<PAGE>
 
                                                                     EXHIBIT 4.9

                                                                   Debenture No.

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS.  IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.

                       ANCHOR PACIFIC UNDERWRITERS, INC.

               10% Convertible Subordinated Debenture, Series C
                   (convertible into shares of common stock)

$_________                                                   Concord, California
                                                                  ______________

          ANCHOR PACIFIC UNDERWRITERS, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to _____________ or such
other person in whose name this Debenture is registered on the Debenture
Register (as that term is defined below) (the "Holder"), the principal amount of
______________  Dollars ($_________), with simple interest on the unpaid balance
of such principal amount at the rate of ten percent (10%) per annum from the
date of this Debenture.  Interest on the outstanding principal balance shall be
computed on the basis of a 360 day year of twelve 30-day months and shall be
paid to the Holder on ____________, 1999, ________, 2000 and ____________, 2000
(each, an "Interest Payment Date").  Each Debenture delivered upon registration
of transfer or in exchange for or in lieu of this Debenture shall carry the
rights to interest accrued and unpaid, and to accrue, which were carried by this
Debenture.

          The full principal amount of this Debenture, plus interest, will be
due and payable on ________, 2001 (the "Maturity Date").  Payment of interest
and principal shall be made in lawful money of the United States of America by
wire transfer to an account designated by the Holder appearing on the Debenture
Register.

          This Debenture is a duly authorized Debenture of the Company, Series
C, limited to the aggregate principal amount of $_________.
<PAGE>
 
     1.   Representations, Warranties and Covenants.
          ----------------------------------------- 

          1.1  Organization, Good Standing and Qualification.  The Company is a
               ---------------------------------------------                   
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted.  The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.

          1.2  Valid Issuance of Debentures and Shares.  The Debenture, when
               ---------------------------------------                      
issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, and based
in part upon the representations of the Holder contained in the Subscription
Agreement pursuant to which this Debenture is being issued, will be issued in
compliance with all applicable federal and state securities laws.  The shares of
the Company's Common Stock, $.02 par value per share, issuable upon conversion
of the Debentures (the "Shares") have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of this Debenture,
shall be duly and validly issued, fully paid and nonassessable.

          1.3  Compliance with Other Instruments.  The Company is not in
               ---------------------------------                        
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Debenture or of
any material provision of any instrument or contract to which it is a party or
by which it is bound or, to its knowledge, of any material provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company.  The execution, delivery and issuance of
this Debenture will not result in:  (a) any such violation or be in conflict
with or constitute, with or without the passage of time and giving of notice, a
default under any such provision, instrument or contract; or (b) an event which
results in the creation of any lien, charge or encumbrance upon any assets of
the Company.

     2.   Subordination.
          ------------- 

          2.1  Subordination.  The indebtedness evidenced by this Debenture is
               -------------                                                  
subordinate and junior in right of payment to all Senior Debt (as such term is
defined below) to the extent provided herein, and the Holder, by such Holder's
acceptance hereof, agrees to the subordination herein provided and shall be
bound by the provisions hereof.  Senior Debt shall continue to be Senior Debt
and entitled to the benefits of these subordination provisions irrespective of
any amendment, modification or waiver of any term of the Senior Debt or
extension or renewal of the Senior Debt.

                                       2
<PAGE>
 
          2.2  Senior Debt Defined.  As used herein, the term "Senior Debt"
               -------------------                                         
shall mean the following whether now outstanding or subsequently incurred,
assumed or created:  (a) all indebtedness (whether or not secured) of the
Company or its subsidiaries to banks, insurance companies or other financial
institutions regularly engaged in the business of lending money; (b) such other
indebtedness of the Company or its subsidiaries to the extent that the
instrument creating or evidencing such indebtedness provides that it shall
constitute Senior Debt; (c) any indebtedness issued in exchange for such Senior
Debt, or any indebtedness arising from the satisfaction of such Senior Debt by a
guarantor; and (d) any deferrals, renewals, or extensions of any such Senior
Debt.

