**Exhibit10.06**

 

**EMPLOYMENTAGREEMENT**

 

AGREEMENT made this 21st day of December,2004, among KMG America Corporation, a Virginia corporation (“Parent”), KanawhaInsurance Company, a South Carolina corporation (the “Company”) and Paul F.Kraemer (the “Executive”).

 

The Board of Directors of Parent (the “ParentBoard”) and the Board of Directors of the Company (the “Company Board” and,together with the Parent Board, the “Boards”) recognize that the Executive willmake a substantial contribution to the growth and success of the Company.  The Boards desire to provide for theemployment of the Executive with the Company, and the Executive is willing tocommit himself to serve the Company, on the terms and conditions herein provided.  The Executive’s employment with the Companyis contingent on his execution of this Employment Agreement.

 

In order to effect the foregoing, Parent, theCompany and the Executive wish to enter into an employment agreement on theterms and conditions set forth below. Accordingly, in consideration of the premises and the respectivecovenants and agreements of the parties herein contained, and intending to belegally bound hereby, the parties hereto agree as follows:

 

# 1.                                       Employment.  The Company hereby agrees to employ theExecutive, and the Executive hereby agrees to serve the Company, on the termsand conditions set forth herein.

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# 2.                                       Term.  The employment of the Executive by theCompany as provided in Section 1 will commence effective December 20,2004, and will end on December 31, 2007, unless further extended or soonerterminated as hereinafter provided.  TheCompany shall have the right, but not the obligation, to extend or renew theterm of this Agreement by one year by providing the Executive with writtennotice of extension on or before October 31, 2005.  For purposes of this Agreement, “Term” shallmean the actual duration of Executive’s employment hereunder, taking intoaccount any extension of such employment or termination of employment pursuantto Section 6.

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# 3.                                       Positionand Duties.  The Executive shallserve as a Senior Vice President of the Company, shall report directly to theChief Executive Officer of Parent and shall have such responsibilities, dutiesand authority as may from time to time be assigned to the Executive by theChief Executive Officer of Parent, including serving as an officer or employeeof any affiliate of the Company that the Chief Executive Officer of the Companyor the Parent CEO deems appropriate.  TheExecutive shall devote substantially all of his working time and efforts to thebusiness and affairs of the Company; provided, that nothing in this Agreementshall preclude Executive from serving as a director or trustee in any otherfirm or from pursuing personal real estate investments and other personal investments,as long as such activities do not interfere with Executive’s performance of hisduties hereunder or violate Section 8 or 9 of this Agreement.

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# 4.                                       Placeof Performance.  In connection withthe Executive’s employment by the Company, the Executive shall be based at theEastern regional office of the Company, located in Boston, Mass., except forrequired travel on the Company’s business to an extent substantially consistentwith present business travel obligations.

 

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# 5.                                       Compensationand Related Matters.

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## (a)                                  Base Salary.  The Company shall pay the Executive a basesalary annually (the “Base Salary”), which shall be payable in periodicinstallments according to the Company’s normal payroll practices.  The initial Base Salary shall be$350,000.  During the Term, the ParentBoard or the Compensation Committee of the Parent Board (the “CompensationCommittee”) shall, after taking into account the recommendations of the ChiefExecutive Officer of Parent, review the Base Salary at least once a year todetermine whether the Base Salary should be increased effective the following January 1.  The amount of any increase shall bedetermined before March 31 of each year and shall be retroactive to January 1.  The Base Salary, including any increases,shall not be decreased during the Term. For purposes of this Agreement, the term “Base Salary” shall mean theamount established and adjusted from time to time pursuant to this Section 5(a).

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## (b)                                 Signing Bonus.  By no later than March 31, 2005, theCompany shall pay the Executive a one-time cash bonus equal to 25% of theExecutive’s Base Salary, subject to continued employment through the date ofpayment.

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## (c)                                  Annual CashIncentive Awards.  The Executiveshall be eligible to participate in the Company’s annual cash incentive bonusplan adopted by the Compensation Committee for each fiscal year during the Termof this Agreement (the “Bonus Plan”), subject to the terms and conditions ofthe Bonus Plan.  If the Executive, Parentor the Company, as the case may be, satisfies the performance criteriacontained in such Bonus Plan for a fiscal year, he shall receive an annual cashincentive bonus (the “Incentive Bonus”) in an amount determined by theCompensation Committee and subject to ratification by the Parent Board, if required,but not to exceed 100% of the Executive’s then current Base Salary.  If the Executive, Parent or the Company, asthe case may be, fails to satisfy the performance criteria contained in suchBonus Plan for a fiscal year, the Compensation Committee may determine whetherany Incentive Bonus shall be payable to Executive for that year, subject toratification by the Parent Board, if required. Beginning January 1, 2005, the Bonus Plan shall contain bothindividual and group goals established by the Compensation Committee.  The annual Incentive Bonus shall be paid tothe Executive no later than thirty (30) days after the date the CompensationCommittee determines whether the criteria in the Bonus Plan for such fiscalyear were satisfied.  For purposes of thisAgreement, the term “Incentive Bonus” shall mean the amount establishedpursuant to this Section 5(c).

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## (d)                                 Stock Based Awards.  Parent and the Company have established the2004 Stock Incentive Plan (“Stock Incentive Plan”).  Subject to the terms and conditions of theStock Incentive Plan, the Executive shall be eligible to participate in theStock Incentive Plan, and shall be eligible to receive annual stock optionand/or restricted stock awards under the Stock Incentive Plan.  The Compensation Committee shall approve anysuch awards made to the Executive pursuant to the Stock Incentive Plan.

