CONTINGENT COMPENSATION AGREEMENT
     This Contingent Compensation Agreement (this “Agreement”) is made and entered into on the1st day of April, 2004 **(“Effective Date”)**by and between Old Lyme Insurance CompanyLtd. (“OLIC”), a Bermuda corporation, and Program Brokerage Corporation, a Delaware corporation(“PBC”).
     WHEREAS, upon the closing (the “Closing”) of the transactions contemplated by the StockPurchase Agreement dated as of April 1, 2004, entered into by and between Fairfax Inc., a Wyomingcorporation, and Old Lyme Insurance Group, Ltd., (the “Stock Purchase Agreement”), OLIC will be adirect, wholly owned subsidiary of Old Lyme Insurance Group, Ltd. (“OLIG”);
     WHEREAS, OLIC desires to act as a reinsurance company on Programs (defined in Article I below)developed by PBC and other business placed by PBC; and
     WHEREAS, PBC desires to continue offering Programs and other business to various insurancecarriers for whom OLIC desires to provide reinsurance; and
     WHEREAS, OLIC desires to incentivize PBC to develop and produce Programs and market them toinsurers to whom OLIC desires to provide reinsurance; and
     WHEREAS, OLIC desires to compensate PBC, for business produced by PBC and assumed by OLIC if,and for so long as, such business is profitable, subject to the terms and conditions hereof.
     NOW, THEREFORE, in consideration of the premises and of the mutual promises set forth herein,and intending to be legally bound hereby, OLIC and PBC agree as follows:
ARTICLE I
DEFINITIONS
A.  Capitalized terms used herein shall have the meanings set forth below:
    “Accident Year” means the period from: April 1, 2004 to December 31, 2004, and then January1 to December 31 each year thereafter. The presentation of underwriting results for anAccident Year represents Earned Premiums and Incurred Losses on all claims arising fromoccurrences during such period.     “Acquisition Costs” means commission expenses, fronting fees or other such charges paid orpayable by OLIC to PBC in connection with direct business placed by PBC with OLIC or to anyinsurers from which OLIC is assuming business in connection with a Program managed by PBC orindividual policies placed by PBC, including the Commission (as defined therein).
 

 

    “Contingent Compensation” means sixty five percent (65%) of the Underwriting Profit orUnderwriting Loss for each Accident Year.     “Contingent Compensation Statement” means the written report to be prepared by OLICreporting the Underwriting Profit or Underwriting Loss and the Contingent Compensation as ofthe end of each calendar quarter and Accident Year. The Contingent Compensation Statementshall be substantially in the form attached hereto as Exhibit A.     “Earned Premiums” means gross earned premium net of return premium, less ceded reinsurancepremiums earned by OLIC from business produced by PBC to unaffiliated carriers and assumedby OLIC during the Accident Years.     “General and Administrative Expenses” means all expenses incurred by OLIC including, but notlimited to, premium taxes, salaries, rent, utilities, furniture, fixtures, inspection fees,information technology, telecommunications, postage, boards and bureaus, licenses, legal andauditing expenses, administrative services fees, provisions for or write-offs ofuncollectible premiums and reinsurance recoverables to the extent not recorded as areduction of Earned Premiums or increase in Incurred Losses, and all other overhead.Without limiting the generality of the foregoing, “General and Administrative Expenses”shall include any costs, fees, expenses, judgments, settlements or other charges to OLICarising from claims by any third parties in connection with the business produced by PBC tounaffiliated carriers and assumed by OLIC, but shall not include: (i) the Management Feepaid by OLIC to OLIG, pursuant to the Management Agreement between OLIC and OLIG, datedApril 1, 2004; and (ii) the fees charged by Jenkens & Gilchrist Parker Chapin LLP relatingto forming and funding OLIG and negotiating and drafting the purchase agreement related toOLIG’s purchase of Old Lyme Insurance Co., Ltd.     “Incurred Losses” means all losses and allocated and unallocated loss adjustment expensespaid and incurred, including IBNR (net of reinsurance), relating to business placed by PBCwith unaffiliated carriers and assumed by OLIC. The IBNR included in the Incurred Lossesshall be calculated by OLIC and reviewed by an independent third-party actuary on an annualbasis.     “Program” means a type or structure of coverage(s) offered to a number of likepolicyholders.     “Underwriting Loss” has the meaning set forth in Article II(B)(1) hereof.     “Underwriting Profit” has the meaning set forth in Article II(B)(1) hereof.
 