          2.3  Default on Senior Debt.  If the Company shall default in the
               ----------------------                                      
payment of any principal of or interest on any Senior Debt when the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by declaration of acceleration or otherwise, then, upon written notice of such
default to the Company by the holders of Senior Debt or any trustee therefor,
unless and until such default shall have been cured or waived or shall have
ceased to exist, no direct or indirect payment (in cash, property, securities,
by set-off or otherwise) shall be made or agreed to be made on account of the
principal of or interest on this Debenture, or in respect of any redemption,
repayment, retirement, purchase or other acquisition of this Debenture.

          2.4  Prior Payment of Senior Debt.
               ---------------------------- 

               (a)  In the event of:  (i) any insolvency, bankruptcy,
     receivership, liquidation, reorganization, readjustment, composition or
     other similar proceeding relating to the Company; (ii) any proceeding for
     the liquidation, dissolution or other winding up of the Company, voluntary
     or involuntary, whether or not involving insolvency or bankruptcy
     proceedings; (iii) any assignment by the Company for the benefit of
     creditors; or (iv) any other marshalling of the assets of the Company, all
     Senior Debt (including any interest thereon accruing after the commencement
     of any such proceedings) shall first be paid in full before any payment or
     distribution, whether in cash, securities or other property, shall be made
     to any Holder on account of the principal or interest on this Debenture.
     Any payment or distribution, whether in cash, securities or other property
     (other than securities of the Company or any other corporation provided for
     by a plan of reorganization or readjustment the payment of which is
     subordinate, at least to the extent provided in these subordination
     provisions with respect to the indebtedness evidenced by this Debenture, to
     the payment of all Senior Debt at the time outstanding and to any
     securities issued in respect thereof under any such plan of reorganization
     or readjustment), which would otherwise (but for these subordination
     provisions) be payable or deliverable in respect of this Debenture shall be
     paid or delivered

                                       3
<PAGE>
 
     directly to the holders of Senior Debt in accordance with the priorities
     then existing among such holders until all Senior Debt (including any
     interest thereon accruing after the commencement of any such proceedings)
     shall have been paid in full.  In the event of any such proceeding, after
     payment in full of all sums owing with respect to Senior Debt, the Holder
     of this Debenture, together with the holders of any obligations of the
     Company ranking on a parity with this Debenture, shall be entitled to be
     paid from the remaining assets of the Company the amounts at the time due
     and owing on account of unpaid principal of and interest on this Debenture
     and such other obligations before any payment or other distribution,
     whether in cash, property or otherwise, shall be made on account of any
     capital stock or any obligations of the Company ranking junior to this
     Debenture and such other obligations.

               (b)  In the event that, notwithstanding the foregoing, any
     payment or distribution of any character, whether in cash, securities or
     other property (other than securities of the Company or any other
     corporation provided for by a plan of reorganization or readjustment the
     payment of which is subordinate, at least to the extent provided in these
     subordination provisions with respect to the indebtedness evidenced by this
     Debenture, to the payment of all Senior Debt at the time outstanding and to
     any securities issued in respect thereof under any such plan of
     reorganization or readjustment), shall be received by any Holder in
     contravention of any of the terms hereof, such payment or distribution or
     security shall be received in trust for the benefit of, and shall be paid
     over or delivered and transferred to, the holders of the Senior Debt at the
     time outstanding in accordance with the priorities then existing among such
     holders for application to the payment of all Senior Debt remaining unpaid,
     to the extent necessary to pay all such Senior Debt in full. In the event
     of the failure of any such Holder to endorse or assign any such payment,
     distribution or security, each holder of Senior Debt is hereby irrevocably
     authorized to endorse or assign the same.

          2.5  No Impairment of Rights.  Nothing contained herein shall impair,
               -----------------------                                         
as between the Company and the Holder, the obligation of the Company to pay such
Holder the principal of and interest on this Debenture or prevent such Holder
from exercising all rights, powers and remedies otherwise permitted by
applicable law or hereunder upon an Event of Default (as defined below)
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the Holder of this Debenture.

