<PAGE>

                 WORKERS' COMPENSATION AND EMPLOYER'S LIABILITY
                         QUOTA SHARE REINSURANCE CONTRACT
                            EFFECTIVE: JULY 1, 2000

                                    issued to

                            PAULA Insurance Company
                              Pasadena, California



<PAGE>


                                 TABLE OF CONTENTS

<TABLE>
<CAPTION>

ARTICLE                                                                PAGE
<S>                                                                    <C>
ARTICLE I -  CLASSES OF BUSINESS REINSURED                                1

ARTICLE II - COMMENCEMENT AND TERMINATION                                 2

ARTICLE III -  TERRITORY (BRMA 51A)                                       3

ARTICLE IV -  EXCLUSIONS                                                  3

ARTICLE V -  RETENTION AND LIMIT                                          5

ARTICLE VI -  DEFINITIONS                                                 6

ARTICLE VII -  OTHER REINSURANCE                                          7

ARTICLE VIII -  CLAIMS                                                    8

ARTICLE IX -  SALVAGE AND SUBROGATION                                     8

ARTICLE X -  ORIGINAL CONDITIONS                                          8

ARTICLE XI -  CEDING COMMISSION                                           9

ARTICLE XII -  REPORTS AND REMITTANCES                                    9

ARTICLE XIII -  LATE PAYMENTS                                             9

ARTICLE XIV -  OFFSET (BRMA 36C)                                         10

ARTICLE XV -  ACCESS TO RECORDS (BRMA 1D)                                10

ARTICLE XVI -  ERRORS AND OMISSIONS (BRMA 14F)                           10

ARTICLE XVII -  TAXES (BRMA 50B)                                         10

ARTICLE XVIII -  UNAUTHORIZED REINSURERS                                 11

ARTICLE XIX -  INSOLVENCY                                                12

ARTICLE XX -  ARBITRATION                                                13

</TABLE>


<PAGE>


                 WORKERS' COMPENSATION AND EMPLOYER'S LIABILITY
                        QUOTA SHARE REINSURANCE CONTRACT
                            EFFECTIVE: JULY 1, 2000

                                   issued to

                            PAULA Insurance Company
                             Pasadena, California
                     (HEREINAFTER REFERRED TO AS THE "Company")

                                       by

         Insurance Corporation of Hannover, An Illinois Corporation,
                            Los Angeles, California
                 (HEREINAFTER REFERRED TO AS THE "Reinsurer")



ARTICLE I - CLASSES OF BUSINESS REINSURED

A.   By this Contract the Company obligates itself to cede to the Reinsurer
     and the Reinsurer obligates itself to accept quota share reinsurance of
     the Company's net liability under policies, contracts and binders of
     insurance (hereunder called "policies") issued or renewed on or after
     January 1, 2000 as of the effective date hereof, and classified by the
     Company as Workers' Compensation and Employer's Liability business.

B.   "Net liability" as used herein is defined as the Company's gross
     liability remaining after any other reinsurance, as per attached Schedule
     A.

C.   The liability of the Reinsurer with respect to each cession hereunder
     shall commence obligatorily and simultaneously with that of the
     Company, subject to the terms, conditions and limitations hereinafter
     set forth.

D.   "Workers' Compensation and Employer's Liability" as used herein shall
     include business written on a standard Workers' Compensation form of
     policy, insuring the liability imposed by the Workers' Compensation Acts
     and United States Longshore and Harbor Workers' Act, or similar acts or
     laws.


                                  Page 1
<PAGE>

ARTICLE II - COMMENCEMENT AND TERMINATION

A.   This Contract shall become effective on July 1, 2000, with respect to
     losses occurring on or after that date under policies allocated to
     underwriting years commencing on January 1, 2000, and shall continue in
     force thereafter until terminated.

B.   Either party may terminate this Contract on any December 31 but not
     before December 31 2001, by giving the other party not less than 90 days
     prior notice by certified mail.

C.   Notwithstanding paragraph B above, either the Company or the Reinsurer
     may terminate this Contract at any time by the giving of 30 days notice
     in writing to the other party upon the happening of any one of the
     following circumstances:

     (a)  A State Insurance Department or other legal authority orders the
     other party to cease writing business, or

     (b)  One party has become insolvent or has been placed into liquidation
     or receivership (whether voluntary or involuntary), or there has been
     instituted against it proceedings for the appointment of a receiver,
     liquidator, rehabilitator, conservator, or trustee in bankruptcy, or
     other agent known by whatever name, to take possession of its assets or
     control of its operations, or

     (c)  One party's policyholders' surplus has been reduced by whichever
     is greater, either 25% of the amount of surplus at the inception of this
     Contract or 25% of the amount at the latest year end, or

     (d)  One party has become merged with, acquired or controlled by any
     company, corporation or individual(s) not controlling the party's
     operations previously, or

     (e)  One party has reinsured its entire liability under this Contract
     without the terminating party's prior written consent.

     In the event of such termination, the liability of the Reinsurer shall
     be terminated in accordance with the termination provisions of this
     Contract.

D.   In the event of the termination of this Contract the Reinsurer shall be
     relieved of all liability hereunder for losses occurring subsequent to
     termination of this Contract.

