**Exhibit 10.17**

 

**Interests and Liabilities Agreement**

(hereinafter referred to as the “Agreement”)

 

to the

 

**Quota Share Reinsurance Contract**

(hereinafter referred to as the “Contract”)

 

It is hereby mutually agreed by

 

**Coast National Insurance Company (“CoastNational”)**

Anaheim, California

 

**Security National Insurance Company(“Security National”)**

Davie, Florida

 

**Bristol West Insurance Company (“Bristol”)**

Philadelphia, Pennsylvania

and

**Bristol West Casualty Insurance Company(“Bristol”)**

Independence, Ohio

(hereinafter together referred to as the“Subscribing Company”)

 

and

 

**National Union Fire Insurance Company ofPittsburgh, Pa.**

Harrisburg, Pennsylvania

(hereinafter referred to as the “SubscribingReinsurer”)

 

Under the terms of the Agreement attached hereto, the SubscribingReinsurer shall have a 100% participation in the interest and liabilities ofthe Reinsurer described in the attached Agreement; provided, however, that theSubscribing Company shall have the option to elect to reduce such participationpercentage to not less than 80% by giving prior written notice to theSubscribing Reinsurer on or before September 30, 2004.  Any such election shall be irrevocable.

 

Such participants shall be several and not joint with the participationof other subscribing reinsurers, and under no circumstances shall theSubscribing Reinsurer participate in the interests and liabilities, if any, ofthe other subscribing reinsurers in said Agreement.

 

This Agreement shall commence at 12:01 a.m. Eastern Standard Time,January 1, 2005.  It shall remainin effect until 11:59 p.m. December 31, 2006, unless terminated inaccordance with the provisions of the attached Agreement.

 

----

 

**In Witness Whereof**,the parties hereto have caused this Interests and Liabilities Agreement to besigned in duplicate by their duly authorized representatives.

 

In Independence, Ohio, this 12 day of August in theyear 2004.

 

 
| /s/ Alexis Oster, Corporate Counsel |                                                     |
|-------------------------------------|----------------------------------------------------------|
|                                | Coast National Insurance Company  of Anaheim, California |
|                                     |                                                          |  |

 

 

In Independence, Ohio, this 12 day of August in theyear 2004.

 

 
| /s/ Alexis Oster, Corporate Counsel |                                                   |
|-------------------------------------|--------------------------------------------------------|
|                                | Security National Insurance Company  of Davie, Florida |
|                                     |                                                        |  |

 

 

In Independence, Ohio, this 12 day of August in theyear 2004.

 

 
| /s/ Alexis Oster, Corporate Counsel |                                                          |
|-------------------------------------|---------------------------------------------------------------|
|                                | Bristol West Insurance Company  of Philadelphia, Pennsylvania |
|                                     |                                                               |  |

 

 

In Independence, Ohio, this 12 day of August in theyear 2004.

 

 
| /s/ Alexis Oster, Corporate Counsel |                                                           |
|-------------------------------------|----------------------------------------------------------------|
|                                | Bristol West Casualty Insurance Company  of Independence, Ohio |
|                                     |                                                                |  |

 

 

In New York, New York, this 11 day of August in theyear 2004.

 

 
| /s/ Robert J. Coords, Attorney-in Fact |                                                                                   |
|----------------------------------------|----------------------------------------------------------------------------------------|
|                                   | National Union Fire Insurance Company of  Pittsburgh, Pa.  of Harrisburg, Pennsylvania |
|                                        |                                                                                        |  |

 

----

 

COAST NATIONAL INSURANCE COMPANY

SECURITY NATIONAL INSURANCE COMPANY

BRISTOL WEST INSURANCE COMPANY

BRISTOL WEST CASUALTY INSURANCE COMPANY

 

# QUOTA SHARE REINSURANCEAGREEMENT

 

Effective: January 1, 2005

 