          2.6  Subrogation.  Upon the payment in full of all Senior Debt, the
               -----------                                                   
Holders of the Debentures, together with all other subordinated debt of the
Company ranking on a parity therewith, shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
applicable to the Senior Debt

                                       4
<PAGE>
 
until the indebtedness evidenced by the Debentures shall have been paid in full,
and such payments or distributions received by the Holders thereof, by reason of
such subrogation, of cash, securities or other property which otherwise would be
paid or distributed to the holders of Senior Debt, shall, as between the Company
and its creditors other than the holders of Senior Debt, on the one hand, and
such Holders on the other hand, be deemed to be a payment by the Company on
account of Senior Debt and not on account of the Debentures.

          2.7  No Impairment of Security Interest.  The provisions of this
               ----------------------------------                         
Debenture shall not impair any rights, remedies or powers of any secured
creditor of the Company in respect of any security interest.  The securing of
any obligations of the Company otherwise ranking on a parity with the Debentures
or ranking junior to such Debentures shall not be deemed to prevent such
obligations from constituting, respectively, obligations ranking on a parity
with such Debentures or ranking junior to such Debentures.

          2.8  Amendment of Subordination Provisions.  No modification or
               -------------------------------------                     
amendment of the subordination provisions contained in Section 2 hereof in a
manner adverse to the holders of Senior Debt may be made without the consent of
all holders of Senior Debt.

          2.9  Undertaking.  By its acceptance of this Debenture, the Holder
               -----------                                                  
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Debt in order to
implement the foregoing provisions of Section 2 hereof.

     3.   No Restrictions on Issuance of Additional Debt.  Nothing contained in
          ----------------------------------------------                       
this Debenture shall restrict the Company from creating, assuming or incurring
any additional indebtedness, whether ranking junior to, on par with, or senior
to, this Debenture, or require the Company to obtain the consent of the Holder
with respect thereto.

     4.   Default.
          ------- 

          4.1  Event of Default.  Each of the following events shall be an Event
               ----------------                                                 
of Default hereunder:

               (a)  Default in the payment of any interest on this Debenture
     when due, continued for two (2) business days.

               (b)  Default in the payment of the principal on the Maturity
     Date. 

                                       5
<PAGE>
 
               (c)  Material default in the performance of any of the covenants
     or agreements of the Company contained in this Debenture continued for
     thirty (30) days after notice thereof (provided, however, that if the
     default cannot reasonably be corrected within such period, there shall be
     no event of default if corrective action is instituted promptly and is
     pursued diligently until the default is corrected).

               (d)  If a petition in involuntary bankruptcy is filed against the
     Company under any bankruptcy, reorganization, arrangement, insolvency,
     readjustment of debt, dissolution or liquidation under the law of any
     jurisdiction, whether now or hereafter in effect, and is not stayed or
     dismissed within thirty (30) days after such filing, or if the Company
     shall make an assignment for the benefit of creditors, or shall file a
     voluntary petition in bankruptcy, or shall be adjudicated a bankrupt or
     insolvent, or shall file any petition or answer seeking for itself any
     reorganization, arrangement, composition, readjustment, liquidation,
     dissolution or similar relief under any present or future statute, law or
     regulation, or shall seek or consent to or acquiesce in the appointment of
     any trustee, receiver or liquidator of the Company or of all or any
     substantial part of the properties of the Company, or commence voluntary or
     involuntary dissolution proceedings.

               (e)  Default under Senior Debt that gives the holder thereof the
     right to accelerate such Senior Debt, and such Senior Debt is in fact
     accelerated by such holder.

          4.2  Remedies on Default, etc.
               ------------------------ 

               (a)  If an Event of Default occurs and is continuing after the
     expiration of any applicable grace period, the Holder may declare the
     Debenture immediately due and payable.