E.  "Underwriting year" as used herein shall mean the period from January 1,
     2000, through December 31, 2000, and each subsequent 13-month period
     shall be a separate underwriting year. However, if this Contract is
     terminated, the final underwriting year shall be from the beginning of
     the then current underwriting year through the effective date of
     termination. All premiums and losses from policies allocated to an
     underwriting year shall be credited or charged, respectively, to such
     underwriting year, regardless of the date said premiums earn or such
     losses occur. It is understood that a policy will be allocated to the
     underwriting year which is in effect as of:

                                   Page 2

<PAGE>

     1.  As respects all new policies, the effective date of such policies;

     2.  As respects renewals of policies, the renewal date of such policies;

     Such policies shall remain in the same underwriting year, as originally
     allocated, until the next renewal date or premium anniversary date, at
     which time such policies shall be reallocated to the underwriting year
     in effect as of such date as provided in subparagraph 2 above.

ARTICLE III - TERRITORY (BRMA 51A)

The territorial limits of this Contract shall be identical with those of the
Company's policies.

ARTICLE IV - EXCLUSIONS

A.   This Contract does not apply to and specifically excludes the
     following:

     1.  All reinsurance assumed by the Company, except for reinsurance
         assumptions of 100% of the liability arising from primary policies
         of NMRA-SIG and Fairfield.

     2.  Financial guarantee and insolvency.

     3.  Business written by the Company on a co-indemnity basis where the
         Company is not the controlling carrier.

     4.  Business written to apply in excess of a deductible of more than
         $5,000, and business issued to apply specifically in excess over
         underlying insurance.

     5.  Nuclear risks as defined in the "Nuclear Incident Exclusion Clause -
         Liability - Reinsurance" attached to and forming part of this
         Contract.

     6.  Liability as a member, subscriber or reinsurer of any Pool,
         Syndicate or Association, but this exclusion shall not apply to
         Assigned Risk Plans or similar plans.

     7.  All liability of the Company arising by contract, operation of law,
         or otherwise, from its participation or membership, where voluntary
         or involuntary, in any insolvency fund. "Insolvency fund" includes
         any guaranty fund, insolvency fund, plan, pool, association, fund or
         other arrangement, however denominated, established or governed,
         which provides for any assessment of or payment or assumption by the
         Company of part or all of any claim, debt, charge, fee or other
         obligation of any insurer, or its successors or assigns, which has
         been declared by any competent authority to be insolvent, or which
         is otherwise deemed unable to meet any claim, debt, charge, fee or
         other obligation in whole or in part.

                                   Page 3
<PAGE>


     8.  Workers' Compensation where the principal exposures include:

         a.  Operation of aircraft;

         b.  Operation of a carrier on rails;

         c.  Operation or navigation of vessels or barges over 26 feet in
             overall length;

         d.  Repair, cleaning or demolition of vessels or barges used for
             transporting petroleum;

         e.  Stevedoring;

         f.  Oil or natural gas drilling, refining or salvage operations
             and/or oil well shooting;

         g.  Manufacturing, storage, distribution and/or transportation of
             natural or artificial gas;

         h.  Manufacturing, packing, storage, handling, distribution and/or
             transportation of explosives, explosive substances manufactured
             for the express purpose of exploding, ammunition, fuses,
             fireworks, magnesium, celluloid or pyroxylin;

         i.  Construction or maintenance of subways or tunnels more than 50
             feet long and/or subaqueous work under pressure;

         j.  Wrecking or demolition of structures over three stories or 50
             feet high;

         k.  Steeple or chimney shaft work, or construction of towers over 50
             feet high;

         l.  Underground mining;

         m.  Motion picture production;

         n.  Operation of baths, gymnasiums, health clubs and/or reducing
             salons;

         o.  Conventions, fairs, rodeos, speed contests and/or races;

         p.  Operation of amusement parks, circuses, carnivals and/or devices
             used in conjunction therewith;

         q.  Operation of grandstands, exhibition buildings, stadiums,
             baseball parks, theaters and/or skating rinks;


                                    Page 4
<PAGE>


     9.  Liability arising out of the Employee Retirement Income Security Act
         of 1974 and/or any amendments thereto;

     10. Manufacturing, packing, storage, handling, distribution, removal
         and/or transportation of asbestos or asbestos products.

B.   Notwithstanding the foregoing, any reinsurance falling within the scope
     of one or more of the exclusions set forth in subparagraph 8 of
     paragraph A that is specially accepted by the Reinsurer from the Company
     shall be covered under this Contract and be subject to the terms hereof,
     except as such terms shall be modified by the special acceptance.
     Furthermore, any exclusion set forth in subparagraph 8 of paragraph A
     shall be waived automatically when, in the opinion of the Company, the
     exposure excluded therein is incidental to the principal exposure on the
     risk in question, not exceeding 10% of total payroll.

C.   If the Company is bound, without the knowledge and contrary to the
     instructions of the Company's supervisory underwriting personnel, on any
     business falling within the scope of one or more of the exclusions set
     forth in subparagraph 8 of paragraph A, the exclusion shall be
     suspended with respect to such business until 30 days after an
     underwriting supervisor of the Company acquires knowledge thereof.