TABLE OF CONTENTS

 
| **ARTICLE** |   | **SUBJECT** |                                | **PAGE** |
|-------------|--------|-------------|-------------------------------------|----------|
|        |   |        |                                |     |   |
| I           |   |        | Business  Covered                   |     | 1 |
| II          |   |        | Term  and Termination               |     | 1 |
| III         |   |        | Quota  Share Participation          |     | 1 |
| IV          |   |        | Territory                           |     | 1 |
| V           |   |        | Premium                             |     | 2 |
| VI          |   |        | Limit  of Liability                 |     | 2 |
| VII         |   |        | Ceding  Commission                  |     | 2 |
| VIII        |   |        | Fee  Income                         |     | 3 |
| IX          |   |        | Commutation                         |     | 3 |
| X           |   |        | Experience  Account Balance         |     | 3 |
| XI          |   |        | Reports  and Remittances            |     | 3 |
| XII         |   |        | Offset                              |     | 4 |
| XIII        |   |        | Agency/Combined  Results            |     | 4 |
| XIV         |   |        | Maximum  Subject Net Premium        |     | 4 |
| XV          |   |        | Cancellation  for Non-Payment       |     | 5 |
| XVI         |   |        | Cancellation  for Change in Control |     | 5 |
| XVII        |   |        | Special  Termination                |     | 6 |
| XVIII       |   |        | Exclusions                          |     | 6 |
| XIX         |   |        | Definitions                         |     | 7 |
| XX          |   |        | Loss  Settlements                   |     | 7 |
| XXI         |   |        | Net  Retained Lines Clause          |     | 8 |
| XXII        |   |        | No  Third Party Rights              |     | 8 |
| XXIII       |   |        | Errors  or Omissions                |     | 8 |
| XXIV        |   |        | Insolvency  Clause                  |     | 8 |
| XXV         |   |        | ECO  and Excess Limits Liability    |     | 9 |
| XXVI        |   |        | Access  to Records                  |     | 9 |
| XXVII       |   |        | Arbitration                         |     | 9 |
| XXVIII      |   |        | Governing  Law                      |     | 10 |
| XXIX        |   |        | Entire  Agreement/Interpretation    |     | 10 |

 

----

 

QUOTA SHARE REINSURANCE AGREEMENT

 

between

 

COAST NATIONAL INSURANCE COMPANY (“CoastNational”), a California domestic company, SECURITY NATIONAL INSURANCE COMPANY (“Security National”), a Florida domesticcompany,BRISTOL WEST INSURANCE COMPANY (“Bristol”), a Pennsylvania domestic company,BRISTOL WEST CASUALTY INSURANCE COMPANY (“Bristol”) an Ohio domestic company,(hereinafter called the “Company”)

 

and

 

THE PARTICIPANTS SUBSCRIBING TO THERESPECTIVEINTERESTS AND LIABILITIES AGREEMENTS TO WHICH THIS AGREEMENTIS ATTACHED(hereinafter called the “Reinsurer”)

 

## ARTICLE I

 

# BUSINESS COVERED

 

The Reinsurer hereby reinsures, subject to the limits and terms andconditions contained herein;

 

A Quota SharePercentage of the Company’s paid Ultimate Net Loss (“UNL”) of Loss Occurrenceson Policies attaching during the Term of this Agreement for Non-standard Autobusiness (“Policies”).  

 

## ARTICLE II

 

TERM AND TERMINATION

 

This Agreementshall commence at 12:01 a.m. Eastern Standard Time, January 1, 2005.  It shall remain in effect until 11:59 p.m.December 31, 2006.

 

## ARTICLE III

 

# QUOTA SHARE PARTICIPATION

 

The Company has the option to cede from 5% to 30% for Policiesattaching during Underwriting Years 2005 and 2006.  The Company shall notify the Reinsurer of the actual percentage,in writing, no later then 30 Business Days before January 1, 2005, withrespect to Underwriting Year 2005 and January 1, 2006, with respect toUnderwriting Year 2006.  In the eventthe Company fails to notify the Reinsurer, as provided herein, the Quota SharePercentage shall be 15%.

 

ARTICLE IV

 

# TERRITORY

 

This Agreement covers policies on risks located in the states of theUnited States in which the Company was writing business as of the effectivedate of this Agreement.  This Agreementwill cover risks located in  future newstates entered into by the Company, as listed on the attached schedule for2005 and 2006.  The Company shall notifythe Reinsurer and secure written consent from the Reinsurer of any changes tothe attached schedule.  Such consentshall not be unreasonably withheld.

