<PAGE>
                                                                    Exhibit 10.4


                                                                       W. HARTER


                              EMPLOYMENT AGREEMENT


         THIS AGREEMENT (this "Agreement") is hereby made and entered into as of
the 21st day of July 2003, by and between DIRECT GENERAL CORPORATION, a
Tennessee corporation ("Company") and WILLIAM J. HARTER, a natural person
residing in Memphis, Tennessee ("Employee"). Company and Employee are entering
into this Agreement in order to set forth, in definitive written form, their
respective rights and obligations in what each of them intends to be a long-term
and amicable continuing employment relationship. Consideration for this
Agreement consists of the continued employment of Employee under the terms
hereof and the other undertakings herein made. The sufficiency, adequacy and
receipt of said consideration are by execution hereof acknowledged by Company
and by Employee, each of which enters into this Agreement with the intention of
being bound hereby and AGREES as follows:

         1.       EMPLOYMENT. Company hereby continues the employment of
Employee as Senior Vice President of Corporate Development, Banking and Finance
of Direct General Corporation, and Employee hereby accepts such continuation of
employment.

         2.       TERM. Employee's term of employment as Senior Vice President
of Corporate Development, Banking and Finance on the terms hereinafter set forth
shall be for a period of three (3) years (the "Term") beginning on the closing
of the IPO (as such term is defined below); provided, however, that this
Agreement may be terminated prior to expiration of the Term pursuant to
paragraph 12 herein below.

         3.       EXCLUSIVITY. Employee shall devote all of his time during
reasonable business hours to performance of his duties under this Agreement.
Nothing herein shall restrict Employee, with the Company's prior written
consent, from service on charitable or civic organization boards of directors
(which consent the Company shall not unreasonably withhold, it being the belief
of the parties that Employee's service on a reasonable number of such boards
furthers his interests and the Company's interests). It is further understood
that Employee may be elected to serve as an officer or director by appropriate
corporate action of the Company or of any one or more of the Company's
affiliates and, if elected, will so serve.

         4.       DUTIES AND RESPONSIBILITIES. Employee will render services
customarily performed by the Senior Vice President of Corporate Development,
Banking and Finance. Employee's duties and responsibilities will include (but
not by way of limitation) those set forth on Exhibit "A" hereto and he shall use
his good faith and diligent efforts to perform such duties and responsibilities
set forth on Exhibit "A" hereto and such other duties and responsibilities as
the Company's Board of Directors (or "Board") or Chief Executive Officer (or
"CEO") of the Company shall prescribe.

So long as Employee is employed by the Company, whether within the Term of this
Agreement or otherwise, and for a period of twelve (12) months following
Employee's termination of employment for any reason, Employee shall not make any
statement that is


<PAGE>

disparaging about the Company, any of its officers, directors, or shareholders,
including, but not limited to, any statement that disparages the products,
services, finances, financial condition, capabilities or other aspect of the
businesses of the Company or its affiliates. During the same period Employee
will not engage in any conduct that is intended to inflict harm upon the
professional or personal reputation of the Company or any of its officers,
directors, shareholders or employees.

         5.       ANNUAL BASE SALARY. During the term of Employee's employment
hereunder, Company will pay Employee a base salary of One Hundred and Sixty Five
Thousand ($165,000.00) Dollars per year, payable as nearly as practical in equal
installments and with the frequency then used by the Company in paying its other
employees. The Company's Board of Directors or Compensation Committee of the
Board ("Compensation Committee") shall annually review such base salary and may
increase or decrease such base salary, but shall not decrease it to less than
$165,000. It is intended by the parties that base salary and other compensation
herein provided shall compensate Employee for all services rendered as Senior
Vice President of Corporate Development, Banking and Finance and any other
position he may serve as director or officer of the Company and its affiliates.