D.   If the Company is required to accept an assigned risk which conflicts
     with one or more of the exclusions set forth in subparagraph 8 of
     paragraph A, reinsurance shall apply, but in no event shall the
     Reinsurer's liability exceed the applicable limits set forth in Article
     V.

ARTICLE V - RETENTION AND LIMIT

A.   As respects business subject to this Contract, the Company shall cede to
     the Reinsurer and the Reinsurer agrees to accept no less than 10% and no
     more than 25% of the Company's net earned premium and liability for
     ultimate net loss (as defined in paragraph A of Article VI). The Company
     shall determine the cession percentage and provide notice of same to the
     Reinsurer by December 15 of each underwriting year.

B.   In addition to its initial retention, the Company shall retain an amount
     of its net liability for loss which would be ceded hereunder to the
     Reinsurer were it not for the provisions of this paragraph. Said
     additional retention (hereinafter referred to as the "loss corridor")
     shall be applied to each underwriting year and shall be 100% of the
     amount of losses incurred (as defined in Article VI, subparagraph D) for
     the underwriting year under consideration greater than 80.0% of premiums
     earned (as defined in Article VI, subparagraph E), but less than 90.0%
     of premiums earned for the underwriting year. The loss corridor shall
     not exceed an amount equal to 10.0% of premiums earned for the
     underwriting year.


                                    Page 5
<PAGE>


C.   Notwithstanding the provisions of paragraph A above, the maximum cession
     to Reinsurer is limited to $20,000,000 of premium, for any Underwriting
     year, except for the Underwriting year 2000 where the maximum cession to
     Reinsurer is limited to $12,500,000 of premium.

ARTICLE VI - DEFINITIONS

A.   "Ultimate net loss" as used herein is defined as the sum or sums
     (including loss in excess of policy limits, extra contractual obligations
     and loss adjustment expense, as hereinafter defined) paid or payable by
     the Company in settlement of claims and in satisfaction of judgments
     rendered on account of such claims, including the Company's Medical and
     Indemnity loss, after deduction of all salvage, all recoveries and all
     claims on inuring insurance or reinsurance, whether collectible or not.
     Nothing here shall be construed to mean that losses under this Contract
     are not recoverable until the Company's ultimate net loss had been
     ascertained. The Reinsurer will not be liable for amounts in excess of
     its share of the net liability (as defined in paragraph B of Article I).

B.   "Loss in excess of policy limits" and "extra contractual obligations" as
     used herein shall be defined as follows:

     1.  "Loss in excess of policy limits" shall mean 100% of any amount paid
         or payable by the Company in excess of its policy limits, but
         otherwise within the terms of its policy, as a result of an action
         against it by its insured or its insured's assignee to recover
         damages the insured is legally obligated to pay to a third party
         claimant because of the Company's alleged or actual negligence or
         bad faith in rejecting a settlement within policy limits, or in
         discharging its duty to defend or prepare the defense in the trial
         of an action against its insured, or in discharging its duty to
         prepare or prosecute an appeal consequent upon such an action.

     2.  "Extra contractual obligations" shall mean 100% of any punitive,
         exemplary, compensatory or consequential damages, other than loss in
         excess of policy limits, paid or payable by the Company as a result
         of an action against it by its insured, its insured's assignee or a
         third party claimant, which action alleges negligence or bad faith
         on the part of the Company in handling a claim under a policy
         subject to this Contract. An extra contractual obligation shall be
         deemed to have occurred on the same date as the loss covered or
         alleged to be covered under the policy.

     Notwithstanding anything stated herein, this Contract shall not apply to
     any loss in excess of policy limits or any extra contractual obligation
     incurred by the Company as the result of any fraudulent and/or criminal
     act by any officer or director of the Company acting individually or
     collectively or in collusion with any individual or corporation or any
     other organization or party involved in the presentation, defense or
     settlement of any claim covered hereunder.

C.   "Loss adjustment expense" as used herein shall mean all costs and
     expenses assignable to a specific claim that are incurred by the Company
     in the investigation, appraisal, adjustment, settlement, litigation,
     defense or appeal of a specific claim, regardless of how such expenses


                                    Page 6
<PAGE>

     are classified for statutory reporting purposes. Loss adjustment expense
     shall include, but not be limited to, the following:

     1.  Court costs and costs of supersedeas and appeal bonds;

     2.  Prejudgment interest, unless included as part of the award or
         judgment;

     3.  Post-judgment interest; and

     4.  Claim specific costs and expenses which are the result of actions
         and/or disputes between the original insured and the Company.

D.   "Losses incurred" as used herein shall mean ceded losses and loss
     adjustment expense paid as of the effective date of calculation, plus
     the ceded reserves for losses and loss adjustment expense outstanding as
     of the same date, all as respects business subject to this Contract,
     other than business classified by the Company dividend plan business. It
     is understood and agreed that all losses and related loss adjustment
     expense under policies allocated to an underwriting year shall be
     charged to that underwriting year, regardless of the date said losses
     actually occur, unless this Contract is terminated on a "cut-off" basis,
     in which event the Reinsurer shall have no liability for losses
     occurring after the effective date of termination. It is understood that
     losses retained by the Company pursuant to the loss retention corridor
     provisions of Article V shall be included in "loss incurred" as respects
     calculation of the loss retention corridor.