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### (i)                                     2004 StockIncentive Plan Option Grants.  Optionawards under the Stock Incentive Plan will have an exercise price per shareequal to the closing price of Parent’s common stock on the trading dayimmediately preceding the date of grant, will have a term of

 

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### ten (10) years and will vest and become exercisable with respect to 1/4of the underlying shares of Parent common stock on the first, second, third andfourth anniversaries, respectively, of the date of grant; *provided, however,* that the Executive willbe 100% vested in all outstanding option awards, including the unvested portionof such awards, and shall be permitted to exercise all vested option awardsonly during the 90-day period following such accelerated vesting, upon (i) anytermination of the Executive’s employment by the Company or the Parent Boardother than a termination for “Cause” pursuant to Section 6(c) or anyresignation by the Executive without “Good Reason” (as defined below),following a Change in Control (as defined in the Stock Incentive Plan), (ii) atermination by the Company without Cause (as defined herein), (iii) atermination by the Executive for Good Reason (as defined herein), (iv) theExecutive’s death, or (v) the Disability (as defined below) of the Executive,and that the Executive will forfeit all unvested options if he is terminatedfor Cause or he terminates his employment hereunder for other than GoodReason.  Effective as of the date hereof,Parent shall grant the Executive incentive options to purchase 155,000 sharesof Parent’s common stock under the Stock Incentive Plan with an exercise priceequal to the initial public offering price per share of Parent’s common stock,subject to the vesting provisions described above.

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### (ii)                                  2004 StockIncentive Plan Restricted Stock Awards. The Stock Incentive Plan provides for the issuance of shares of Parentcommon stock as restricted common stock (“Restricted Stock Grants”) to theextent that such shares of common stock are available thereunder.  Restricted Stock Grants awarded to theExecutive shall be subject to forfeiture restrictions that will terminate withrespect to 1/4 of the awarded shares on the first, second, third and fourthanniversaries of the date of the issuance; *provided,further*, that the Executive will be 100% vested and all restrictionson each outstanding Restricted Stock Grant will lapse upon (i) any terminationof the Executive’s employment by the Company or the Parent Board other than atermination for “Cause” pursuant to Section 7(c), or any resignation bythe Executive with or without “Good Reason” (as defined below), following aChange in Control (as defined in the Stock Incentive Plan), (ii) a terminationby the Company without Cause (as defined herein), (iii) a termination by theExecutive for Good Reason (as defined herein), (iv) the Executive’s death, or(v) the Disability (as defined below) of the Executive and that the Executivewill forfeit all shares with respect to which the forfeiture restrictions havenot terminated if he is terminated for Cause or he resigns for other than GoodReason.  The common stock issued asRestricted Stock Grants will have voting and dividend rights.

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## (e)                                  Benefits.

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### (i)                                     Vacation.  The Executive shall be entitled to five (5)weeks of paid vacation per full calendar year. The Executive shall be entitledto cash in lieu of any unused vacation time. The Executive shall not be entitled to carry over any unused vacationtime from year to year.

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### (ii)                                  Sick and PersonalDays.  The Executive shall beentitled to sick and personal days in accordance with the policies of theCompany.

 

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### (iii)                               Employee Benefits.

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#### (A)                              Participation inEmployee Benefit Plans.  Subject tothe terms of any applicable plans, policies or programs, the Executive and hisspouse and eligible dependents, if any, and their respective designatedbeneficiaries where applicable, will be eligible for and entitled toparticipate in any Company sponsored employee benefit plans, including but notlimited to benefits such as group health, dental, accident, disabilityinsurance, group life insurance, and a 401(k) plan, as such benefits may beoffered from time to time, on a basis no less favorable than that applicable toother executives of the Company.  In lieuof electing to participate in any of the Company’s group health, dental,accident, disability insurance, group life insurance or similar insuranceplans, the Executive shall have the right to continue to participate in anysuch plans in which the Executive currently participates through existingagreements with former employers and to direct the Company to pay, and the Companyshall pay, the premiums with respect to such plans.

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#### (B)                                Disability Insurance.  The Company will, during the Term, maintain arenewable long-term Disability plan that, subject to the terms of such plan andany applicable plans, policies or programs, provides for payment of not lessthan 60% of the Executive’s Base Salary.

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### (iv)                              Directors and OfficersInsurance.  During the Term and for aperiod of 24 months thereafter, the Executive shall be entitled to director andofficer insurance coverage for his acts and omissions while an officer of theCompany on a basis no less favorable to him than the coverage provided tocurrent officers and directors of the Company.

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### (v)                                 Key Man LifeInsurance.  The Company may purchaseon the life of the Executive up to $15.0 million of key man life insurance withthe Company as the beneficiary of the death benefit.

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### (vi)                              Expenses, Office andSecretarial Support.  The Executiveshall be entitled to reimbursement of all reasonable expenses, in accordancewith the Company’s policy as in effect from time to time and on a basis no lessfavorable than that applicable to other executives of the Company, including,without limitation, telephone, reasonable travel and reasonable entertainmentexpenses incurred by the Executive in connection with the business of theCompany, promptly upon the presentation by the Executive of appropriatedocumentation.  The Executive shall beentitled to appropriate office space, administrative support, and such otherfacilities and services as are suitable to the Executive’s positions andadequate for the performance of the Executive’s duties.