 

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## ARTICLE V

 

# PREMIUM

 

The Company shallpay the Reinsurer its Quota Share Percentage of the Company’s Subject NetPremium written for the Business Covered hereinafter referred to as the “CededPremium.” Throughout this Agreement, the currency to be used is U.S. dollars.

 

ARTICLE VI

 

LIMIT OF LIABILITY

 

The maximum amountrecoverable for any one Underwriting Year shall be 150% of the Ceded Premiumfor that Underwriting Year subject to the third paragraph of this Article.

 

The maximum amountrecoverable for a Catastrophic Loss Occurrence shall be the Quota SharePercentage applicable of the product of .5% times the Subject Net Premiumwritten for the Underwriting Year in which the loss occurred.  The maximum amount recoverable for theaggregate of Catastrophic Loss Occurrences shall be the Quota Share Percentageapplicable of the product of .4% times the Subject Net Premium written for theterm of this Agreement.  For theavoidance of doubt, Terrorist Event shall be deemed a Catastrophic LossOccurrence.

 

Subject to theforegoing, the Reinsurer’s  liabilityshall be limited to  107% of theaggregate Ceded Premium for the term of this Agreement.

 

ARTICLE VII

 

CEDING COMMISSION

 

The Company shallreceive a commission equal to 38% of Ceded Premium.  This ceding commission is intended to cover  all acquisition costs, taxes and all otherexpenses of the Company,  except lossand loss adjustment expense.  Ifthe  Loss Ratio as of the end of anycalendar quarter ending on or after December 31, 2005 is greater than 72%,the Ceding Commission shall decrease by 1% for each 1% increase in the LossRatio over the 72% threshold; provided that the Ceding Commission shall notdecrease below  23% pursuant to thisparagraph.  If the  Loss Ratio as of the end of any calendarquarter ending on or after the commutation of this Agreement in accordance withArticle IX is less than 72%, the Ceding Commission shall increase by 1%for each 1% decrease in the Loss Ratio under the 72% threshold.  In the event the Ceding Commission decreasespursuant to this Article, the Company shall return to the Reinsurer the excessportion of Ceding Commission previously paid by the Reinsurer on the date ofdelivery of the next Loss Report.  Inthe event the Ceding Commission rate increases pursuant to this Article, theReinsurer shall pay to the Company the additional Ceding Commission on the dateof Commutation.

 

Effective on thecommencement of any calendar quarter, by giving 30 Business Days prior writtennotice, the Company has the option to increase or decrease the percent ofCeding Commission.  In such event theFee Income percentage is increased or decreased by the same amount.

 

On or afterDecember 31, 2007, if the Experience Account Balance is less than$10,000,000, the Ceding Commission shall immediately be reduced to the minimumceding commission of  23%, unless therehas been a Commutation in accordance with Article IX.

 

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ARTICLE VIII

 

FEE INCOME

 

On the date thatthe Ceded Premium is paid hereunder the Company shall pay the Reinsurer anamount equal to 13% of Ceded Premium, or the percent applicable of CededPremium if changed in accordance with the Ceding Commission Article.  For the avoidance of doubt this Fee Incomeis not a part of Ceded Premium.

 

ARTICLE IX

 

COMMUTATION

 

The Company may,at its sole option, commute this Agreement on or after December 31, 2006,or on the first or last business day of any month thereafter, by giving theReinsurer 30 Business Days prior written notice.  In such event, within 45 Business Days of Commutation theReinsurer shall pay the Company a Profit Commission equal to the ExperienceAccount Balance as of the end of the prior month, if positive.  Such payment shall be made within 45Business Days of the commutation date. Upon payment of the Profit Commission the Company shall fully andfinally release the Reinsurer from all past, present or future liabilitiesunder this Agreement.  

 

ARTICLE X

 

EXPERIENCE ACCOUNTBALANCE

 

At the end of eachcalendar quarter, the Reinsurer shall calculate and report to the Company anExperience Account Balance as follows:

 

(a) Ceded Earned Premium paid; plus

(b) Fee Income paid; less

(c )Ceding Commission; less

(d) Reinsurer’s Margin; less

(e) Ultimate Net Loss paid by the Reinsurer hereunder.