E.   "Premiums earned" as used herein shall mean ceded net written premium
     collected for policies allocated to the underwriting year, less the
     unearned portion thereof as of the effective date of calculation, less
     the earned portion of premiums paid for inuring excess of loss
     reinsurance for the underwriting year, all as respects business subject
     to this Contract. It is understood and agreed that all premiums for
     policies allocated to an underwriting year shall be credited to that
     underwriting year, unless this Contract is terminated on a "cut-off"
     basis, in which event the ceded unearned premium remains with the
     Company.


ARTICLE VI - OTHER REINSURANCE

A.   The Company shall maintain in force excess of loss reinsurance and
     inuring reinsurance, recoveries under which shall inure to the benefit
     of this Contract.

B.   The Company shall not have any other quota share reinsurance and retain
     the retention net and unreinsured.

C.   The inuring reinsurance is detailed in Schedule A, attached and forming
     part of this contract. Changes in the inuring reinsurance will be
     advised to Reinsurer and Schedule A modified as necessary.


                                  Page 7


<PAGE>


ARTICLE VIII - CLAIMS

A.   Losses shall be reported by the Company, in summary form as hereinafter
     provided, but the Company shall notify the Reinsurer immediately when a
     specific case involves unusual circumstances or large loss possibilities
     or when the claim exceeds $75,000 in payments plus case reserves.
     Further, the Company, shall notify the Reinsurer whenever a claim
     involves a fatality, amputation, spinal cord damage, brain damage,
     blindness, extensive burns or multiple fractures, regardless of
     liability. The Reinsurer shall have the right to participate, at its
     own expense, in the defense or control of any claim or suit or
     proceeding involving these specifically-reported claims.

B.   All loss settlements made by the Company, whether under strict policy
     conditions or by way of compromise, shall be binding upon the Reinsurer,
     and the Reinsurer agrees to pay or allow, as the case may be, its
     proportion of each such settlement in accordance with Article XII. It is
     agreed, however, that if the Reinsurer's share of any loss is equal to
     or greater than $100,000, the Reinsurer will pay its share of said loss
     as promptly as possible after receipt of reasonable evidence of the
     amount paid by or on behalf of the Company.


ARTICLE IX - SALVAGE AND SUBROGATION

The Reinsurer shall be credited with its proportionate share of salvage
(i.e., reimbursement obtained or recovery made by the Company, less the
actual cost, excluding salaries of officials and employees of the Company and
sums paid to attorneys as retainer, of obtaining such reimbursement or making
such recovery) on account of claims and settlements involving reinsurance
hereunder. The Company hereby agrees to enforce its rights to salvage or
subrogation relating to any loss, a part of which loss was sustained by the
Reinsurer, and to prosecute all claims arising out of such rights.


ARTICLE X - ORIGINAL CONDITIONS

A.   All reinsurance under this Contract shall be subject to the same rates,
     terms, conditions, waivers and interpretations and to the same
     modifications and alterations as the respective policies of the Company.
     However, in no event shall this be construed in any way to provide
     coverage outside the terms and conditions set forth in this Contract.
     The Reinsurer shall be credited with its exact proportion of the
     original premiums received by the Company.

B.   Nothing herein shall in any manner create any obligations or establish
     any rights against the Reinsurer in favor of any third party or any
     persons not parties to this Contract.


                                  Page 8


<PAGE>

ARTICLE XI - CEDING COMMISSION

A.   The Reinsurer shall allow the Company a __% ceding commission on all
     premiums ceded to the Reinsurer hereunder. The Company shall allow the
     Reinsurer return commission on return premiums at the same rate.

B.   It is expressly agreed that the ceding commission allowed the Company
     includes provision for all dividends, commissions, taxes, assessments,
     and all other expenses of whatever nature, including unallocated loss
     adjustment expenses.


ARTICLE XII - REPORTS AND REMITTANCES

A.   Within 45 days after the end of each month, the Company shall report to
     the Reinsurer:

     1.  Ceded net earned premium for the month;

     2.  Ceding commission thereon;

     3.  Ceded losses and loss adjustment expense paid during the month (net
         of any recoveries during the month under the "cash call" provisions
         of Article VIII),

     4.  Pro rata portion of inuring excess of loss reinsurance premiums, if
         any, due for the month, including premium equivalents (i.e. amounts
         paid under the Annual Aggregate Deductible per Schedule A).


     The positive balance of (1) less (2) less (3) less (4) shall be remitted
     by the Company with its report. Any balance shown to be due the Company
     shall be remitted by the Reinsurer as promptly as possible after receipt
     and verification of the Company's report.

B.   Within 45 days after the end of each calendar quarter, the Company shall
     report to the Reinsurer the ceded written, unearned  premiums and ceded
     outstanding loss reserves as of the end of the calendar quarter.