 

ARTICLE II
CONTINGENT COMPENSATION
A.  Contingent Compensation Payments. OLIC shall pay to PBC an amount equal to theContingent Compensation as calculated on the basis of statutory income or loss, in accordancewith Section B of this Article II. B.  Contingent Compensation Calculations; Timing of Payments.
 1.  The Underwriting Profit of OLIC relating to the business produced by PBC shallbe determined on an Accident Year basis, and shall be an amount equal to: EarnedPremiums less the sum of (i) Incurred Losses; (ii) Acquisition Costs; and (iii) Generaland Administrative Expenses. In the event that such calculation results in a valueless than zero, such amount shall be referred to as the “Underwriting Loss.”  2.  OLIC shall pay to PBC the Contingent Compensation calculated in accordance withparagraph 3 of this Section B attributable to business produced by PBC to unaffiliatedcarriers, having an inception date on or after April 1, 2004, and assumed by OLIC. Ifthe sum of the Underwriting Profits or Underwriting Losses of all open Accident Yearsfor all lines is a net Underwriting Loss as of the end of the applicable calculationperiod, there shall be no payment due to PBC by OLIC and the amount of any such netUnderwriting Loss shall be carried forward and applied against any Underwriting Profitreported on the Contingent Compensation Statement of succeeding periods until offset infull by a subsequent Underwriting Profit.  3.  The Contingent Compensation shall be calculated and payable as set forth below:
 (a)  Within forty-five (45) days following the end of the firstcalendar year in respect of each Accident Year: twenty-five percent (25%) ofthe Contingent Compensation reported on the Contingent Compensation Statementfor such period.  (b)  Within ninety (90) days following the end of the secondcalendar year in respect of each Accident Year: the product of (x) the mostrecent Contingent Compensation calculation, and (y) 0.50, less (z) the sum ofall payments made pursuant to Item (i) above; provided, however,that, after reduction for net Underwriting Losses carried forward as providedherein, such calculation produces an Underwriting Profit.  (c)  Within ninety (90) days following the end of the thirdcalendar year in respect of each Accident Year: the product of (x) the mostrecent Contingent Compensation calculation, and (y) 0.75, less (z) the sum ofall payments made pursuant to Item (i) above; provided, however,that, afterreduction for net Underwriting Losses carried forward as provided herein,such calculation produces an Underwriting Profit.
 

 

 (d)  Within ninety (90) days following the end of the fourthcalendar year in respect of each Accident Year: the sum of (x) the mostrecent Contingent Compensation calculation, less (y) the sum of all paymentsmade pursuant to Items (i) and (ii) above, subject to the application of anyUnderwriting Losses carried forward.  (e)  The Contingent Compensation for each Accident Year shall berecalculated as of each subsequent calendar year-end until such time as allclaims have been settled and, in each instance, shall be payable withinninety (90) days following the end such calendar year-end.  (f)  Further Adjustments. If, at any time, the net payment duefor all lines and Accident Years combined, valued at any December 31, isgreater than the aggregate amount of the Contingent Compensation paymentspreviously paid by OLIC in connection with the subject Accident Years, OLICshall pay to PBC the additional amount. If the net payment due for all linesand Accident Years combined , valued at December 31, is less than thepayments previously paid by OLIC in connection with the subject AccidentYears, PBC shall pay the difference to OLIC.  (g)  Delivery of Information. The information necessary to preparethe Contingent Compensation Statement in respect of each Accident Year shallbe delivered to OLIC, or to such affiliate of OLIC as OLIC may direct, noless than 15 days prior the date on which the Contingent Compensation towhich such Statement relates is due to be paid.  (h)  Review of Contingent Compensation Calculations. PBC shallhave the right to review each Contingent Compensation calculated by or onbehalf of OLIC pursuant to this Article II.B and set forth in a ContingentCompensation Statement.
C.  Form and Method of Payments. All payments due hereunder shall be disbursedto PBC or OLIC, as the case may be, by wire transfer in immediately available funds to anaccount to be designated in writing by the party receiving such payment.
ARTICLE III
TERM AND TERMINATION
A.  Term and Termination Generally. Except as provided below, the term (the“Term”) of this Agreement shall be continuous unless (1) terminated by mutual agreementamong the parties; or (2) terminated by either party upon twenty-four (24) months priorwritten notice to the other party; or (3) terminated by either party upon notice subsequentto a period of 30 days commencing upon such party’s providing the other party with detailednotice of breach during which the other party has not cured the breach. In the
 