         6.       STOCK OPTIONS. Subject to the discretion and approval of the
Board of Directors or the Compensation Committee, upon an initial public
offering of the common stock of the Company ("IPO") during the term of
Employee's employment hereunder, the Company will grant to Employee Incentive
Stock Options ("ISOs") for the purchase of One Thousand Five Hundred (1,500)
shares of common stock of the Company. Said number of ISO shares shall be
adjusted in the event of a split of the Company's common stock in connection
with the IPO. Unless otherwise determined by the Board of Directors or the
Compensation Committee in accordance with the Plan (defined below), the per
share exercise price for said ISOs shall be equal to the initial offering price
per share at the time of the IPO. The vesting schedule and other terms of the
said ISOs shall be determined by the Company's Board of Directors or the
Compensation Committee, and shall be determined in accordance with the terms of
the Company's recently adopted 2003 Equity Incentive Plan (the "Plan").

         7.       FRINGE BENEFITS. During the term of this Agreement, Company
shall:

                  (a)      EMPLOYEE BENEFIT PLANS. Provide Employee the
opportunity to participate in the same medical, health, hospitalization and
other insurance coverage and retirement plans in which Company provides its
other full-time employees an opportunity to participate.

                  (b)      PAID TIME OFF. Allow Employee to take paid time off
(or "Paid Time Off" or "PTO," which includes vacation days) in the same manner
as is provided for other senior officers of the Company.

                  (c)      BUSINESS EXPENSES. Reimburse Employee for reasonable
out-of-pocket expenses he incurs on behalf of himself or the Company in
connection with the



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<PAGE>

performance of his duties and responsibilities under this Agreement, subject to
the applicable reimbursement policy in effect at the time.

                  (d)      COMPANY VEHICLE. Provide Employee with a Company
vehicle in the same manner as is provide for other senior level officers of the
Company.

         8.       INCENTIVE COMPENSATION. The Board of Directors or the
Compensation Committee shall, usually during the month of April, annually
consider an incentive payment to Employee to be paid in one lump sum, payable
promptly after action by the Board or Compensation Committee and subject to a
maximum of fifty percent (50%) of Employee's base salary. In framing its
decision on the amount of incentive compensation to be paid to Employee, if any,
the Company's Board of Directors or Compensation Committee shall take into
account the Company's business and financial condition and operating results
achieved and Employee's contribution toward attainment of Company objectives as
may be determined from time to time by the CEO, Board of Directors, or
Compensation Committee, pursuant to any executive cash bonus plan adopted by the
Board or Compensation Committee under the Plan, or otherwise. No incentive
compensation shall become payable hereunder until and unless the Company's Board
of Directors or Compensation Committee shall award it.

         9.       USE OF EMPLOYEE'S NAME, ETC. Employee hereby grants the
Company the right during the term of this Agreement to make use of, and to
permit others to make use of the, the Employee's name, pictures, photographs,
and other likenesses, and voice, in connection with the advertising, publicity
and exploitation of any Company products, or in connection with the use or
implementation of any of the Employee's services hereunder or the proceeds
thereof. The right to use any of the foregoing shall continue as a non-exclusive
and non-compensable right for one (1) year after termination of Employee's
employment with Company by Employee's resignation or by Company for cause, and
for six (6) months following termination of Employee's employment with Company
without just cause; provided, however, in such event, Company shall not,
directly or indirectly, represent Employee as endorsing any product or service
without the Employee's written consent, which shall not be unreasonably
withheld.

         10.      INSURANCE. Employee shall cooperate with the Company if it
applies for, in its own name or otherwise, but at its expense, keyman life,
health, accident or other insurance covering Employee, and acknowledges that the
Company may do so for any amount that it deems desirable. Unless otherwise
agreed, the Employee and his family will have no right, title or interest in or
to such insurance. Employee shall, if requested, assist the Company in procuring
such insurance by submitting from time to time to the customary medical,
physical and other examinations, and by signing such applications, statements
and other instruments as insurer may require.