C.   Annually, the Company shall furnish the Reinsurer with such information
     as the Reinsurer may require to complete its Annual Convention Statement.


ARTICLE XIII - LATE PAYMENTS

The interest penalties provided for in this Article shall apply to the
Reinsurer or to the Company in the following circumstances:


                                  Page 9


<PAGE>

A.   Payments due from the Reinsurer to the Company shall have as a due date
     the date on which the report is received by the Reinsurer, and shall be
     overdue 10 days thereafter.

B.   Payments due from the Company to the Reinsurer shall have a due date of
     the date specified in this Contract. Payments shall be overdue 10 days
     thereafter.

C.   Overdue amounts shall bear simple interest from the overdue date at a
     rate determined by the Prime Rate for the first day of the calendar
     month in which the amount becomes overdue as published in the Wall
     Street Journal. If the interest generated for 100% in respect of any
     overdue payment as outlined in paragraph A or B is less than $100,
     and/or the overdue period is 10 days or less, then interest penalty
     shall be waived.


ARTICLE XIV - OFFSET (BRMA 36C)

The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the right of offset may exercise such right any time whether
the balances due are on account of premiums or losses or otherwise.


ARTICLE XV - ACCESS TO RECORDS (BRMA 1D)

The Reinsurer or its designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to
this reinsurance.


ARTICLE XVI - ERRORS AND OMISSIONS (BRMA 14F)

Inadvertent delays, errors or omissions made in connection with this Contract
or any transaction hereunder shall not relieve either party from any
liability which would have attached had such delay, error or omission not
occurred, provided always that such error or omission is rectified as soon as
possible after discovery.


ARTICLE XVII - TAXES (BRMA 50B)

In consideration of the terms under which this Contract is issued, the
Company will not claim a deduction in respect of the premium hereon when
making tax returns, other than income or profits tax returns, to any state or
territory of the United States of America or the District of Columbia.


                                   Page 10


<PAGE>

ARTICLE XVIII - UNAUTHORIZED REINSURERS

A.   If the Reinsurer is unauthorized in any state of the United States of
     America or the District of Columbia, or is rated "B++" or lower by A.M.
     Best, the Reinsurer agrees to fund its share of the Company's ceded
     outstanding loss and loss adjustment expense reserves (including
     incurred but not reported loss reserves) by:

     1.  Clean, irrevocable and unconditional letters of credit issued and
         confirmed, if confirmation is required by the insurance regulatory
         authorities involved, by a bank or banks meeting the NAIC Securities
         Valuation Office credit standards for issuers of letters of credit
         and acceptable to said insurance regulatory authorities; and/or

     2.  Escrow accounts for the benefit of the Company; and/or

     3.  Cash advances;

     if, without such funding, a penalty would accrue to the Company on any
     financial statement it is required to file with the insurance regulatory
     authorities involved. The Reinsurer, at its sole option, may fund in
     other than cash if its method and form of funding are acceptable to the
     insurance regulatory authorities involved.

B.   With regard to funding in whole or in part by letters of credit, it is
     agreed that each letter of credit will be in a form acceptable to
     insurance regulatory authorities involved, will be issued for a term of
     at least one year and will include an "evergreen clause," which
     automatically extends the term for at least one additional year at each
     expiration date unless written notice of non-renewal is given to the
     Company not less than 30 days prior to said expiration date. The Company
     and the Reinsurer further agree, notwithstanding anything to the
     contrary in this Contract, that said letters of credit may be drawn upon
     by the Company or its successors in interest at any time, without
     diminution because of the insolvency of the Company or the Reinsurer,
     but only for one or more of the following purposes:

     1.  To reimburse itself for the Reinsurer's share of losses and/or loss
         adjustment expense paid under the terms of policies reinsured
         hereunder, unless paid in cash by the Reinsurer;

     2.  To reimburse itself for the Reinsurer's share of any other amounts
         claimed to be due hereunder, unless paid in cash by the Reinsurer;

     3.  To fund a cash account in an amount equal to the Reinsurer's share
         of any ceded outstanding loss and loss adjustment expense reserves
         (including incurred but not reported loss reserves) funded by means
         of a letter of credit which is under non-renewal notice, if said
         letter of credit has not been renewed or replaced by the Reinsurer
         10 days prior to its expiration date;

     4.  To refund to the Reinsurer any sum in excess of the actual amount
         required to fund the Reinsurer's share of the Company's ceded
         outstanding loss and loss adjustment


                                 Page 11

<PAGE>


         expense reserves (including incurred but not reported loss
         reserves), if so requested by the Reinsurer.

     In the event the amount drawn by the Company on any letter of credit is
     in excess of the actual amount required for [(1)] or (3), or in the case
     of (2), the actual amount determined to be due, the Company shall
     promptly return to the Reinsurer the excess amount so drawn.