               (b)  In case of a default in the payment of any principal or
     interest due on this Debenture, the Company shall pay to the Holder thereof
     the amount owing together with:  (i) simple interest on the amount owing at
     the rate per annum equal to the lower of (x) twelve percent (12%) or (y)
     the maximum rate permitted under applicable law on the amounts past due;
     and (ii) such additional amount as shall be sufficient to cover the cost
     and expenses of collection, including, without limitation, reasonable
     attorneys' fees, expenses and disbursements.

               (c)  No right, power or remedy conferred by this Debenture upon
     any Holder shall be exclusive of any other right, power or remedy referred
     to herein or now or hereafter available at law, in equity, by statute or
     otherwise.

                                       6
<PAGE>
 
     5.   Conversion.
          ---------- 

          5.1  Conversion Rights.  The Holder may at any time, and from time to
               -----------------                                               
time, prior to the first to occur of the Maturity Date or the date fixed by the
Company for redemption of this Debenture (the "Redemption Date"), convert this
Debenture or any portion of the principal amount hereof which is $5,000 or an
integral multiple of $5,000, into Shares, at a conversion price of $0.60 per
Share (the "Conversion Price"), subject to adjustment in certain events
described below.

          The number of Shares that the Holder shall receive upon any such
conversion shall be determined by dividing the principal amount of this
Debenture to be so converted by the Conversion Price in effect at the time of
such conversion.  In the event that this Debenture is called for redemption, the
right to convert the Debenture shall terminate at the close of business on the
Redemption Date and will be lost if not exercised prior to that time unless the
Company defaults in making the payment due upon redemption.  In the event of a
partial conversion of this Debenture, the Company shall execute and deliver to
the Holder a new Debenture in the aggregate principal amount equal to and in
exchange for the unconverted portion of the principal amount of the Debenture so
surrendered for conversion.

          5.2  Effect of Conversion; Issuance of Shares on Conversion.
               ------------------------------------------------------  
Conversion of this Debenture shall be deemed to have been made at the close of
business on the date that the Debenture shall have been surrendered for
conversion, accompanied by written notice of election to convert in the form of
Exhibit "A" attached hereto (or such other form reasonably acceptable to the
Company), and thereupon the Holder shall have no further rights hereunder,
except with respect to the receipt of accrued interest due hereunder and the
Shares issuable upon conversion of this Debenture.  As soon as practicable after
full or partial conversion of this Debenture, the Company shall pay to the
Holder all interest accrued hereunder with respect to the portion of the
Debenture so converted to the date of conversion.  In addition, as soon as
practicable after full or partial conversion of this Debenture, the Company
shall, at its expense, cause to be issued in the name of, and delivered to, the
Holder a certificate or certificates for the number of Shares to which the
Holder shall be entitled on such conversion, together with any other securities
and property to which the Holder is entitled on such conversion under the terms
of this Debenture.  No fractional shares will be issued on conversion of this
Debenture.  If on any conversion of this Debenture a fraction of a share
results, the Company will pay the cash value of that fractional share,
calculated on the basis of the then effective Conversion Price.

          5.3  Adjustments to Conversion Price.
               ------------------------------- 

               (a)  If the Company shall at any time while this Debenture is
     outstanding subdivide the outstanding shares of its Common Stock, the

                                       7
<PAGE>
 
     Conversion Price then in effect immediately before that subdivision shall
     be proportionately decreased, and if the Company shall at any time while
     this Debenture is outstanding combine the outstanding shares of Common
     Stock, the Conversion Price then in effect immediately before that
     combination shall be proportionately increased.  Except as otherwise
     provided below, any adjustment under this Section 5.3 shall become
     effective at the close of business on the date the subdivision or
     combination becomes effective.  A dividend on any security of the Company
     payable in Common Stock, or a split of the Company's Common Stock, shall be
     considered a subdivision of Common Stock for purposes of this Section 5.3
     at the close of business on the record date with respect to such dividend
     or stock split.  A reverse split of the Company's Common Stock shall be
     considered a combination of Common Stock for purposes of this Section 5.3
     at the close of business on the record date with respect to such reverse
     stock split.