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### (vii)                           Reimbursement of CertainProfessional Fees and Club Dues. During the Term, the Company shall reimburse, at the request of theExecutive, reasonable fees for professional organizations reasonably related tothe life and health insurance businesses, shall reimburse financial advisoryfees of $5,000 per year during the Term and shall reimburse dues with respectto club memberships in the amount of $7,500 per year during the Term.

 

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# 6.                                       Termination.  The Executive’s employment hereunder may beterminated without any breach of this Agreement only under the followingcircumstances:

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## (a)                                  Death.  The Executive’s employment hereunder shallterminate upon his death.

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## (b)                                 Disability.  If, in the written opinion of a qualifiedphysician reasonably agreed to by the Company and the Executive, the Executiveshall become unable to perform his duties hereunder due to Disability, theCompany may terminate the Executive’s employment hereunder.  As used in this Agreement, the term “Disability”shall mean inability of the Executive, due to physical or mental condition, toperform the essential functions of the Executive’s job, after consideration ofthe availability of reasonable accommodations, for more than 180 total calendardays during any period of 12 consecutive months.

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## (c)                                  For Cause.  The Company may terminate the Executive’semployment hereunder for Cause.  Forpurposes of this Agreement, the Company shall have “Cause” to terminate theExecutive’s employment hereunder upon a determination by the Company that theExecutive (i) has committed fraud or misappropriated, stolen or embezzledfunds or property from the Company or an affiliate of the Company or secured orattempted to secure personally any profit in connection with any transactionentered into on behalf of the Company or any affiliate of the Company,(ii) has been convicted of a felony in a final, non-appealable judgment,or entered a plea of guilty or “*nolocontendre*” to a felony, which is likely to cause material harm tothe Company’s (or any affiliate of the Company) business, customer or supplierrelations, financial condition or prospects, (iii) has, notwithstandingnot less than 30 days’ prior written notice from the Company, willfully failedto perform (other than by reason of illness or temporary disability ) hismaterial duties hereunder, (iv) has knowingly violated or breached any law orregulation to the material detriment of the Company or any affiliates of theCompany or its business, or (v) has breached any non-competition,non-disclosure or non-solicitation agreement between Executive and the Companywhich causes or is reasonably likely to cause material harm to theCompany.  For purposes of this provision,no act or failure to act, on the part of the Executive, shall be considered “willful”unless it is done, or omitted to be done, by the Executive in bad faith orwithout reasonable belief that his action or omission was in the best interestsof the Company.

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## (d)                                 Without Cause.  The Company may at any time terminate theExecutive’s employment hereunder without Cause.

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## (e)                                  Termination by theExecutive.

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### (i)                                     The Executive mayterminate his employment hereunder (A) for Good Reason or (B) at any time afterthe date hereof by giving sixty (60) days prior notice of his intention toterminate.

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### (ii)                                  For purposes of thisAgreement, “Good Reason” shall mean (A) a failure by Parent or the Company tocomply with any material provision of this Agreement (other than the Company’spayment obligations referred to in clause (E) below) which has not been curedwithin thirty (30) days after notice of such noncompliance has been given bythe Executive to the Company, (B) the assignment to the Executive of anymaterial duties inconsistent with the

 

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### Executive’s position with the Company or a substantial adversealteration in the nature or status of the Executive’s responsibilities withoutthe consent of the Executive, (C) without the consent of the Executive, amaterial reduction in employee benefits other than a reduction generallyapplicable to similarly situated executives of the Company, (D) without theconsent of the Executive, relocation of the Company’s principal place ofbusiness outside a fifty (50) mile radius of Minneapolis/St. Paul, Minnesota,or (E) any failure by the Company to pay the Executive Base Salary or anyIncentive Bonus to which he is entitled under the Bonus Plan or hereunder whichfailure has not been cured within ten (10) days after notice of suchnoncompliance has been given by the Executive to the Company or any failure ofthe Compensation Committee to approve a Bonus Plan for any fiscal year.

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## (f)                                    Any termination ofthe Executive’s employment by the Company or by the Executive (other thantermination pursuant to subsection (a) or (b) of this Section 6)shall be communicated by written Notice of Termination to the other partyhereto in accordance with Section 13. For purposes of this Agreement, a “Notice of Termination” shall mean anotice which shall indicate the specific termination provision in thisAgreement relied upon and shall set forth in reasonable detail the facts andcircumstances claimed to provide a basis for termination of the Executive’semployment under the provision so indicated.

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## (g)                                 “Date of Termination”shall mean (i) if the Executive’s employment is terminated by his death, thedate of his death, (ii) if the Executive’s employment is terminated pursuant tosubsection (b) above, the date as of which the physician’s written opinionis received by the Company, (iii) if the Executive’s employment is terminatedpursuant to subsection (c) above, the date specified in the Notice ofTermination, and (iv) if the Executive’s employment is terminated for any otherreason, the date sixty (60) days following the date on which a Notice ofTermination is given.

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# 7.                                       CompensationUpon Termination, Death or During Disability.