ARTICLE XIX - INSOLVENCY

A.   In the event of the insolvency of one or more of the reinsured
     companies, this reinsurance shall be payable directly to the company or
     to its liquidator, receiver, conservator or statutory successor
     immediately upon demand, with reasonable provision for verification, on
     the basis of the liability of the company without diminution because of
     the insolvency of the company or because the liquidator, receiver,
     conservator or statutory successor of the company has failed to pay all
     or a portion of any claim. It is agreed, however, that the liquidator,
     receiver, conservator or statutory successor of the company shall give
     written notice to the Reinsurer of the pendency of a claim against the
     company indicating the policy or bond reinsured which claim would
     involve a possible liability on the part of the Reinsurer within a
     reasonable time after such claim is filed in the conservation or
     liquidation proceeding or in the receivership, and that during the
     pendency of such claim, the Reinsurer may investigate such claim and
     interpose, at its own expense, in the proceeding where such claim is to
     be adjudicated, any defense or defenses that it may deem available to
     the company or its liquidator, receiver, conservator or statutory
     successor. The expense thus incurred by the Reinsurer shall be
     chargeable, subject to the approval of the Court, against the company as
     part of the expense of conservation or liquidation to the extent of a
     pro rata share of the benefit which may accrue to the company solely as
     a result of the defense undertaken by the Reinsurer.

B.   Where two or more reinsurers are involved in the same claim and a
     majority in interest elect to interpose defense to such claim, the
     expense shall be apportioned in accordance with the terms of this
     Contract as though such expense had been incurred by the company.

C.   It is further understood and agreed that, in the event of the insolvency
     of one or more of the reinsured companies, the reinsurance under this
     Contract shall be payable directly by the Reinsurer to the company or to
     its liquidator, receiver or statutory successor, except as provided by
     Section 4118(a) of the New York Insurance Law or except (1) where this
     Contract specifically provides another payee of such reinsurance in the
     event of the insolvency of the company or (2) where the Reinsurer with
     the consent of the direct insured or insureds has assumed such policy
     obligations of the company as direct obligations of the Reinsurer to the
     payees under such policies and in substitution for the obligations of the
     company to such payees.


                                   Page 12

<PAGE>


ARTICLE XX - ARBITRATION

A.   As a condition precedent to any right of action hereunder, any dispute
     arising out of the interpretation, performance or breach of this
     Contract, including the formation or validity thereof, shall be
     submitted for decision to a panel of three arbitrators. Notice
     requesting arbitration will be in writing and sent certified or
     registered mail, return receipt requested.

B.   One arbitrator shall be chosen by each party and the two arbitrators
     shall, before instituting the hearing, choose an impartial third
     arbitrator who shall preside at the hearing. If either party fails to
     appoint its arbitrator within 30 days after being requested to do so by
     the other party, the latter, after 10 days notice by certified or
     registered mail of its intention to do so, may appoint the second
     arbitrator.

C.   If the two arbitrators are unable to agree upon the third arbitrator
     within 30 days of their appointment, the third arbitrator shall be
     selected by the American Arbitration Association.

D.   All arbitrators shall be disinterested active or former executives of
     insurance or reinsurance companies or Underwriters at Lloyd's, London
     with expertise or experience in the area being arbitrated.

E.   Within 30 days after notice of appointment of all arbitrators, the panel
     shall meet and determine timely periods for briefs, discovery procedures
     and schedules for hearings.

F.   The panel shall be relieved of all judicial formality and shall not be
     bound by the strict rules of procedure and evidence. Unless the panel
     agrees otherwise, arbitration shall take place in Los Angeles,
     California, but the venue may be changed when deemed by the panel to be
     in the best interest of the arbitration proceeding. Insofar as the
     arbitration panel looks to substantive law, it shall consider the law of
     the State of California. The decision of any two arbitrators when
     rendered in writing shall be final and binding. The panel is empowered
     to grant interim relief as it may deem appropriate.

G.   The panel shall make its decision considering the custom and practice of
     the applicable insurance and reinsurance business within 60 days
     following the termination of the hearings. Judgment upon the award may
     be entered in any court having jurisdiction thereof.

H.   If more than one reinsurer is involved in arbitration where there are
     common questions of law or fact and a possibility of conflicting awards
     or inconsistent results, all such reinsurers shall constitute and act as
     one party for purposes of this Article and communications shall be made
     by the Company to each of the reinsurers constituting the one party;
     provided, however, that nothing therein shall impair the rights of such
     reinsurers to assert several, rather than joint defenses or claims, nor
     be construed as changing the liability of the reinsurers under the terms
     of this Contract from several to joint.



                                     Page 13

<PAGE>

I.   Each party shall bear the expense of its own arbitrator and shall
     jointly and equally bear with the other party the cost of the third
     arbitrator. The remaining costs of the arbitration shall be allocated by
     the panel. The panel may, at its discretion, award such further costs
     and expenses as it considers appropriate, including but not limited to
     attorneys fees, to the extent permitted by law.

                                    Page 14


<PAGE>

IN WITNESS WHEREOF, the Company by its duly authorized representative has
executed this Contract as of the date undermentioned at:

Pasadena, California, this 11th day of August in the year 2000.


                                       /s/ Jeffrey A. Snider
                                       --------------------------------
                                       PAULA Insurance Company


IN WITNESS WHEREOF, the Reinsurer by its duly authorized representative has
executed this Contract as of the date undermentioned at:

Los Angeles, California, this 11th day of August in the year 2000.