               (b)  In the event the Company, at any time or from time to time
     while this Debenture is outstanding, shall make or issue, or fix a record
     date for the determination of holders of Common Stock entitled to receive,
     a dividend or other distribution with respect to the Company's Common stock
     payable in securities of the Company other than shares of Common Stock,
     then and in each such event, provisions shall be made so that the Holder
     shall receive upon conversion hereof, in addition to the number of shares
     of Common Stock receivable thereupon, the amount of securities of the
     Company which he would have received had this Debenture been converted into
     Common Stock on the date of such event and had the Holder thereafter,
     during the period from the date of such event to and including the
     conversion date, retained such securities receivable by him.

               (c)  If while this Debenture is outstanding, the Shares issuable
     upon conversion of this Debenture shall be changed into the same or a
     different number of shares of any other class or classes of stock of the
     Company, whether by recapitalization, reclassification or other exchange
     (other than a subdivision or combination of shares, or a capital
     reorganization, merger or sale of assets, provided for elsewhere in Section
     5.3 hereof), the Holder shall, upon the conversion of this Debenture, be
     entitled to receive, in lieu of the Shares which the Holder would have
     become entitled to receive but for such change, a number of shares of such
     other class or classes of stock that would have been subject to receipt by
     the Holder if he had exercised his right of conversion of this Debenture
     immediately before that change.

               (d)  If while this Debenture is outstanding, there shall be a
     merger or consolidation of the Company with or into another corporation
     (other

                                       8
<PAGE>
 
     than a merger which does not result in any reclassification, conversion,
     exchange or cancellation of outstanding shares of Common Stock of the
     Company), or the sale of all or substantially all of the Company's
     properties and assets to any other person, then, as a part of such merger,
     consolidation or sale, lawful provision shall be made so that the Holder
     shall thereafter be entitled to receive upon conversion of this Debenture,
     during the period specified in this Debenture, the number of shares of
     stock or other securities or property of the Company, or of the successor
     corporation resulting from such merger, consolidation or sale, to which a
     holder of the Shares deliverable upon conversion of this Debenture would
     have been entitled on such merger, consolidation or sale if this Debenture
     had been converted immediately before such merger, consolidation or sale.
     In any such case, appropriate adjustment shall be made in the application
     of the provisions of this Section 5.3 with respect to the rights of the
     Holder after such merger, consolidation or sale to the end that the
     provisions of this Section 5.3 (including adjustments of the Conversion
     Price then in effect and number of shares purchasable upon conversion of
     this Debenture) shall continue to be applicable after that event and shall
     be as nearly equivalent to the provisions hereof as may be practicable.

               (e)  The Company shall promptly and in any case not later than
     ten (10) days after the date of any adjustment of the Conversion Price give
     written notice of such adjustment and the number of Shares or other
     securities issuable upon conversion of this Debenture, by first-class mail,
     postage prepaid, to the registered Holder at the Holder's address as shown
     on the Debenture Register. The certificate shall state such adjustment and
     show in reasonable detail the facts on which such adjustment is based.

               (f)  The form of this Debenture need not be changed because of
     any adjustment in the Conversion Price or in the number of Shares issuable
     upon its conversion. A Debenture issued after any adjustment on any partial
     conversion or upon replacement may continue to express the same Conversion
     Price and the same number of Shares (appropriately reduced in the case of
     partial conversion) as are stated on this Debenture as initially issued,
     and that Conversion Price and that number of Shares shall be considered to
     have been so changed as of the close of business on the date of the
     adjustment.

     6.   Registration of Transfer and Exchange.
          ------------------------------------- 

          6.1  Debenture Register.  The Company shall cause to be kept at the
               ------------------                                            
principal office of the Company a register (the "Debenture Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration and the transfer of the Debenture subject to the
provisions regarding transferability contained in this Debenture.  Upon
surrender for registration of transfer of any Debenture at the principal office
of the Company, the Company shall execute 

                                       9
<PAGE>
 
and deliver, in the name of the designated transferee or transferees, one or
more new Debentures in minimum denominations of $5,000 and integral multiples of
$5,000.