 

ARTICLE XI

 

REPORTS ANDREMITTANCES

 

Within 30 BusinessDays following the end of each calendar month, the Company shall provide awritten report (the “Loss Report”) to the Reinsurer, which shall include thefollowing data, in the aggregate as well as by each Relevant Company named:

 

1.  Subject Net Premium writtenand earned for the month.

2.  Cumulative Subject NetPremium written and earned.

3.  Ceded Net Premium writtenand earned for the month.

4.  Cumulative Ceded Net Premiumwritten and earned.

5.  Ceded Ultimate Net Loss paidby the Company during the quarter, separating Allocated Loss Adjustment Expenseand Unallocated Loss Adjustment Expense.

 

3

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6.  Ceded Cumulative UltimateNet Loss paid by the Company, separating Allocated Loss Adjustment Expense andUnallocated Loss Adjustment Expense.

 

7.  Ceded Ultimate Net Lossoutstanding including incurred but not reported amounts, separating AllocatedLoss Adjustment Expense and Unallocated Loss Adjustment Expense.

 

8.  Ceded unearned premium.

 

The Company shallpay the Ceded Earned Premium, net of Ceding Commission, plus Fee Income,simultaneous with the sending of the Loss Report.  Except as otherwise provided in Article VII, the Reinsurershall pay any net amounts owed hereunder within 30 Business Days of receivingthe Loss Report.

 

In the event oflate payments on any of the foregoing by either party interest shall accrue atan effective annual yield of 6% for the overdue period (the “Interest”).

 

Within 30 BusinessDays following the end of each calendar quarter, the Company shall provide awritten report to the Reinsurer that shall include actuarial data as mutuallyagreed.

 

ARTICLE XII

 

OFFSET

 

Each party heretoshall have, and may exercise at any time and from time to time, the right tooffset any undisputed balance or balances, whether on account of premiums or onaccount of losses, due from such party to the other (or, if more than one, anyother) party hereto under this Agreement and may offset the same against anyundisputed balance or balances due to the former from the latter under thesame  reinsurance agreement betweenthem, and the party asserting the right of offset shall have and may exercisesuch right whether any undisputed balance or balances due to such party fromthe other are on account of premiums or on account of losses and regardless ofthe capacity, whether as assuming insurer or as ceding insurer, in which eachparty acted under the agreement. 

 

For the avoidanceof doubt the Reinsurer’s liability shall be reduced by any amounts owed to theReinsurer by any Relevant Company.

 

ARTICLE XIII

 

AGENCY/COMBINEDRESULTS

 

It is agreed thatCoast National shall be the agent for the Company authorized to receive anypayments due the Company and/or any communication relating to thisAgreement.  Any payments made to CoastNational by the Reinsurer or communications given to Coast National by theReinsurer shall discharge the Reinsurer as to all Relevant Companies in thisAgreement.  All calculations, includingbut not limited to, Limit of Liability, Experience Account Balance shall be onthe combined sum of all Relevant Companies that are included as Company. 

 

ARTICLE XIV

 

MAXIMUM SUBJECTNET PREMIUM

 

It is agreed thatthe maximum Subject Net Premium written for the Company for Underwriting Years2005 and 2006 shall equal $925,000,000 and $1,100,000,000 respectively. 

 

It is agreed thatthe maximum Subject Net Premium written in the state of California forUnderwriting Years 2005 and 2006 shall equal $550,000,000 and $650,000,000respectively.

 

4

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It is agreed thatthe maximum Subject Net Premium written in the state of Florida forUnderwriting Years 2005 and 2006 shall equal $150,000,000 and $200,000,000respectively.

 

It is agreed thatthe maximum Subject Net Premium written in the state of Texas for UnderwritingYears 2005 and 2006 shall equal $50,000,000 and $100,000,000 respectively.

 

If at any time theCompany estimates that the maximum Subject Net Premium, as heretofore itemized,will be exceeded they may request a revision in writing and the Reinsurer shallrespond to that request in writing, within 30 days, with its approval ordenial.  However, this request cannot bemade for any Underwriting Year prior to the year of the request of change.  Such approval shall not be unreasonablywithheld.

 

In the event theaforementioned maximum Subject Net Premiums written for any individualUnderwriting Year are exceeded, the Quota Share Percentage applicable shall bethe quotient of (1) the product of (A) the Quota Share Percentage otherwiseapplicable times (B) the maximum Subject Net Premium written, divided by (2)the Subject Net Premium written.