 

   event of termination, the provisions of Article II hereof shall continue as to all businesswritten under this Agreement prior to the effective date of termination.     B.  Termination by OLIC. OLIC may immediately, unless otherwise indicated, uponwritten notice to PBC, terminate this Agreement in whole or in part, for cause, which causeshall include, but shall not be limited to, the following:
 (1)  either PBC, Kaye Group Inc. or any material subsidiary of Kaye Group Inc. becomesinsolvent, institutes or acquiesces in the institution of any bankruptcy, financialreorganization, or liquidation proceeding or any such proceeding is instituted against PBC,Kaye Group Inc. or any subsidiary of Kaye Group Inc. and remains undismissed for thirty (30)days (PBC shall immediately notify OLIC of the foregoing); or  (2)  PBC, or the owner of a controlling interest in PBC, sells, exchanges, transfers,assigns, consolidates, pledges or causes to be sold, exchanged, transferred, assigned,consolidated, or pledged, all or substantially all of the stock or assets of PBC, or anyentity controlling PBC, to a third party other than Hub International Limited (“Hub”)or itssubsidiaries, without the the prior written consent of OLIC. PBC shall immediately notifyOLIC of any such sale, exchange, transfer, assignment, consolidation or pledge; or  (3)  PBC fails to maintain the quality of services and obligations necessary to operatewithin this Agreement; or  (4)  PBC engages in acts or omissions constituting abandonment, fraud, insolvency,misappropriation of funds, material misrepresentation, or gross and willful misconduct; or  (5)  PBC’s licenses or certificates of authority are cancelled, suspended, or are declinedrenewal by any regulatory body in a jurisdiction in which PBC offers Programs and suchactions materially affect the Programs which OLIC reinsures in whole or in part; or  (6)  OLIC determines, in good faith, that PBC has otherwise materially breached any of itsobligations hereunder.
C.  Termination by PBC. PBC may immediately, unless otherwise indicated, terminate thisAgreement in whole or in part, for cause, which cause shall include, but not be limited to,the following:
 (1)  OLIC institutes or acquiesces in the institution of any bankruptcy, financialreorganization, supervision, rehabilitation, conservationship or liquidation proceeding, orany such proceeding is instituted against OLIC and remains undismissed for thirty (30) days;or  (2)  OLIC’s license, certificate of authority or other eligibility is cancelled or declinedrenewal by any regulatory or quasi-regulatory body and such action materially affects OLIC’sability to issue the reinsurance that forms the basis for this Agreement:
 

 

ARTICLE IV
MISCELLANEOUS PROVISIONS
A.  Cooperation. The parties shall cooperate in a commercially reasonable manner inorder that the obligations of the parties hereunder will be effectively, efficiently andpromptly discharged. OLIC shall, at all reasonable times, during its normal business hours,make available to PBC properly authorized personnel of OLIC for the purpose of consultationand decision and information as may be reasonably required by PBC. PBC shall: (i) promptlyrespond to any question from OLIC and persons authorized by it or by any regulator withrespect to the accounts and records maintained in accordance with the terms of this Agreement;and (ii) assist and cooperate with OLIC’s auditors and regulators in the conduct of any auditor examination of OLIC’s financial condition and results of operations; and (iii) at allreasonable times, during its normal business hours, make available to OLIC properly authorizedpersonnel of PBC for the purpose of consultation and decision and information as may bereasonably required by OLIC. B.  Reasonableness. The parties will act reasonably and in good faith on all matterswithin the terms of this Agreement. C.  Assignment. This Agreement shall be binding upon and inure to the benefit of theparties hereto and their respective successors and assigns and legal representatives. ThisAgreement is not assignable except by operation of law or by written consent of the partieshereto. D.  Amendments and Waivers. This Agreement may be amended at any time by an agreement inwriting between the parties. The terms of this Agreement may be waived only by a writteninstrument signed by the party waiving compliance. No delay on the part of any party inexercising any right, power or privilege hereunder shall operate as a waiver thereof. Norshall any waiver on the part of any party of any right, power or privilege, nor any single orpartial exercise of any such right, power or privilege, preclude any further exercise thereofor the exercise of any other such right, power or privilege. E.  Entire Agreement. This Agreement constitutes the entire contract between the partieswith respect to the subject matter hereof and there are no understandings between the partiesas to the Services to be provided other than as expressed in this Agreement. Any amendment ormodification hereto shall be null and void unless made by amendment to this Agreement andsigned by all parties. F.  No Third-Party Beneficiaries. Nothing in this Agreement is intended or shall beconstrued to give any person, other than the parties hereto, any legal or equitable right,remedy or claim under or in respect of this Agreement or any provision contained herein.
 