         11.      RECORDS. Upon termination of this Agreement, Employee shall
not be entitled to keep or preserve any record, document or other instrument of
Company, or any copy thereof, and shall return all such property to the Company.



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<PAGE>

         12.      TERMINATION.

                  (a)      FOR CAUSE. Company may terminate employment of
Employee "for cause" upon the occurrence of any of the following:

                           (i)      Employee's refusal to perform, or failure to
                  perform, in a normal business manner those duties under this
                  Agreement or those assigned to him by the Board of Directors
                  of the Company or by the Chief Executive Officer;

                           (ii)     Employee's failure or refusal to obey and
                  materially comply with any instructions promulgated in good
                  faith by its Chief Executive Officer or any rules, policies
                  and regulations of Company respecting the operations of
                  Company;

                           (iii)    Employee's engaging in any misconduct which
                  materially and demonstrably injuries the Company; or

                           (iv)     Employee's engaging in any unlawful conduct
                  in connection with his duties of employment with Company, or
                  any acts of dishonesty in connection therewith, conviction of
                  a felony, or of a misdemeanor involving moral turpitude.

If Employee's employment terminates "for cause" as described above, then this
Agreement shall terminate and Employee shall receive base compensation accrued
through the date of termination, but Employee shall not be entitled to receive
any other compensation.

                  (b)      DEATH OR DISABILITY. This Agreement shall terminate
without other or further liability of any party hereto upon the death or
permanent disability of Employee, provided such termination due to permanent
disability does not otherwise violate applicable law. Upon such termination,
Employee, or in the case of death, Employee's spouse, shall receive base
compensation accrued through the date of termination (subject to any customary
applicable withholding). As herein used, the term "permanent disability" shall
mean physical or mental impairment of Employee to such an extent that he is
thereby unable to perform his normal duties and obligations under this Agreement
for a period of one hundred and twenty (120) cumulative days during any twelve
(12) month period.

                  (c)      RESIGNATION. This Agreement shall terminate upon
Employee's resignation without other or further liability of any party hereto,
except for and to the extent that specific provisions hereof contemplate their
survival following termination.

                  (d)      WITHOUT JUST CAUSE. Company may terminate employment
of Employee at any time "without just cause". Termination "without just cause"
means termination of Employee's employment by Company that is initiated by
Company and is


                                       4
<PAGE>

not for one of the above-enumerated reasons. If Employee's employment terminates
"without just cause" as described above, then this Agreement shall terminate and
Employee shall receive base compensation accrued through the date of termination
and a continuation of his base salary through the relevant period of
non-competition imposed by Section 17(a) of this Agreement or the end of this
Agreement Term, whichever is earlier, (any such continuation salary is subject
to any customary applicable withholding), but Employee shall not be entitled to
receive any other compensation.

                  (e)      EFFECT OF TERMINATION WITH RESPECT TO FRINGE
BENEFITS. Upon termination of this Agreement, the Company's obligation to
provide any fringe benefits provided for herein shall cease, although Employee
shall retain any rights provided for in any fringe benefit plan document which
includes, but is not limited to, accrued Paid Time Off, if any.

          13.     INVENTIONS AND CREATIONS. Employee agrees that all inventions,
discoveries, improvements, ideas and other contributions (herein called
collectively "Inventions") whether or not patented or patentable, copyrighted or
copyrightable, or otherwise protectable in law, which are conceived, made,
developed or acquired by Employee, either individually or jointly, during his
employment with the Company and which relate in any manner to the business of
the Company, shall belong to the Company, and by execution hereof Employee
assigns and transfers to the Company his entire right, title and interest in the
Inventions

         14.      REMEDIES. In addition to, and not in limitation of, the
remedies set forth in Section 17(b) of this Agreement, as related to Section 17
hereof, Employee acknowledges that legal remedies for the breach of this
Agreement would be inadequate and that in addition to damages or other remedies
provided herein or by law or equity, upon a breach or threatened breach by
Employee of any of the covenants contained in this Agreement, without posting
any bond or security, the Company shall be entitled to seek and obtain equitable
relief in the form of specific performance, preliminary or permanent injunction,
or any other appropriate equitable remedy against Employee prohibiting any
breach or further breach of this Agreement.