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## (a)                                  Disability.  During any period that the Executive fails toperform his duties hereunder as a result of his incapacity due to a physical ormental condition (“disability period”), the Executive shall continue to receivehis full Base Salary at the rate then in effect for such disability period (andshall not be eligible for payments under the disability plans, programs andpolicies maintained by the Company or in connection with employment by theCompany (“Disability Plans”)) until his employment is terminated pursuant to Section 6(b)hereof, and upon such termination, the Executive shall, within ten (10) days ofsuch termination, be entitled to all amounts to which the Executive is entitledpursuant to the Disability Plans.  TheExecutive’s rights under any long-term Disability Plan shall be determined inaccordance with the provisions of such plan, but in no event will the Companymaintain a long-term Disability plan that provides for payment of less than 60%of the Executive’s Base Salary.  Inaddition, upon the Executive’s termination in accordance with Section 6(b)hereof, all stock options, restricted stock grants awards and any other equityawards granted by Parent to the Executive shall become fully vested,unrestricted and exercisable as of the Date of Termination. All vested optionsshall remain exercisable by the Executive or his agent until 90 days after theDate of Termination and shall then expire and no longer be exercisable.

 

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## (b)                                 Death.  If the Executive’s employment is terminatedby his death pursuant to Section 6(a) hereof, the Company shall within ten(10) days following the date of the Executive’s death, pay to the Executive’sdesignated beneficiary(ies) any earned and accrued but unpaid installment ofBase Salary through the date of his death, an amount equal to the Executive’sannual Base Salary for the year in which the termination took place, and anamount equal to the Executive’s target Bonus for the year in which thetermination took place, together with any other amounts to which the Executiveis entitled pursuant to death benefit plans, programs and policies.  In addition, all stock options, restrictedstock awards and any other equity awards granted by Parent to the Executiveshall become fully vested, unrestricted and exercisable as of the Date ofTermination. All vested options shall remain exercisable by the Executive’sestate or designated beneficiary(ies) until 90 days after the Date ofTermination and shall then expire and no longer be exercisable.

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## (c)                                  Cause or otherthan Good Reason.  If the Executive’semployment shall be terminated by the Company for Cause or by the Executive forother than Good Reason, the Company shall pay the Executive his full BaseSalary through the Date of Termination at the rate in effect at the time Noticeof Termination is given and reimburse the Executive for all reasonable andcustomary expenses incurred by the Executive in performing services hereunderprior to the Date of Termination in accordance with Section 6(d), and Parentand the Company shall have no further obligations to the Executive under thisAgreement.

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## (d)                                 Termination by theCompany without Cause (other than for death or Disability) or Termination bythe Executive for Good Reason.  Ifthe Company shall terminate the Executive’s employment other than for death,Disability pursuant to Section 6(b) or Cause, or the Executive shallterminate his employment for Good Reason, then:

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### (i)                                     the Company shallpay the Executive any earned and accrued but unpaid installment of Base Salarythrough the Date of Termination at the rate in effect at the time Notice ofTermination is given and all other unpaid and pro rata amounts to which theExecutive is entitled as of the Date of Termination under any compensation orbonus plan or program of the Company, including without limitation, theapproved annual Bonus Plan for the year in which the Date of Termination occursand all accrued but unused vacation time, such payments to be made in a lumpsum on or before the tenth day following the Date of Termination;

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### (ii)                                  in lieu of anyfurther salary payments to the Executive for periods subsequent to the Date ofTermination, the Company shall pay as liquidated damages to the Executive anamount equal to the product of (A) the sum of (1) the Executive’s Base Salaryin effect as of the Date of Termination and (2) the average Annual Bonus thatthe Executive earned in the most recent two fiscal years, and (B) the quotientof the number of whole months remaining in the term of this Agreement as of theDate of Termination (such period is sometimes referred to herein as the “SeverancePeriod”) divided by twelve (12); such payment to be made in a lump sum on orbefore the tenth day following the Date of Termination.  In addition, all stock options, restrictedstock awards and any other equity awards granted by Parent to the Executiveshall become fully vested, unrestricted and exercisable as of the Date ofTermination;

 

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### (iii)                               In the case of atermination of the Executive’s employment by the Company without Cause or forDisability, or by the Executive for Good Reason, the Company shall pay the fullcost for the Executive to participate in the health insurance plan in which theExecutive was enrolled immediately prior to the Date of Termination for aperiod of eighteen (18) months, provided that the Executive’s continuedparticipation is possible under the general terms and provisions of such plansand programs.  In the event that theExecutive’s participation in any such plan or program is barred, the Companyshall arrange to provide the Executive with benefits substantially similar tothose which the Executive would otherwise have been entitled to receive undersuch plan from which his continued participation is barred  In the event the Executive secures employmentduring the eighteen (18) month period following the Date of Termination with anew employer that provides equal or better health insurance benefits at no additionalcost to the Executive, and the Executive elects to receive such benefits, theCompany shall be relieved of its obligations under this paragraph following thedate the Executive elects to receive such health insurance benefits from hisnew employer; and

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### (iv)                              The obligations of theCompany to make any payments to Executive required under Section 7(d)(ii)hereof shall be conditioned on the execution and delivery by the Executive of ageneral release of claims in form and substance reasonably satisfactory to theCompany.