                                       /s/ Axel Freiboth
                                       --------------------------------
                                       Insurance Corporation of Hannover,
                                       An Illinois Corporation


                                   Page 15

<PAGE>

U.S.A.
------

             NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
         (APPROVED BY LLOYD'S UNDERWRITERS' FIRE AND NON-MARINE ASSOCIATION)


     (1)  This reinsurance does not cover any loss or liability accruing to
the Reassured as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber or association.

     (2)  Without in any way restricting the operation of paragraph (1) of
this Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal and
replacement) of the classes specified in Clause II of this paragraph (2) from
the time specified in Clause III in this paragraph (2) shall be deemed to
include the following provision (specified as the Limited Exclusion
Provision):

     LIMITED EXCLUSION PROVISION.*

     I.    It is agreed that the policy does not apply under any liability
            coverage, to (INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION/
            bodily injury or property damage) with respect to which an
            insured under the policy is also an insured under a nuclear
            energy liability policy issued by Nuclear Energy Liability
            Insurance Association, Mutual Atomic Energy Liability
            Underwriters or Nuclear Insurance Association of Canada, or would
            be an insured under any such policy but for its termination upon
            exhaustion of its limit of liability.

     II.    Family Automobile Policies (liability only), Special Automobile
            Policies (private passenger automobiles, liability only), Farmers
            Comprehensive Personal Liability Policies (liability only),
            Comprehensive Personal Liability Policies (liability only) or
            policies of a similar nature; and the liability portion of
            combination forms related to the four classes of policies stated
            above, such as the Comprehensive Dwelling Policy and the
            applicable types of Homeowners Policies.

    III     The inception dates and thereafter of all original policies as
            described in II above, whether new, renewal or replacement, being
            policies which either
            (a) become effective on or after 1st May, 1960, or
            (b) become effective before that date and contain the Limited
            Exclusion Provision set our above;
            provided this paragraph (2) shall not be applicable to Family
            Automobile Policies, Special Automobile Policies, or policies or
            combination policies of a similar nature, issued by the Reassured
            on New York risks, until 90 days following approval of the
            Limited Exclusion Provision by the Governmental Authority having
            jurisdiction thereof.

    (3)  Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation of paragraph
(1) of this Clause, it is understood and agreed that for all purposes of this
reinsurance the original liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:

         Owners, Landlords and Tenants Liability, Contractual Liability,
         Elevator Liability, Owners or Contractors (including railroad)
         Protective Liability, Manufacturers and Contractors Liability,
         Products Liability, Professional and Malpractice Liability,
         Storekeepers Liability, Garage Liability, Automobile Liability
         (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time
specified in Clause V of this paragraph (3), the following provision
(specified as the Broad Exclusion Provision):

    BROAD EXCLUSION PROVISION.*

It is agreed that the policy does not apply:
        I.   Under any Liability Coverage to (INJURY, SICKNESS, DISEASE, DEATH
             OR DESTRUCTION bodily injury or property damage)

             (a)  with respect to which an insured under the policy is also
                  an insured under a nuclear energy liability policy issued
                  by Nuclear Energy Liability Insurance Association, Mutual
                  Atomic Energy Liability policy issued by Nuclear Energy
                  Liability Insurance Association, Mutual Atomic Energy
                  Liability Underwriters or Nuclear Insurance Association of
                  Canada, or would be an insured under any such policy but for
                  its termination upon exhaustion of its limit of liability; or
             (b)  resulting from the hazardous properties of nuclear material
                  and with respect to which (1) any person or organization is
                  required to maintain financial protection pursuant to the
                  Atomic Energy Act of 1954, or any law amendatory thereof, or
                  (2) the insured is, or had this policy not been issued would
                  be, entitled to indemnity from the United States of America,
                  or any agency thereof, under any agreement entered into by
                  the United States of America, or any agency thereof, with any
                  person or organization.