         15.      AMENDMENT AND ASSIGNMENT. This Agreement may be amended only
by a writing signed by both parties hereto. This Agreement, and the rights,
duties and obligations shall not be assignable by Employee, because the services
to be rendered hereunder are unique and personal. There is no prohibition on
assignment of this Agreement by Company to one of its affiliates, and the
Company's rights, duties and obligations hereunder shall be binding upon, and
inure to the benefit of, Company and its affiliates, successors and assigns.

         16.      CONFIDENTIAL INFORMATION. Employee and Company have entered
into that certain Confidentiality Agreement dated as of January 22, 2003 (the
"Confidentiality Agreement") and the parties hereby reconfirm their respective
rights and obligations under said Confidentiality Agreement with respect to the
subject matter contained therein.


                                       5
<PAGE>


         17.      NONCOMPETITION. Employee acknowledges that he has specialized
knowledge and experience in the Company's and its affiliates' businesses, that
his reputation and contacts within the industry are considered to be of great
value to the Company and its affiliates, and that if his knowledge, experience,
reputation or contacts are used to compete with the Company or its affiliates,
then serious and irreparable harm would be caused to the Company and its
affiliates.

                  (a)      RESTRICTIONS UPON EMPLOYEE'S TERMINATION OR
RESIGNATION. Except as otherwise provided herein below, if Employee resigns his
employment with the Company or Employee is terminated "for cause" or "without
just cause", Employee shall not, for a period of SIX (6) MONTHS or the end of
this Agreement Term, whichever is earlier, thereafter, without prior written
consent of the Company, directly or indirectly own an interest in, manage
operate, finance, join, control or participate in the ownership, management,
operation, financing or control of, or be connected with as an officer,
director, employee, partner, principal, agent, representative, consultant or
otherwise, any business or enterprise engaged in or planning to be engaged in
writing, issuing, underwriting, selling distributing or re-insuring personal
property and casualty insurance products or any other business in which the
Company is engaged in, including financing of premiums ; provided that this
restriction shall apply only with respect to the states in which the Company or
its affiliates are doing business or are making an active effort to do business
during the term of this Agreement. Additionally, during the SIX (6) MONTH period
following termination, Employee shall not directly or indirectly solicit, entice
or seek to induce or influence any employee of the Company (including any
affiliate of the Company) to leave his/her employment with the Company or its
affiliates. Nothing herein shall prevent Employee's acquiring, for investment
purposes, equity interests in any such business or enterprise so long as (i) no
such equity interest exceeds five percent (5%) of the investee's business or
enterprise's equity and (ii) Employee does not have any relationship with such
investee's business or enterprise that is otherwise restricted by this
paragraph.

                  (b)      REMEDIES FOR BREACH. The parties hereto recognize
that the services to be rendered under this Agreement by Employee are of a
special and unique character; and in the event the Employee shall violate any of
the restrictions set forth in this Section 17, then Company may, in any court of
competent jurisdiction, obtain damages for any such breach of this Agreement,
enforce the specific performance hereof, or enjoin Employee from performing any
prohibited act hereunder. Nothing herein contained shall be construed to prevent
Company's election of any such remedy in law or in equity in the event of the
breach of this Section 17 by Employee.

                  (c)      JUDICIAL MODIFICATION AND SEVERABILITY. If any
provision of this Section 17 shall be held to be invalid or unenforceable, the
remaining provisions of this Agreement shall nevertheless continue to be valid
and enforceable as though the invalid or unenforceable parts had not been
included herein. In the event the terms of this Section 17 relating to duration,
subject matter, or territory shall be declared by a court of competent
jurisdiction to exceed the maximum duration, subject matter, or territory, such



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<PAGE>

court deems reasonable and enforceable, then the provision(s) deemed
unenforceable shall be amended to reflect the maximum duration, subject matter
or territory which shall be enforceable.