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# 8.                                       Nondisclosure.  During the Executive’s employment with theCompany and for a period of twenty-four (24) months following the Date ofTermination, the Executive shall hold in a fiduciary capacity for the benefitof Parent and the Company all secret or confidential information, knowledge ordata relating to Parent and the Company or any of their affiliated companies,and their respective businesses, which shall have been obtained by theExecutive during the Executive’s employment by the Company or any of itsaffiliated companies and which shall not be or become public knowledge (otherthan by acts by the Executive or representatives of the Executive in violationof this Agreement).  After termination ofthe Executive’s employment with the Company, the Executive shall not, withoutthe prior written consent of the Company or as may otherwise be required by lawor legal process, communicate or divulge any such information, knowledge ordata to anyone other than the Company and those designated by it.  The agreement made in this Section 8shall be in addition to, and not in limitation or derogation of, anyobligations otherwise imposed by law or by separate agreement upon theExecutive in respect of confidential information of Parent and the Company.

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# 9.                                       Non-Competitionand Non-Solicitation.  During theExecutive’s employment with the Company and for a period thereafter equal tothe Severance Period, the Executive shall not, for himself or herself or onbehalf of or in conjunction with any other person, persons, company, firm, partnership,corporation, business, group or other entity (each, a “Person”), work in theprincipal line of business engaged in, or planned to be engaged in, by theCompany at the Date of Termination within any state where the Company is doingbusiness or has plans for commencing business as of the Date ofTermination.  The Executive’s passiveownership of less than five percent (5%) of the securities of a public companyshall not be treated as an action in competition with the Company.

 

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## (a)                                  Executive herebyacknowledges and agrees that his employment with the Company places him in aposition of trust and confidence with respect to the business operations,customers, prospects and personnel of the Company.  He agrees that, due to his position andknowledge, his engaging in any business that competes in the principal line ofbusiness as the Company will cause the Company significant and irreparableharm.

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## (b)                                 In consideration ofthe compensation and benefits extended to him under this Agreement, Executiveagrees that, during the term of Executive’s employment by the Company and for aperiod thereafter equal to the Severance Period, the Executive shall not, forany reason whatsoever, directly or indirectly, for himself or herself or onbehalf of or in conjunction with any other Person with whom the Executive worksor is affiliated:

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### (i)                                     solicit and/orhire any Person who is on the Date of Termination, or has been within six (6)months prior to the Date of Termination, an employee of the Company or itsaffiliates;

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### (ii)                                  solicit, induce orattempt to induce or hire any Person who is, at the Date of Termination, or hasbeen within six (6) months prior to the Date of Termination, an actualcustomer, client, business partner, or a prospective customer, client, businesspartner of the Company, for the purpose or with the intent of (A) inducing orattempting to induce such Person to cease doing business with the Company orits affiliates, (B) enticing or attempting to entice such Person to do businesswith Executive or any affiliate of Executive, or (C) in any way interferingwith the relationship between such Person and the Company or its affiliates; or

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### (iii)                               solicit, induce orattempt to induce any Person who is or that is, at the time of the Date ofTermination, or has been within six (6) months prior to the Date ofTermination, a supplier, licensee or consultant of, or provider of goods orservices to the Company or its affiliates, for the purpose or with the intentof (A) inducing or attempting to induce such Person to cease doing businesswith the Company or its affiliates or (B) in any way interfering with therelationship between such Person and the Company or its affiliates.

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## (c)                                  In the event theSeverance Period is less than 12 months, or in the event there is no SeverancePeriod, the Company shall have the right, but not the obligation, to extend theperiod of time during which the restrictive covenants set forth in clauses (a)and (b) above shall remain in effect for up to 24 additional months followingthe Severance Period or the Date of Termination, as the case may be, subject topaying consideration to the Executive for such extended period in cash in anamount equal to the Executive’s Base Salary in effect on the Date ofTermination, payable monthly in arrears. The Company shall provide written notice to the Executive at least 60days prior to the second anniversary of the Date of Termination of the Company’selection to extend the restrictive covenants as provided herein.

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## (d)                                 Because of thedifficulty of measuring economic losses to the Company as a result of a breachof the foregoing covenants, and because of the immediate and irreparable damagethat could be caused to the Company for which it would have no other adequateremedy, Executive agrees that the foregoing covenants in this Section 9,in addition to and not in limitation of any other rights, remedies or damagesavailable to the Company at law, in equity or

 

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## under this Agreement, shall be enforced by the Company in the event ofthe breach or threatened breach by Executive, by injunctions and/or restrainingorders.

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## (e)                                  It is agreed by theparties that the covenants contained in this Section 9 impose a fair andreasonable restraint on Executive in light of the activities and business ofthe Company on the date of the execution of this Agreement and the currentplans of the Company; but it is also the intent of the Company and Executivethat such covenants be construed and enforced in accordance with the changingactivities, business and locations of the Company and its affiliates throughoutthe term of these covenants.  Executivealso acknowledges that this restraint will not prevent him from earning a livingin his chosen field of work.

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## (f)                                    The covenants inthis Section 9 are severable and separate, and the unenforceability of anyspecific covenant shall not affect the provisions of any other covenant.  Moreover, in the event any court of competentjurisdiction shall determine that the scope, time or territorial restrictionsset forth herein are unreasonable, then it is the intention of the parties thatsuch restrictions be enforced to the fullest extent that such court deemsreasonable, and the Agreement shall thereby be reformed to reflect the same.

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## (g)                                 All of the covenantsin this Section 9 shall be construed as an agreement independent of anyother provision in this Agreement, and the existence of any claim or cause ofaction of Executive against the Company whether predicated on this Agreement orotherwise shall not constitute a defense to the enforcement by the Company ofsuch covenants.  It is specificallyagreed that the duration of the period during which the agreements andcovenants of Executive made in this Section 9 shall be effective shall becomputed by excluding from such computation any time during which Executive isin violation of any provision of this Section 9.

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## (h)                                 Notwithstanding any ofthe foregoing, if any applicable law, judicial ruling or order shall reduce thetime period during which Executive shall be prohibited from engaging in anycompetitive activity described in Section 9 hereof, the period of time forwhich Executive shall be prohibited pursuant to Section 9 hereof shall bethe maximum time permitted by law.

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# 10.                                 Successors;Binding Agreement.  This Agreementshall be binding upon and inure to the benefit of successors and permittedassigns of the parties.  This Agreementmay not be assigned, nor may performance of any duty hereunder be delegated, byeither party without the prior written consent of the other; *provided, however,*the Company may assignthis Agreement to any successor to its business, including but not limited toin connection with any subsequent merger, consolidation, sale of all orsubstantially all of the assets or stock of the Company or similar transactioninvolving the Company or a successor corporation.

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# 11.                                 AdditionalPayments by the Company.

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## (a)                                  If it is determined(as hereafter provided) that any payment or distribution by the Company to orfor the benefit of the Executive, whether paid or payable or distributed ordistributable pursuant to the terms of this Agreement or otherwise pursuant toor by reason of any other agreement, policy, plan, program or arrangement,including without limitation any option, share appreciation right or similarright, or the lapse or termination of any restriction on or the 

 

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## vesting or exercisability of any of the foregoing (a “Payment”), wouldbe subject to the excise tax imposed by Section 4999 of the Code (or anysuccessor provision thereto) or to any similar tax imposed by state or locallaw, or any interest or penalties with respect to such excise tax (such tax ortaxes, together with any such interest and penalties, are hereaftercollectively referred to as the “Excise Tax”), then Executive will be entitledto receive an additional payment or payments (a “Gross-Up Payment”) in anamount such that, after payment by Executive of all taxes (including anyinterest or penalties imposed with respect to such taxes), including any ExciseTax, imposed upon the Gross-Up Payment, Executive retains an amount of theGross-Up Payment equal to the Excise Tax imposed upon the Payments.

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## (b)                                 All determinationsrequired to be made under this Section 11, including whether an Excise Taxis payable by Executive and the amount of such Excise Tax and whether aGross-Up Payment is required and the amount of such Gross-Up Payment, will bemade by the Company’s then current outside auditors; provided that if that firmis unwilling or unable to provide such services, another accounting firm may beselected by the Company (such accounting firm the “Accounting Firm”).  The Company will direct the Accounting Firmto submit its determination and detailed supporting calculations to both theCompany and Executive within 30 calendar days after the date of the change incontrol or the date of Executive’s termination of employment, if applicable,and any other such time or times as may be requested by the Company orExecutive.  If the Accounting Firmdetermines that any Excise Tax is payable by Executive, the Company will paythe required Gross-Up Payment to Executive no later than five calendar daysprior to the due date for Executive’s income tax return on which the Excise Taxis included.  If the Accounting Firmdetermines that no Excise Tax is payable by Executive, it will, at the sametime as it makes such determination, furnish Executive with an opinion that hehas substantial authority not to report any Excise Tax on his federal, state,local income or other tax return.  Anydetermination by the Accounting Firm as to the amount of the Gross-Up Paymentwill be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999of the Code (or any successor provision thereto) and the possibility of similaruncertainty regarding applicable state or local tax law at the time of anydetermination by the Accounting Firm hereunder, it is possible that Gross-UpPayments which will not have been made by the Company should have been made (an“Underpayment”), consistent with the calculations required to be madehereunder.  In the event that the Companyexhausts or fails to pursue its remedies pursuant to Section 11(f) hereofand Executive thereafter is required to make a payment of any Excise Tax,Executive shall so notify the Company, which will direct the Accounting Firm todetermine the amount of the Underpayment that has occurred and to submit itsdetermination and detailed supporting calculations to both the Company andExecutive as promptly as possible.  Anysuch Underpayment will be promptly paid by the Company to, or for the benefit of,Executive within five business days after receipt of such determination andcalculations.

##  

## (c)                                  The Company andExecutive will each provide the Accounting Firm access to and copies of anybooks, records and documents in the possession of the Company or Executive, asthe case may be, reasonably requested by the Accounting Firm, and otherwisecooperate with the Accounting Firm in connection with the preparation andissuance of the determination contemplated by Section 11(b) hereof.

 

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## (d)                                 The federal, state andlocal income or other tax returns filed by Executive will be prepared and filedon a consistent basis with the determination of the Accounting Firm withrespect to the Excise Tax payable by Executive. To the extent the Excise Tax has not been previously withheld fromamounts paid to the Executive, Executive will make proper payment of the amountof any Excise Tax, and at the request of the Company, provide to the Companytrue and correct copies (with any amendments) of his federal income tax returnas filed with the Internal Revenue Service and corresponding state and localtax returns, if relevant, as filed with the applicable taxing authority, andsuch other documents reasonably requested by the Company, evidencing suchpayment.  If prior to the filing ofExecutive’s federal income tax return, or corresponding state or local taxreturn, if relevant, the Accounting Firm determines that the amount of theGross-Up Payment should be reduced, Executive will within five business dayspay to the Company the amount of such reduction.