          6.2  Transfer of Debentures.  At the time the Debenture is presented
               ----------------------                                         
or surrendered for registration of transfer it shall (if so required by the
Company) be duly endorsed, or be accompanied by a written instrument of transfer
in form satisfactory to the Company, duly executed by the Holder thereof or his
attorney duly authorized in writing.  No service charge shall be made for any
registration of transfer, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer of the Debentures.

          6.3  Replacement Debenture.
               --------------------- 

               (a)  If the Debenture is mutilated and is surrendered to the
     Company, the Company shall execute and deliver in exchange therefor a new
     Debenture of like tenor and principal amount and bearing a number not
     contemporaneously outstanding.  If there shall be delivered to the Company:
     (i) evidence to its satisfaction of the destruction, loss or theft of the
     Debenture; and (ii) such security or indemnity as may be required by it to
     save the Company and any agent harmless.  Then, in the absence of notice to
     the Company that the Debenture has been acquired by a bona fide purchaser,
     the Company shall execute and deliver, in lieu of any such destroyed, lost
     or stolen Debenture, a new Debenture of like tenor and principal amount and
     bearing a number not contemporaneously outstanding.  In the event such
     mutilated, destroyed, lost or stolen Debenture has become or is about to
     become due and payable, the Company in its discretion may, instead of
     issuing a new Debenture, retire such Debenture.

               (b)  Upon the issuance of any new Debenture under this Section
     6.3, the Company may require the payment of a sum sufficient to cover any
     tax or other governmental charge that may be imposed in relation thereto
     and any other expenses connected therewith.

               (c)  Any new Debenture issued pursuant to this Section 6.3 in
     lieu of any destroyed, lost or stolen Debenture shall constitute an
     original additional contractual obligation of the Company, whether or not
     the destroyed, lost or stolen Debenture shall be at any time enforceable by
     anyone.

               (d)  The provisions of this Section 6.3 are exclusive and shall
     preclude (to the extent lawful) all other rights and remedies with respect
     to the replacement or payment of mutilated, destroyed, lost or stolen
     Debentures.

     7.   Limitations on Disposition.  The Holder understands that this
          --------------------------                                   
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued 

                                       10
<PAGE>
 
under this Debenture are "restricted securities" under the federal securities
laws inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable restrictions
such securities may be resold without registration under the Securities Act of
1933, as amended (the "Act") only in certain limited circumstances. In this
connection, the Holder represents that it is familiar with Rule 144 under the
Act and the limitations imposed thereby and by the Act.

          The Holder further agrees not to make any disposition of all or any
portion of this Debenture, the Shares or any other securities issued hereunder
unless and until:  (a) there is then in effect a Registration Statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or (b) the Holder shall have (i)
notified the Company of the proposed disposition and shall have furnished the
Company with a reasonably detailed statement of the circumstances surrounding
the proposed disposition; and (ii) furnished the Company with an opinion of
counsel, satisfactory to the Company, that such disposition will not require
registration of the securities under the Act.

          The Holder understands that this Debenture, the Shares and any other
securities issued hereunder may bear the following legend, together with any
other legend required by law:

          "The securities represented hereby have not been registered
          under the Securities Act of 1933, or any state securities
          laws. These securities may not be sold or transferred in the
          absence of an effective registration statement or
          qualification under such securities laws or an opinion of
          counsel, satisfactory to the Company, that the sale or
          transfer is pursuant to an exemption from the registration
          or qualification requirements of any applicable securities
          laws."

     8.   Limitations on Dividends and Distributions.  So long as this Debenture
          ------------------------------------------                            
is outstanding, the Company shall not declare, pay, make or set apart any sum
for a dividend or other distribution (whether in cash or other property) with
respect to any class of capital stock of the Company (other than dividends or
distributions payable in its capital stock), or for the redemption, retirement,
purchase or other acquisition for value of any share of any class of capital
stock of the Company or any warrants or rights to purchase any class of capital
stock of the Company.