         18.      APPLICABLE LAW. This Agreement is subject to and not in
abrogation of the applicable laws of the United States of America and shall be
construed and enforced in accordance with the laws of the State of Tennessee.

         19.      INDEMNITY. To the extent permitted by law and the Company's
charter and bylaws, the Company will indemnify the Employee against any claim or
liability including, but not limited to, any claim regarding the use by Company
of the Employee's name or likeness and will hold the Employee harmless from and
pay any expenses (including, without limitation, legal fees and court costs),
judgments, fines, penalties, settlements and other amounts arising out of or in
connection with any act or omission of the Employee performed or made in good
faith on behalf of the Company pursuant to this Agreement. The Company will not
be obligated to pay the Employee's legal fees and related charges of counsel
during any period that the Company furnished, at its expense, counsel to defend
the Employee; but any counsel furnished by the Company must be reasonably
satisfactory to the Employee.

         20.      BINDING EFFECT. This Agreement shall be binding upon, and
inure to the benefit of, the parties hereto, the affiliates of the Company, and
the parties' respective heirs, successors, assigns, and personal legal
representatives.

         21.      SEVERABILITY. In addition to the applicability of Section
17(c) hereof, should any other provision of this Agreement be determined to be
invalid, illegal or unenforceable by a court of competent jurisdiction, then
such provision shall be amended by the parties hereto so as to make it valid,
legally enforceable but keeping it as close to its original meaning as possible.
The invalidity, illegality or unenforceability of any provisions shall not
affect, in any manner, the other provisions herein contained which shall remain
in full force and effect.

         22.      WAIVER. No failure by the Company to insist upon the strict
performance of any term or condition of this Agreement or to exercise any right
or remedy available to it will constitute a waiver. No breach or default of any
provision of this Agreement will be waived, altered or modified, and the Company
will not waive any of its rights, except by a written instrument executed by the
Company. No waiver of any breach or default will affect or alter any term or
condition of this Agreement, and such term or condition will continue in full
force and effect with respect to any other then existing or subsequent breach or
default thereof.

         23.      MISCELLANEOUS.

                  (a)      NOTICE. All notices under or in connection with this
         Agreement shall be in writing and may be delivered personally or sent
         by mail, courier, electronic mail, fax, or other written means of
         communication to the parties at


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<PAGE>

         their addresses set forth below, or to such other addresses and fax
         numbers as to which notice is given:

                           (i)      IF TO THE COMPANY:

                                    Direct General Corporation
                                    Attention:  William C. Adair, CEO
                                    2813 Business Park Drive, Building I
                                    Memphis, Tennessee 38118
                                    Fax: (901) 541-3382

                                    WITH COPY TO:

                                    Direct General Corporation
                                    Attn:   Ronald F. Wilson, General Counsel
                                    1281 Murfreesboro Road
                                    Nashville, Tennessee 37217
                                    Fax (615) 366-3722

                           (ii)     IF TO THE EMPLOYEE:

                                    William J. Harter
                                    8785 Birch Park Lane
                                    Germantown, Tennessee 38139

                                    WITH COPY TO:

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

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

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

                  Notice will be deemed given on receipt.

                  (b)      HEADINGS. Section headings are for purposes of
         convenient reference only and will not affect the meaning or
         interpretation of any provision of this Agreement.

                  (c)      ENTIRE AGREEMENT. This Agreement, its Exhibits, and
         the Confidentiality Agreement constitute the entire agreement of the
         parties with respect to the matters herein addressed and supersedes any
         and all prior agreements or understandings between them. This Agreement
         is not intended to amend, and does not amend, any document referred to
         in it.