##  

## (e)                                  The fees and expensesof the Accounting Firm for its services in connection with the determinationsand calculations contemplated by Sections 11(b) and 11(d) hereof will be borneby the Company.  If such fees and expensesare initially advanced by Executive, the Company will reimburse Executive thefull amount of such fees and expenses within five business days after receiptfrom Executive of a statement therefore and reasonable evidence of his paymentthereof.

##  

## (f)                                    Executive willnotify the Company in writing of any claim by the Internal Revenue Servicethat, if successful, would require the payment by the Company of a Gross-UpPayment.  Such notification will be givenas promptly as practicable but no later than ten (10) business days afterExecutive actually receives notice of such claim and Executive will furtherapprise the Company of the nature of such claim and the date on which suchclaim is requested to be paid (in each case, to the extent known by Executive).  Executive will not pay such claim prior tothe earlier of (x) the expiration of the 30-calendar-day period following thedate on which he gives such notice to the Company and (y) the date that anypayment of amount with respect to such claim is due.  If the Company notifies Executive in writingprior to the expiration of such period that it desires to contest such claim,Executive will:

##  

### (i)                                     provide theCompany with any written records or documents in his possession relating tosuch claim reasonably requested by the Company;

###  

### (ii)                                  take such action inconnection with contesting such claim as the Company reasonably requests inwriting from time to time, including without limitation accepting legalrepresentation with respect to such claim by an attorney competent in respectof the subject matter and reasonably selected by the Company;

###  

### (iii)                               cooperate with theCompany in good faith in order effectively to contest such claim; and

###  

### (iv)                              permit the Company toparticipate in any proceedings relating to such claim; provided, however, thatthe Company will bear and pay directly all costs and expenses (includinginterest and penalties) incurred in connection with such contest and willindemnify and hold harmless Executive, on an after-tax basis, for and againstany Excise Tax or income tax,

 

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### including interest and penalties with respect thereto, imposed as aresult of such representation and payment of costs and expenses.  Without limiting the foregoing provisions ofthis Section 11(f), the Company will control all proceedings taken inconnection with the contest of any claim contemplated by this Section 11(f)and, at its sole option, may pursue or forego any and all administrativeappeals, proceedings, hearings and conferences with the taxing authority inrespect of such claim (provided that Executive may participate therein at hisown cost and expense) and may, at its option, either direct Executive to paythe tax claimed and sue for a refund or contest the claim in any permissiblemanner, and Executive agrees to prosecute such contest to a determinationbefore any administrative tribunal, in a court of initial jurisdiction and inone or more appellate courts, as the Company will determine; provided, however,that if the Company directs Executive to pay the tax claimed and sue for arefund, the Company will advance the amount of such payment to Executive on aninterest-free basis and will indemnify and hold Executive harmless, on anafter-tax basis, from any Excise Tax or income tax, including interest orpenalties with respect thereto, imposed with respect to such advance; andprovided further, however, that any extension of the statute of limitationsrelating to payment of taxes for the taxable year of Executive with respect towhich the contested amount is claimed to be due is limited solely to suchcontested amount.  Furthermore, theCompany’s control of any such contested claim will be limited to issues withrespect to which a Gross-Up Payment would be payable hereunder and Executivewill be entitled to settle or contest, as the case may be, any other issueraised by the Internal Revenue Service or any other taxing authority.

###  

## (g)                                 If, after the receiptby Executive of an amount advanced by the Company pursuant to Section 11(f)hereof, Executive receives any refund with respect to such claim, Executivewill (subject to the Company’s complying with the requirements of Section 11(f))hereof) promptly pay to the Company the amount of such refund (together withany interest paid or credited thereon after any taxes applicable thereto). If,after the receipt by Executive of an amount advanced by the Company pursuant toSection 11(f) hereof, a determination is made that Executive will not beentitled to any refund with respect to such claim and the Company does notnotify Executive in writing of its intent to contest such denial or refundprior to the expiration of 30 calendar days after such determination, then suchadvance will be forgiven and will not be required to be repaid and the amountof such advance will offset, to the extent thereof, the amount of Gross-UpPayment required to be paid pursuant to this Section 11. If, after thereceipt by Executive of a Gross-Up Payment but before the payment by Executiveof the Excise Tax, it is determined by the Accounting Firm that the Excise Taxpayable by Executive is less than the amount originally computed by theAccounting Firm and consequently that the amount of the Gross-Up Payment islarger than that required by this Section 11, Executive shall promptlyrefund to the Company the amount by which the Gross-Up Payment initially madeto Executive exceeds the Gross-Up Payment required under this Section 11.

##  

# 12.                                 ContinuedPerformance.  Provisions of thisAgreement shall survive any termination of Executive’s employment hereunder ifso provided herein or if necessary or desirable fully to accomplish thepurposes of such provisions, including, without limitation, the obligations ofthe Executive under the terms and conditions of Sections 8 and 9.  Any obligation of the Company to makepayments to or on behalf of the Executive under Section 7 is expresslyconditioned upon the Executive’s continued performance of the Executive’sobligations under Sections 8 and 9 for the time periods stated in Sections 8and 9.  The Executive recognizes that,except to the extent, 

 

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# if any, provided in Section 7, the Executive will earn nocompensation from the Company after the Date of Termination.