 

G.  Governing Law. This Agreement shall be interpreted and governed by the laws of theState of New York, without giving effect to the conflict of laws provisions of suchjurisdiction. H.  Invalidity. Unless the invalidity or unenforceability of any provision or portionhereof frustrates the intent of the parties or the purpose of this Agreement, such invalidityor unenforceability shall not affect the validity or enforceability of the other provisions orportions hereof. In the event that such provision shall be declared unenforceable by a courtof competent jurisdiction, such provision, to the extent declared unenforceable, shall bestricken. However, in the event any such provision shall be declared unenforceable due to itsscope, breadth or duration, then it shall be modified to the scope, breadth or durationpermitted by law and shall continue to be fully enforceable as so modified. I.  Dispute Resolution. In the event of an alleged breach of this Agreement or anydispute or difference arising with reference to the applicable interpretation or effect ofthis Agreement, or any part thereof (each, a “Dispute”), the parties agree to submit thedisputes to JAMS in New York City, for non-binding mediation, the costs of which shall beborne equally by both parties.    In the event a Dispute is not resolved pursuant to the preceding paragraph, such Disputeshall be referred to a Board of Arbitration (the “Board”) of two (2) arbitrators and anumpire. The members of the Board shall be U.S. citizens and shall be active or retireddisinterested officers of insurance or reinsurance companies.
 1.  One arbitrator shall be chosen by the party initiating the arbitration anddesignated in the letter requesting arbitration. The other party shall respond, withinthirty (30) days, advising of its arbitrator. The umpire shall thereafter be chosen bythe two (2) arbitrators. In the event either party fails to designate its arbitratoras indicated above, the other party is hereby authorized and empowered to name thesecond arbitrator, and the party which failed to designate its arbitrator shall bedeemed to have waived its right to designate an arbitrator and shall not be aggrievedthereby. The two (2) arbitrators shall then have thirty (30) days within which tochoose an umpire. If they are unable to do so, the umpire shall be chosen by themanager of the American Arbitration Association who shall be a person meeting thequalifications set forth above. Each party shall submit its case to the Board withinthirty (30) days from the date of the appointment of the umpire, but this period oftime may be extended by unanimous written consent of the Board.  2.  The sittings of the Board shall take place in New York, New York, unlessotherwise agreed by the parties hereto. The Board shall make its decision with regardto the custom and usage of the insurance and reinsurance business. The Board isreleased from all judicial formalities and may abstain from the strict rules ofevidence. The written decision of a majority of the Board shall be rendered withinsixty (60) days following the termination of the Board’s hearings, unless the
 

 

    parties consent to an extension. Such majority decision of the Board shall be finaland binding upon the parties both as to law and fact, and may not be appealed toany court of any jurisdiction. Judgment may be entered upon the final decision ofthe Board in any court of proper jurisdiction.  3.  Each party shall bear the fees and expenses of the arbitrator elected by or onits behalf, and the parties shall bear the fees and expenses of the umpire asdetermined by the Board.
J.  Notices. Any notice or other communication required or permitted hereunder shall bein writing and shall be delivered personally, telegraphed, telexed, sent by facsimiletransmission or sent by certified, registered or express mail, postage prepaid. Any suchnotice shall be deemed given when so delivered personally, telegraphed or telexed or sent byfacsimile transmission to the appropriate facsimile number or, if mailed, three days afterthe date of deposit in the United States mails, to the appropriate address.. Any party may,by notice given in accordance with this Agreement to the other parties, designate anotheraddress or person for receipt of notices hereunder.    **Notice to Program Brokerage Corporation**.: