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                             CERTIFICATE OF DESIGNATIONS

                                          OF

               SERIES B JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK

                                          OF

                                   PAULA FINANCIAL


           (Pursuant to Section 151 of the Delaware General Corporation Law)

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     PAULA Financial, a Delaware corporation (the "Company"), hereby certifies
that the following resolution was adopted by the Board of Directors of the
Company as required by Section 151 of the General Corporation Law at a meeting
duly called and held on September 24, 1998.

     RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Company (the "Board of Directors" or the "Board") in
accordance with the provisions of the Certificate of Incorporation, the Board of
Directors hereby creates a series of preferred stock of the Company and hereby
states the designation and number of shares, and fixes the relative rights,
preferences and limitations thereof as follows:

     SERIES B JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK:

     Section 1.  DESIGNATION AND AMOUNT.  The shares of such series shall be
designated as "Series B Junior Participating Cumulative Preferred Stock" (the
"Series B Preferred Stock") and the number of shares constituting the Series B
Preferred Stock shall be 63,339.  Such number of shares may be increased or
decreased by resolution of the Board of Directors; PROVIDED, HOWEVER, that no
decrease shall reduce the number of shares of Series B Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Company convertible into Series B Preferred Stock.

     Section 2.  DIVIDENDS AND DISTRIBUTIONS.

     (a)  Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
B Preferred Stock with respect to dividends, the holders of shares of Series B
Preferred Stock, in preference to the holders of shares of Common Stock, par
value $0.01 per share (the "Common Stock"), of the Company, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September and
December in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series B Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (i) $.25 per share ($1.00 per annum) or (ii) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share amount of
all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series B Preferred Stock.  In the event the
Company shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser


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number of shares of Common Stock, then in each such event the amount to which
the holder of each share of Series B Preferred Stock was entitled immediately
prior to such event under clause (ii) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event, and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

     (b)  The Company shall declare a dividend or distribution on the Series B
Preferred Stock as provided in paragraph (a) of this Section 2 immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); PROVIDED, HOWEVER, that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.25 per share ($1.00
per annum) on the Series B Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.

     (c)  Dividends shall begin to accrue and be cumulative on outstanding
shares of Series B Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which event dividends on such shares shall begin to accrue from the
date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of Series B Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date.  Accrued but unpaid dividends shall cumulate
but shall not bear interest.  Dividends paid on the shares of Series B Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding.  The Board
of Directors may fix a record date for the determination of holders of shares of
Series B Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.

     Section 3.  VOTING RIGHTS.  The holders of shares of Series B Preferred
Stock shall have the following voting rights:

     (a)  Subject to the provision for adjustment hereinafter set forth, each
share of Series B Preferred Stock shall entitle the holder thereof to one
hundred (100) votes on all matters submitted to a vote of the stockholders of
the Company.

     (b)  Except as otherwise provided herein, in the Certificate of
Incorporation, in any other Certificate of Designations creating a series of
preferred stock or any similar stock or by law, the holders of shares of Series
B Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Company having general voting rights shall vote together as
one class on all matters submitted to a vote of stockholders of the Company.


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     (c)  Except as set forth herein, or as otherwise provided by law, holders
of Series B Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.

     Section 4.  CERTAIN RESTRICTIONS.

     (a)  Whenever quarterly dividends or other dividends or distributions
payable on the Series B Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series B Preferred Stock outstanding shall have
been paid in full, the Company shall not, directly or indirectly:

          (i)   declare or pay dividends on, or make any other distributions
with respect to any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series B Preferred Stock;

          (ii)  declare or pay dividends on, or make any other distributions
with respect to any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series B Preferred
Stock, except dividends paid ratably on the Series B Preferred Stock and all
such parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then entitled;

          (iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series B Preferred Stock, provided that the
Company may at any time redeem, purchase or otherwise acquire shares of any such
junior stock in exchange for shares of any stock of the Company ranking junior
(either as to dividends or upon dissolution, liquidation or winding up) to the
Series B Preferred Stock; or

          (iv)  redeem or purchase or otherwise acquire for consideration any
shares of Series B Preferred Stock, or any shares of stock ranking on a parity
with the Series B Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective Series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.

     (b)  The Company shall not permit any subsidiary of the Company to purchase
or otherwise acquire for consideration, directly or indirectly, any shares of
stock of the Company unless the Company could, under paragraph (a) of this
Section 4, purchase or otherwise acquire such shares at such time and in such
manner.

     Section 5.  REACQUIRED SHARES.  Any shares of Series B Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof.  All such shares
shall upon their cancellation become authorized but unissued shares of preferred
stock and may be reissued as part of a new series of


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preferred stock subject to the conditions and restrictions on issuance set forth
herein, in the Certificate of Incorporation, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock or as
otherwise required by law.

     Section 6.  LIQUIDATION, DISSOLUTION OR WINDING UP.  Upon any liquidation,
dissolution or winding up of the Company, no distribution shall be made to:  (i)
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series B Preferred Stock unless,
prior thereto, the holders of shares of Series B Preferred Stock shall have
received the greater of (A) $1.00 per share ($.01 per one one-hundredth of a
share), plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, or (B) an
aggregate amount per share, subject to the provision for adjustment hereinafter
set forth, equal to 100 times the aggregate amount to be distributed per share
to holders of shares of Common Stock; or (ii) the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series B Preferred Stock, except distributions made ratably
on the Series B Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up.

     In the event the Company shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such event the aggregate amount to which each holder of a share of Series B
Preferred Stock was entitled immediately prior to such event under the proviso
in clause (i) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event, and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.

     Section 7.  CONSOLIDATION, MERGER OR OTHER.  In the event the Company shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, or otherwise changed, then in any
such event each share of Series B Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the aggregate
amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is
changed or exchanged.  In the event the Company shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such event the amount set forth in the preceding sentence with respect
to the exchange or change of shares of Series B Preferred Stock shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event, and


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the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.

     Section 8.  NO REDEMPTION.  The shares of Series B Preferred Stock shall
not be redeemable.

     Section 9.  RANK.  The Series B Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the Company's preferred stock whether issued before or after
the issuance of the Series B Preferred Stock.

     Section 10.  AMENDMENT.  The Certificate of Incorporation of the Company
shall not be amended in any manner that would materially alter or change the
powers, preferences or special rights of the Series B Preferred Stock without
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of Series B Preferred Stock, voting together as a single class.

     IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf
of the Company by a Senior Vice President of the Company this 28th day of
September, 1998.

                                          By:  /s/ Bradley K. Serwin
                                               -----------------------
                                         Name:  Bradley K. Serwin
                                         Title: Senior Vice President







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