 

ARTICLE XV

 

CANCELLATION FORNON-PAYMENT

 

If the Companyfails to pay Ceded Earned Premium when due to the Reinsurer, the Reinsurershall promptly notify the Company in writing of the balance due.  If the Company fails to remit payment withinthirty (30) Business Days including interest at a rate of 6% per annum on thebalance, then the Reinsurer shall have the right to cancel the Agreement on arun-off basis for Policies attaching prior to cancellation and the Limit ofLiability shall be reduced to Ceded Premium paid, plus Fee Income paid, net ofCeding Commission, less Reinsurer’s Margin, effective on the last day for whichpayment was received.  

 

ARTICLE XVI

 

CANCELLATION FORCHANGE IN CONTROL

 

In the event of aChange in Control , the Reinsurer or the Company has the option to cancelcoverage for the Relevant Company at the end of the calendar quarter in whichthe Change in Control occurred, or any subsequent quarter, on a cut-offbasis.  For the avoidance of doubt, inthe event of such cancellation, the Reinsurer shall have no further liabilityunder or related to this Agreement to the Relevant Company after thecancellation date.  For purposes of thisAgreement, Change of Control means any of the following: (i) the failure at anytime of Bristol West Holdings, Inc. (“Holdings”) to legally and beneficiallyown and control 100% of the issued and outstanding shares of capital stock ofeach Company or the failure at any time of Holdings to have the ability toelect all of the boards of directors of each Company; or (ii) any person (otherthan Kohlberg Kravis Roberts & Co. and Bristol West Associates LLC), eitherindividually or acting in concert with one or more other persons, shall haveacquired beneficial ownership, directly or indirectly, of securities ofHoldings (or other securities convertible into such securities) representing 51%or more of the combined voting power of all securities of Holdings entitled tovote in the election of members of the board of directors of Holdings.

 

Furthermore, inthe event this option is elected and after the cut-off of business for theRelevant Company or Relevant Companies, the combined surplus of the remainingCompanies would be less than 50% of the combined surplus of all RelevantCompanies as of December 31, 2004, the Reinsurer or the Companies has theoption to cancel the entire Agreement, at the end of such quarter or anysubsequent quarter, on a cut-off basis. For the avoidance of doubt, in the event of such cancellation, theReinsurer shall have no further liability under or related to this Agreement tothe Company.  In such event within 45 BusinessDays of such cancellation, the Reinsurer shall pay the Company a ProfitCommission equal to the positive Experience Account Balance, as of the end ofthe prior month, if any.

 

5

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ARTICLE XVII

 

SPECIALTERMINATION

 

1. This Agreementshall automatically terminate without the need for any action by any partyhereto in the event that any other party should at any time become insolvent,or suffer any impairment of contributed capital, or file a petition inbankruptcy, or enter liquidation, rehabilitation, or voluntary supervision, orhave a receiver appointed.

 

2. The Reinsurermay terminate this Agreement effective December 31, 2005 if the accidentyear 2005 loss ratio for that portion of the business that is covered and cededto the Reinsurer under this Agreement, measured as of September 30, 2005,is greater than 82%.  If the Reinsurerelects to exercise this option, it will notify the Company on or before December 1,2005.  In the event the Company does notagree with such loss ratio calculation, it will notify the Reinsurer within 5days of receipt of the Notice of Cancellation of its desire to have anindependent actuary, appointed jointly, to determine the loss ratio.  In the event the independent actuary’scalculation of such loss ratio is less than or equal to 82% the cancellationnotice shall be rescinded.  As used inthis paragraph only, the term “loss ratio” shall be based upon losses paid andoutstanding, and shall include Allocated Loss Adjustment Expenses, UnallocatedLoss Adjustment Expenses and incurred but not reported amounts.

 

3. The Reinsurermay terminate this Agreement in the event the Company’s combined PolicyholdersSurplus, as reported in their annual or quarterly statement in accordance withstatutory accounting policies and procedures, falls below 70% of the Company’scombined Policyholders Surplus as of December 31, 2004.  However, in the event the Company’s combinedPolicyholders Surplus increases to 80% of the Company’s combined PolicyholdersSurplus as of December 31, 2004 prior to the effective date ofcancellation, the cancellation notice shall be rescinded.