#  

# 13.                                 Notices.  For the purposes of this Agreement, notices,demands and all other communications provided for in this Agreement shall be inwriting and shall be deemed to have been duly given when delivered or (unlessotherwise specified) mailed by United States certified or registered mail,return receipt requested, postage prepaid, addressed as follows:

#  

|   | If to the Executive: |
|--------|----------------------|
|   |                 |   |
|   |                 | Paul F. Kraemer |
|   |                 | 26 Twin Pond Lane |
|   |                 | Sudbury, MA 01776 |
|   |                 | FAX: (      ) |
|   |                 |   |
|   | If to the Company:   |
|   |                 |   |
|   |                 | KANAWHA INSURANCE COMPANY |
|   |                 | c/o KMG AMERICA CORPORATION |
|   |                 | 6306 Maple Ridge |
|   |                 | Excelsior, Minnesota 55331 |
|   |                 | Attention: Chief Executive Officer |
|   |                 | FAX: (952) 474-8676 |
|   |                 |   |
|   |                 | with a copy to: |
|   |                 |   |
|   |                 | Hunton & Williams LLP |
|   |                 | Riverfront Plaza, East Tower |
|   |                 | 951 E. Byrd Street |
|   |                 | Richmond, Virginia 23219 |
|   |                 | Attention: Daniel M. LeBey, Esq. |
|   |                 | FAX: (804) 788-8218 |

 

or to such other address as any party may have furnished to the othersin writing in accordance herewith, except that notices of change of addressshall be effective only upon receipt.

 

# 14.                                 Miscellaneous.  No provisions of this Agreement may bemodified, waived or discharged unless such waiver, modification or discharge isagreed to in writing signed by the Executive and such officer of the Company asmay be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the otherparty hereto of, or compliance with, any condition or provision of thisAgreement to be performed by such other party shall be deemed a waiver ofsimilar or dissimilar provisions or conditions at the same or at any prior orsubsequent time.  No agreements orrepresentations, oral or otherwise, express or implied, with respect to thesubject matter hereof have been made by either party which are not set forthexpressly in this Agreement.  Thevalidity, interpretation, construction and performance of this Agreement shall

 

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# be governed by the laws of the Commonwealth of Virginia without regardto its conflicts of law principles.

#  

## (a)                                  Validity.  The invalidity or unenforceability of anyprovision or provisions of this Agreement shall not affect the validity orenforceability of any other provision of this Agreement, which shall remain infull force and effect.

##  

## (b)                                 Counterparts.  This Agreement may be executed in one or morecounterparts, each of which shall deemed to be in an original but all of whichtogether will constitute one and the same instrument.

##  

## (c)                                  Disputes.  Any dispute or controversy arising under orin connection with this Agreement shall, at the Executive’s sole discretion, besettled exclusively by such judicial remedies as the Executive may seek topursue or by arbitration conducted before a panel of three arbitrators inMinneapolis, Minnesota in accordance with the rules of the American ArbitrationAssociation then in effect; provided, however, that the Company shall beentitled to seek a restraining order or injunction in any court of competentjurisdiction with respect to any violation or threatened violation of theprovisions of Sections 8 or 9 of this Agreement and the Executive herebyconsents that such restraining order or injunction may be granted without thenecessity of the Company’s posting any bond. Judgment may be entered on the arbitrator’s award in any court havingjurisdiction.  The expenses ofarbitration shall be borne by the Company.

##  

## (d)                                 Indemnification.  The Company shall indemnify and hold theExecutive harmless to the maximum extent permitted by the laws of theCommonwealth of Virginia (and the law of any other appropriate jurisdictionafter any reincorporation of the Company) against judgments, fines, amountspaid in settlement and reasonable expenses, including attorneys’ fees incurredby Executive, in connection with the defense of, or as a result of any actionor proceeding (or any appeal from any action or proceeding) in which Executiveis made or is threatened to be made a party by reason of the fact that he is orwas an officer or trustee of the Company, regardless of whether such action orproceeding is one brought by or in the right of the Company to procure ajudgment in its favor (or other than by or in the right of the Company); *provided, however*, that thisindemnification provision shall not apply to any action or proceeding relatingto a dispute between the Company and the Executive based on any alleged breachor violation of this Agreement.

##  

## (e)                                  Entire Agreement.  This Agreement sets forth the entireagreement of the parties hereto in respect of the subject matter containedherein and supersedes all prior agreements, promises, covenants, arrangements,communications, representations or warranties, whether oral or written, by anyofficer, employee or representative of any party hereto; and any prioragreement of the parties hereto in respect of the subject matter containedherein.

##  

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IN WITNESS WHEREOF, the parties have executedthis Agreement on the date and year first above written.

 
|   | KMG AMERICA CORPORATION                                   |
|--------|-----------------------------------------------------------|
|   |                                                      |
|   |                                                      |
|   | By:                                                       | /s/   Kenneth U. Kuk |   |
|   | Name: Kenneth U. Kuk                                      |
|   | Title: Chairman, President & Chief  Executive Officer |
|   |                                                      |
|   |                                                      |
|   | KANAWHA INSURANCE COMPANY                                 |
|   |                                                      |
|   |                                                      |
|   | By:                                                       | /s/ Kenneth U. Kuk |   |
|   | Name: Kenneth U. Kuk                                      |
|   | Title: Chairman                                           |
|   |                                                      |
|   |                                                      |
|   | PAUL F. KRAEMER                                           |
|   |                                                      |
|   |                                                      |
|   |  /s/  Paul F. Kraemer                                |   |

 

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