         24.      ARBITRATION. Any dispute, controversy or claim arising between
the parties hereto concerning the terms of this Agreement, other than with
respect to Section 17 hereof and with respect to the equitable remedies provided
in Section 14 hereof, shall


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be determined by binding arbitration in Shelby County, Tennessee, in accordance
with the then-current rules and regulations promulgated by the American
Arbitration Association, and judgment upon the award may be entered in any court
having jurisdiction thereof.

         25.      FURTHER ASSURANCES. The parties hereto shall execute such
other and further documents, and take such further actions, as may be reasonably
necessary in order to carry out the intentions of this Agreement.

         26.      EMPLOYMENT-AT-WILL. If the full Term of this Agreement, is
completed hereunder and the Company and Employee have not expressly extended
this Agreement or its Term in accordance with Section 15 (Amendment and
Assignment) hereof, then immediately following the completion of the Term, the
employment relationship between the Company and Employee shall revert
automatically to the status of an employment-at-will relationship under the laws
of the State of Tennessee, and at that time no contract of employment for a
fixed period of time, minimum compensation, specified title or responsibilities,
or any other terms shall exist or be deemed to exist between the Company and
Employee.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and date first above written.


                                      EMPLOYER:
                                      DIRECT GENERAL CORPORATION

                                     By    /s/ Tammy R. Adair
                                       -------------------------------------

                                     Name      Tammy R. Adair
                                         -----------------------------------

                                     Title     Executive Vice President
                                          ----------------------------------


                                      EMPLOYEE:


                                     By  /s/ William J. Harter
                                        ------------------------------------
                                          WILLIAM J. HARTER



                                       9

<PAGE>


EXHIBIT "A"

                     EMPLOYEE'S DUTIES AND RESPONSIBILITIES


DUTIES AND RESPONSIBILITIES OF SENIOR VICE PRESIDENT OF CORPORATE DEVELOPMENT,
BANKING AND FINANCE, INCLUDE THE FOLLOWING:

1.       BANKING AND INVESTOR RELATIONS. Responsible for the establishment and
         maintenance of corporate investor and banking relations, enforcement of
         Company policy and procedures for dissemination of material information
         to the public, development and enforcement of public relations
         practices and procedures.

2.       CAPITAL AND FINANCING TRANSACTIONS. Assists, as requested, in the
         management and organization of financing and capitalization of the
         Company and its subsidiaries including, but not limited to, equity
         capital raising projects and/or debt acquisitions and structuring.

3.       POLICY ENFORCEMENT. Assists in the enforcement of the Company's
         policies, practices and procedures related to items #1 and #2 above and
         such others areas as requested by the Chief Executive Officer.

4.       GENERAL BUSINESS ACTIVITIES. Assists and advises, if requested by the
         Chief Executive Officer, in planning, organizing, implementing, and
         controlling the Company's general business objectives and activities.

5.       FINANCIAL ADVICE. Serves, as requested by the Company's Board of
         Directors, Audit Committee, or Chief Executive Officer as advisor on
         financial matters and, in consultation with the Company's Chief
         Financial Officer, recommends appropriate strategies and courses of
         action.

6.       FINANCIAL PLANNING. Assists, as requested by the Chief Executive
         Officer and in consultation with the Chief Financial Officer, in making
         recommendations to the Board, Audit Committee of the Board and the
         Chief Executive Officer regarding financial planning for the Company.
         Such financial planning matters may include, but are not limited to,
         analyzing and presenting budgeting plans, forecasting, and cash flow
         projections of Direct General Corporation and its subsidiaries.

7.       SECONDARY AND DEVELOPING RESPONSIBILITIES. Although Employee's primary
         activities shall focus on the foregoing list of duties and
         responsibilities, as the business needs of the Company grow and
         develop, and as requested by the Board of Directors or the Chief
         Executive Officer, Employee may be asked to perform other duties and
         responsibilities for the Company and its subsidiaries that are not
         currently foreseen and not specifically identified on this Exhibit "A",
         but that nevertheless are consistent with the role of Senior Vice
         President of Corporate Development, Banking and Finance.


                                  ************


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