 

4.  If termination is effective under paragraph3, 30 Business Days notice shall be given. For termination under either paragraph 1, 2 or 3, the Reinsurer has theoption to run-off or cut off the in-force business.  In the event the Reinsurer elects to cut off the in-forcebusiness it shall return the unearned Ceded Premium, net of Ceding Commission,minus the net unpaid portion of the unearned Ceded Premium and it shall not beliable for any losses occurring after the effective date of cancellation.

 

ARTICLE XVIII

 

EXCLUSIONS

 

A. Any loss orliability accruing to the Company directly or indirectly from any insurancewritten by or through and Pool or Association including Pools or Associationsin which membership by the Company is required under any statutes orregulations (other than assigned risk automobile plans). 

 

B.  War Risks as excluded by War Risk ExclusionClauses appearing in original policies.

 

C.  Assumed Reinsurance of any kind, exceptpolicies written in Texas on County Mutual paper and reinsured by a RelevantCompany.

 

D.  Business excluded by the attached NuclearIncident Exclusion Clauses.

 

E.  All liability of the Company arising, bycontract, operation of law, or otherwise, from its participation or membership,whether voluntary or involuntary, in any insolvency fund.  “Insolvency fund” includes any guarantyfund, insolvency fund, plan, pool, association, fund or other arrangement,howsoever denominated, established or governed, which provides for anyassessment of or payment or assumption by the Company of part or all of anyclaim, debt, charge, fee or other obligation of an insurer, or its successorsor assigns,

 

6

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which has beendeclared by any competent authority to be insolvent, or which is otherwisedeemed unable to meet any claim, debt, charge, fee or other obligation in wholeor in part. 

 

ARTICLE XIX

 

DEFINITIONS

 

Allocated LossAdjustment Expense and Unallocated Loss Adjustment Expense shall be inaccordance with statutory accounting rules, as described in the NAIC AnnualStatement Instruction and other relevant publications.

 

Business Day shallmean any day other than aSaturday, Sunday or day on which banking institutions in the City of New Yorkare authorized by law or other governmental action to close.

 

Catastrophic LossOccurrence shall mean a loss from the same occurrence involving more than one risk.

 

Loss Ratio shallmean the Company’s ceded Ultimate Net Loss plus incurred but not reporteddivided by the ceded Subject Net Premium on the Business Covered.  This calculation shall be in the aggregatefrom inception and not for each individual Underwriting Year. 

 

Reinsurer’s Marginshall mean 3% of Ceded Premium.

 

Relevant Companyshall mean an individual company named as part of Company.

 

Subject NetPremiums shall mean the premium charged the insured, net of return premium, onthe Business Covered.  The Reinsurerunderstands that the current operating procedures of the Company results inless than 1% of Subject Net Premiums being uncollectible.  In the event that the Company’s operatingprocedures produce uncollectible premium, the amount of uncollectible premiumshall not exceed 2% of the otherwise Subject Net Premiums.

 

Ultimate Net Lossshall mean losses paid and outstanding and shall include Allocated LossAdjustment Expenses, plus Unallocated Loss Adjustment Expenses subject to alimit of 10% of Ceded Premium, plus 80% of the Reinsurer’s Quota SharePercentage of the first $3,000,000 of Extra Contractual Obligations and orExcess Limits Liability.

 

Underwriting Yearshall mean the 12-month period from January 1 until December 31, bothdays inclusive.  For the avoidance ofdoubt, all premiums on all Policies attaching during such period and the lossliability on those Policies shall be included for purposes of any calculationhereunder related to any Underwriting Year.

 

The definition ofoccurrence shall mean a numbered catastrophe by ISO’s Property Claim Services(PCS) , and also  shall include aTerrorist Event as defined in the Schedule A attached.