     9.   Registration Rights.
          ------------------- 

          9.1  Definitions.  For purposes of Section 9 hereof, terms not
               -----------                                              
otherwise defined herein shall have the following meanings:

                                       11
<PAGE>
 
               (a)  The terms "register," "registered" and "registration" refer
     to the preparation and filing of a registration statement in compliance
     with the Act and the rules promulgated thereunder, and the declaration of
     the effectiveness of such registration statement, or the taking of similar
     action under a successor statute or regulation.

               (b)  The term "Registrable Securities" means the Shares issuable
     upon conversion of the Debenture, and any securities issued or issuable
     with respect to such Shares by way of a stock dividend or stock split or in
     connection with a combination or shares, recapitalization, merger,
     consolidation or other reorganization.

               (c)  The term "Rights Holder" or "Rights Holders" means any
     registered holder or holders of Registrable Securities.

               (d)  The term "Prospectus" means a prospectus that complies with
     applicable provisions of the Act.

          9.2  Piggyback Registration.
               ---------------------- 

               (a)  If, at any time, through and including the third anniversary
     date of the issuance of this Debenture, the Company proposes to register
     any of its securities under the Act (other than in connection with a merger
     pursuant to a Form S-4 Registration Statement or an employee stock
     compensation plan pursuant to a Form S-8 Registration Statement), it will
     give written notice by registered mail, at least thirty (30) days prior to
     the filing of each such registration statement, to the Rights Holder of its
     intention to do so.  If the Rights Holder notifies the Company within
     twenty (20) days after receipt of any such notice of its desire to include
     any Registrable Securities in such proposed registration statement, the
     Company shall afford such Rights Holder the opportunity to have any of the
     Registrable Securities registered under such registration statement and
     included in any underwriting involved with respect thereto.

               (b)  Notwithstanding the provisions of Section 9 hereof:  (i) the
     Company shall have the right at any time after it shall have given written
     notice pursuant to said Section 9 (irrespective of whether a written
     request for inclusion of any Registrable Securities shall have been made)
     to elect not to file any such proposed registration statement, or to
     withdraw the same after the filing but prior to the effective date thereof;
     and (ii) in the event a registration under Section 9 hereof relates to an
     underwritten public offering which does not include any securities being
     offered and sold on behalf of selling shareholders, the inclusion of any
     Registrable Securities may, at the election of the Company, be conditioned
     upon the Rights Holder agreement that the public

                                       12
<PAGE>
 
     offering of such Registrable Securities shall not commence until ninety
     (90) days after the effective date of such registration.

               (c)  The rights of the Rights Holder pursuant to Section 9 hereof
     shall be conditioned upon such Rights Holder's participation in the
     underwriting with respect thereto and the inclusion of such Rights Holder's
     Registrable Securities in such underwriting (unless otherwise mutually
     agreed by the Company, the managing underwriter or, if none, a majority of
     the underwriters, and such Rights Holder) to the extent provided herein.

               (d)  Notwithstanding any other provision of this Debenture, if
     the managing underwriter or, if none, a majority of the underwriters,
     determines that marketing factors require a limitation of the number of
     shares to be underwritten or a complete exclusion of such shares, such
     underwriter or underwriters may limit the number of Registrable Securities
     that may be included in the registration and underwriting or exclude all of
     the Registrable Securities, as appropriate. In the case of an underwritten
     registration in which the number of Registrable Securities that may be
     included is limited, the Company shall advise the Rights Holder of the
     limited number of Registrable Securities that may be included in the
     registration, and the number of Registrable Securities that may be included
     in the registration and underwriting shall be allocated among all Rights
     Holders thereof in proportion, as nearly as practicable, to the respective
     amounts of Registrable Securities entitled to inclusion in such
     registration held by such Rights Holders at the time of filing the
     registration statement.

               (e)  The Company shall (together with all Rights Holders
     proposing to distribute their securities through an underwriting) enter
     into an underwriting agreement in customary form with the underwriter or
     underwriters selected for the underwriting.