<PAGE>

        II.  Under any Medical Payments Coverage, or under any Supplementary
             Payments Provision relating to (IMMEDIATE MEDICAL OR SURGICAL
             RELIEF first aid), to expenses incurred with respect to (BODILY
             INJURY, SICKNESS, DISEASE OR DEATH/bodily injury) resulting from
             the hazardous properties of nuclear material and arising out of
             the operation of a nuclear facility by any person or
             organization.
        III. Under any Liability Coverage to (INJURY, SICKNESS, DISEASE,
             DEATH OR DESTRUCTION/bodily injury or property damage) resulting
             form the hazardous properties of nuclear material, if
             (a)  the nuclear material (1) is at any nuclear facility owned
                  by, or operated by or on behalf of, an insured or (2) has
                  been discharged or dispersed therefrom;
             (b)  the nuclear material is contained in spent fuel or waste at
                  any time possessed, handled, used, processed, stored,
                  transported, or disposed of by or on behalf of an insured; or
             (c)  the (INJURY, SICKNESS, DISEASE, DEATH OR DESTRUCTION/bodily
                  injury or property damage) arises out of the furnishing by
                  an insured of services, materials, parts or equipment in
                  connection with the planning, construction, maintenance,
                  operation or use of any nuclear facility, but if such
                  facility is located within the United States of America,
                  its territories, or possessions or Canada, this exclusion
                  (c) applies only to (INJURY TO OR DESTRUCTION OF PROPERTY
                  AT SUCH NUCLEAR FACILITY/property damage to such nuclear
                  facility and any property thereat).
        IV.  As used in this endorsement:
             "hazardous properties" include radioactive, toxic or explosive
             properties; "nuclear material" means source material, special
             nuclear material or byproduct material; "source material",
             "special nuclear material", and "byproduct material" have the
             meanings given them in the Atomic Energy Act of 1954 or in any
             law amendatory thereof; "spent fuel" means any fuel element or
             fuel component, solid or liquid, which has been used or exposed
             to radiation in a nuclear reactor; "waste" means any waste
             material (1) containing byproduct material and (2) resulting
             from the operation by any person or organization of any nuclear
             facility included within the definition of nuclear facility
             under paragraph (a) or (b) thereof; "nuclear facility" means
             (a)  any nuclear reactor,
             (b)  any equipment or device designed or used for (1) separating
                  the isotopes of uranium or plutonium, (2) processing or
                  utilizing spent fuel, or (3) handling processing or
                  packaging waste,
             (c)  any equipment or device used for the processing, fabricating
                  or alloying of special nuclear material if at any time the
                  total amount of such material in the custody of the insured
                  at the premises where such equipment or device is located
                  consists of or contains more than 25 grams of plutonium or
                  uranium 233 or any combination thereof, or more than 250
                  grams of uranium 235,
             (d)  any structure, basin, excavation, premises or place
                  prepared or used for the storage or disposal of waste, and
                  includes the site on which any of the foregoing is located,
                  all operations conducted on such site and all premises used
                  for such operations; "nuclear reactor" means any apparatus
                  designed or used to sustain nuclear fission in a
                  self-supporting chain reaction or to contain a critical
                  mass of fissionable material; (WITH RESPECT TO INJURY TO OR
                  DESTRUCTION OF PROPERTY, THE WORD "INJURY" OR "DESTRUCTION"/
                  "property damage") includes all forms of radioactive
                  contamination of property (INCLUDES ALL FORMS OF
                  RADIOACTIVE CONTAMINATION OF PROPERTY).
        V.   The inception dates and thereafter of all original policies
             affording coverages specified in this paragraph (3), whether
             new, renewal or replacement, being policies which become
             effective on or after 1st May, 1960, provided this paragraph (3)
             shall not be applicable to
                  (i)  Garage and Automobile Policies issued by the Reassured
             on New York risks, or
                  (ii) statutory liability insurance required under Chapter
             90, General Laws of Massachusetts, until 90 days following
             approval of the Broad Exclusion Provision by the Governmental
             Authority having jurisdiction thereof.
      (4) Without in any way restricting the operation of paragraph (1) of
this Clause, it is understood and agreed that paragraphs (2) and (3) above
are not applicable to original liability policies of the Reassured in Canada
and that with respect to such policies this Clause shall be deemed to include
the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian
Underwriters' Association of the Independent Insurance Conference of Canada.

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

*NOTE. THE WORDS PRINTED IN ITALICS IN THE LIMITED EXCLUSION PROVISION AND IN
THE BROAD EXCLUSION PROVISION SHALL APPLY ONLY IN RELATIONS TO ORIGINAL
LIABILITY POLICIES WHICH INCLUDE A LIMITED EXCLUSION PROVISION OR A BROAD
EXCLUSION PROVISION CONTAINING THESE WORDS.

<PAGE>



                 WORKERS' COMPENSATION AND EMPLOYER'S LIABILITY
                       QUOTA SHARE REINSURANCE CONTRACT
                            EFFECTIVE: JULY 1, 2000

     Between PAULA Insurance Company and Insurance Corporation of Hannover

                       Schedule A - INURING REINSURANCE


PAULA Insurance Company is reinsured for Workers' compensation and Employer's
Liability by General Reinsurance Corporation on an excess of loss basis in
three layers providing a total coverage of $10,000,000 excess of $250,000 per
accident. The first layer, $250,000 excess of $250,000 per accident, is
subject to a deductible of $2,000,000 for each year beginning July 1. (In
other words, until PAULA pays an aggregate of $2,000,000 for the portion of
individual claims that is between $250,000 and $500,000, the retention is
$500,000.)

PAULA  Insurance Company is also reinsured for Workers' Compensation by
several carriers through Herbert Clough Inc. on an excess of loss basis in
three layers providing a total coverage of $50,000,000 excess of $10,250,000
per accident, subject to a per employee limit of $5,000,000 in each layer,
and with one automatic pro-rata paid reinstatement.

PAULA Insurance Company is also reinsured for Workers' Compensation Industrial
Aid Aircraft by several carriers through Herbert Clough Inc. on an excess of
loss basis for $5,000,000 excess of $150,000 per occurrence subject to a per
employee limit of $2,000,000.

Allocated lass adjustment expenses are pro-rata in addition on the other than
industrial aid reinsurance and are part of loss on the industrial aid
reinsurance.