 

ARTICLE XX

 

LOSS SETTLEMENTS

 

The Company alone and at its full discretion shall adjust, settle orcompromise all claims and losses.  Allsuch adjustments, settlements, and compromises, including ex gratia payments,shall be binding on the Reinsurer in proportion to its participation.  Ex gratia payments include only thosepayments made to settle a loss or claim covered under the Company’s underlyinginsurance policy for purposes of avoiding the costs of a lawsuit. Under nocircumstances will the Company make a payment for a claim or loss not coveredunder the Company’s underlying insurance policy. The Company shall likewise atits sole discretion commence, continue, defend, compromise, settle or withdrawfrom actions, suits or proceedings and

 

7

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generally do all such matters and things relating to any claim or lossas in its judgment may be beneficial or expedient, and all payments made andcosts and expenses incurred in connection therewith or in taking legal advicetherefore.  The Reinsurer shall receivecredit for their pro-rata share of all salvage and subrogation received by theCompany.  In the event the Company shallfail or neglect to do so, the Reinsurer is hereby authorized and empowered tobring any appropriate action in the name of the Company to enforce any rightsof subrogation.

 

ARTICLE XXI

 

NET RETAINED LINESCLAUSE

 

This Agreementapplies only to that portion of any insurance or reinsurance which the companyretains net for its own account.

 

ARTICLE XXII

 

NO THIRD PARTYRIGHTS

 

No parties, otherthan the Company and the Reinsurer, shall have any rights under this Agreementunless specifically stated herein.

 

ARTICLE XXIII

 

ERRORS OROMISSIONS

 

Any inadvertentdelay, omission or error shall not relieve either party hereto from anyliability which would attach to it hereunder if such delay, omission or errorhad not been made, provided such delay, omission or error is rectifiedimmediately upon discovery. 

 

ARTICLE XXIV

 

INSOLVENCY CLAUSE

 

In the eventof  insolvency  and the appointment of a conservator, liquidator, or statutorysuccessor of the Companythe portion of any risk or obligation assumed by theReinsurer  shall be payable  to the conservator,  liquidator, or statutory successor  on thebasis of claims allowed against the insolvent Company by any court of competentjurisdiction or by any conservator, liquidator, or statutory successor of theCompany having the authority to allow such claims,  without diminution because of that insolvency , or because theconservator, liquidator, or statutory successor  has failed to pay all or a portion of any claims.  It is agreed, however, that the conservator,liquidator,  or statutory successor ofthe Company shall give written notice to the Reinsurers of the pendency of aclaim against the Company which would involve a possible liability on the partof the Reinsurers, indicating the policy or bond reinsured, within a reasonabletime after such claim is filed in the conservation or liquidation proceeding orin the receivership.  It is furtheragreed that during the pendency of such claim the Reinsurers may investigatesuch claim and interpose, at their own expense, in the proceeding where suchclaim is to be adjudicated, any defense or defenses that they may deemavailable to the Company or its conservator, liquidator,  or statutory successor.  The expense thus incurred by the Reinsurersshall be chargeable, subject to the approval of the Court, against the Companyas part of the expense of conservation or liquidation to the extent of a prorata share of the benefit which may accrue to the Company solely as a result ofthe defense undertaken by the Reinsurers.

 

Where two or moreReinsurers are involved in the same claim and a majority in interest elect tointerpose defense to such claim, the expense shall be apportioned in accordancewith the terms of the Agreement as though such expense had been incurred by theCompany.

 

8

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## ARTICLE XXV

 

EXTRA CONTRACTUALOBLIGATIONS AND EXCESS LIMITS LIABILITY

 

This Agreementwill extend to cover any claims-related extra contractual obligations and/orexcess limits liability arising because of, but not limited to, the following:

 

A.  Failure of the Company toagree to pay a claim within the policy limits or to provide a defense againstsuch claims.

 

B.  Actual or alleged bad faith,fraud, or negligence in investigating or handling a claim or in rejecting anoffer of settlement.

 

C.  Negligence or breach of dutyin the preparation of the defense or the conduct of a trial or the preparationor prosecution of any appeal and/or subrogation and/or any subsequent actionresulting therefrom.

 

“Extra contractualobligation” as used in this Agreement will mean those liabilities not coveredunder any other provision of this Agreement for which the Company is liable toits insured or a third-party claimant, or that the Company paid as its share ofa claims-related extra contractual obligation awarded against one or more ofits co-insurers.

 

“Excess limitsliability” as used in this Agreement will mean any amount for which the Companywould have been contractually liable to pay had it not been for the limits ofthe reinsured policy.

