility and
                  any property thereat.

2.    AS USED IN THIS ENDORSEMENT:

"hazardous properties" include radioactive, toxic or explosive properties;

"nuclear material" means source material, special nuclear material or by-product
material;

"source material", "special nuclear material", and "by-product material" have
the meanings given them in the Atomic Energy Act of 1954 or in any law
amendatory thereof;

"spent fuel" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor;

"waste" means any waste material (1) containing by-product material and (2)
resulting from the operation by any person or organization of any nuclear
facility within the definition of nuclear facility under paragraph (a) or (b)
thereof;

"nuclear facility" means

         (a)      any nuclear reactor,

         (b)      any equipment or device designed or used for (1) separating
                  the isotopes of uranium or plutonium, (2) processing or
                  utilizing spent fuel, or (3) handling, processing or packaging
                  waste,

         (c)      any equipment or device used for the processing, fabricating
                  or alloying of special nuclear material if at any time the
                  total amount of such material in the custody of the Insured at
                  the premises where such equipment or device is located
                  consists of or contains more than 25 grams of plutonium or
                  uranium 233 or any combination thereof, or more than 250 grams
                  of uranium 235,

         (d)      any structure, basin, excavation, premises or place prepared
                  or used for the storage or disposal of waste,

and includes the site on which any of the foregoing is located, all operations
conducted on such site and all premises used for such operations;

"nuclear reactor" means any apparatus designed or used to sustain nuclear
fission in a self-supporting chain reaction or to contain a critical mass of
fissionable material;

"property damage" includes all forms of radioactive contamination of property.