 

There will be norecovery hereunder where the extra contractual obligation or excess limitsliability has been incurred due to fraud committed by a member of the board ofdirectors or a corporate officer of the Company, acting individually,collectively, or in collusion with a member of the board of directors, acorporate officer, or a partner of any other corporation, partnership, ororganization involved in the defense or settlement of a claim on behalf of theCompany.

 

The date on whichany extra contractual obligation and/or excess limits liability is incurred bythe Company will be deemed, in all circumstances, to be the date of theoriginal loss.  Nothing in thisArticle will be construed to create a separate or distinct loss apart fromthe original covered loss that gave rise to the extra contractual obligationsand/or excess limits liability discussed in the preceding paragraphs.  The Reinsurers’ liability as respects extracontractual obligations and/or excess limits liability under the Agreement willbe in addition to the indemnification coverage set. 

 

ARTICLE XXVI

 

# ACCESS TO RECORDS

 

The Reinsurer orits designated representative shall have access to the books and records of theCompany at all reasonable times for the purpose of obtaining information, whichpertains in any way to this reinsurance. This clause shall survive termination of this Agreement.

 

ARTICLE XXVII

 

ARBITRATION

 

As a condition precedent to any right of action hereunder, any disputearising out of the interpretation, performance, or breach of this Contract,including the formation or validity thereof, shall be submitted for decision toa panel of three arbitrators.  Noticerequesting arbitration will be in writing and sent certified or registeredmail, return receipt requested.

 

9

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Each party shall choose one arbitrator and the two arbitrators shall,before instituting the hearing, choose an impartial third arbitrator who shallpreside at the hearing.  If either partyfails to appoint the arbitrator within thirty (30) days after being requestedto do so by the other party, the latter, after ten (10) days notice bycertified or registered mail of its intention to do so, may appoint the secondarbitrator.

 

If the two arbitrators are unable to agree upon the third arbitratorwithin thirty (30) days of their appointment, the third arbitrator will bechosen by ARIAS US.  All arbitratorsshall be disinterested active or former executives officers of insurance orreinsurance companies or Underwriters at Lloyd’s London.

 

Within thirty (30) days after notice of appointment of all arbitrators,the panel shall meet and determine timely periods for briefs, discoveryprocedures and schedules for hearings. The panel shall be relieved of all judicial formality and shall not bebound by the strict rules of procedure and evidence.  Unless the panel agrees otherwise, the arbitration will takeplace in New York, but the venue may be changed when deemed by the panel to beto be in the best interest of the arbitration proceeding.  The decision rendered by a majority of thearbitrators shall be final and binding on both parties.  The panel shall make its decisionconsidering the custom and practice of the applicable insurance and reinsurancebusiness as promptly as possible following the termination of thehearings.  Judgment upon the award maybe entered in any court having jurisdiction thereof.

 

Eachparty shall bear the expense of its own arbitrator and shall jointly andequally bear with the other party the cost of the third arbitrator.  The remaining costs of the arbitration shallbe divided equally between the parties.

 

Ifmore than one reinsurer is involved in the same dispute, all such reinsurersshall constitute and act as one party for purposes of this clause, andcommunications shall be made by the Company to each of the reinsurersconstituting the one party provided, however, that nothing therein shall impairthe rights of such reinsures to assert several rather than joint defenses orclaims, nor be construed as changing the liability of the reinsurers under theterms of this contract from several to joint.

 

ARTICLE XXVIII

 

# GOVERNING LAW

 

This Agreement shallbe interpreted and governed by the laws of New York without regard to thatjurisdiction’s rules with respect to conflicts of laws.

 

ARTICLE XXIX

 

ENTIREAGREEMENT/INTERPRETATION

 

With respect tothe business being reinsured hereunder, “i” this Agreement constitutes theentire agreement between the parties, and “ii” there are no understandings oragreements between the parties other than those expressed in thisAgreement.  Any change to ormodification of this Agreement will be made by written amendment to thisAgreement and signed by the parties hereto.

 

This Agreement isbetween sophisticated parties, each of which has reviewed the Agreement and isfully knowledgeable about its terms and conditions.  The parties therefore agree that this Agreement shall beconstrued without regard to the authorship of the language and without anypresumption or rule of construction in favor of either of them.

 

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