               (f)  If, after the third anniversary date of the issuance of this
     Debenture, the Registrable Securities owned by the Holder continue to be
     subject to a legend or other transfer restriction which treats the Holder
     as having affiliate status as that term is used in Rule 144 of the Act,
     then the Holder shall continue to have a one-time right to include any
     Registrable Securities in a proposed registration statement subject to the
     procedures described in Section 9.2 hereof.  This registration right shall
     expire on the earlier of:  (i) the conclusion of the Holder's affiliate
     status; or (ii) the sixth anniversary date of the issuance of this
     Debenture.

          9.3  Expenses.  All expenses incurred in connection with any
               -------- 
registration pursuant to this Debenture, including without limitation, all
registration,

                                       13
<PAGE>
 
filing and qualification fees, printing expenses, fees and disbursements of
counsel for the Company, and expenses of any special audits incidental to or
required by such registration, shall be borne by the Company; provided however
the Company shall not be required to pay:

               (a)  fees of legal counsel of any Rights Holder, or underwriters'
     fees, discounts, commissions or expenses relating to Registrable
     Securities; and

               (b)  for expenses that the Company is prohibited from paying
     under Blue Sky laws or by Blue Sky administrators.

          9.4  Company Responsibilities.  In the case of a registration effected
               ------------------------                                         
by the Company pursuant to this Debenture, the Company shall use its best
efforts to keep the Rights Holder advised in writing as to the initiation,
effectiveness and completion of such registration.  At its expense the Company
shall:

               (a)  prepare and file a registration statement (and such
     amendments and supplements thereto) with respect to such Registrable
     Securities and use its best efforts to cause such registration statement to
     become and remain effective for a period of one hundred eighty (180) days
     or until the Rights Holder or Rights Holders have completed the
     distribution described in the registration statement relating thereto,
     whichever first occurs;

               (b)  furnish such number of copies of a Prospectus in conformity
     with the requirements of applicable law, and such other documents incident
     thereto as a Rights Holder from time to time may reasonably request; and

               (c)  use every reasonable effort to register or qualify the
     Registrable Securities covered by such registration statement under the
     state Blue Sky laws of such jurisdictions as the Company's Board of
     Directors may reasonably determine, and do any and all other acts and
     things which may be necessary under said Blue Sky laws to enable the
     sellers of the Registrable Securities to consummate the public sale or
     other disposition of the Registrable Securities owned by them in such
     jurisdictions, except that the Company shall not for any purpose be
     required to qualify to do business as a foreign corporation in any
     jurisdiction wherein the Registrable Securities are so qualified.

          9.5  Indemnification.
               --------------- 

               (a)  The Company shall indemnify the Rights Holder, each of the
     Rights Holder's officers and directors, and each person controlling such

                                       14
<PAGE>
 
     Rights Holder, with respect to such registration effected pursuant to
     Section 9.2 hereof, and each underwriter, if any, and each person who
     controls any underwriter of the Registrable Securities, against all claims,
     losses, damages and liabilities (or actions in respect thereto) arising out
     of or based on any untrue statement (or alleged untrue statement) of a
     material fact contained in any registration statement or related
     Prospectus, or based on any omission (or alleged omission) to state therein
     a material fact required to be stated therein or necessary to make the
     statements therein not misleading, or any violation by the Company of any
     rule or regulation promulgated under any securities law applicable to the
     Company and relating to action or inaction required of the Company in
     connection with any such registration, and shall reimburse the Rights
     Holder, each of the Rights Holder's officers and directors, and each person
     controlling such Rights Holder, each such underwriter and each person who
     controls any such underwriter, for any legal and any other expenses
     reasonably incurred in connection with investigating or defending any such
     claim, loss, damage, liability or action, provided that the Company shall
     not be liable in any such case to the extent that any such claim, loss,
     damage or liability arises out of or is based on any untrue statement or
     omission based upon written information furnished to the Company in an
     instrument duly executed by such Rights Holder or underwriter specifically
     for use therein.

               (b)  The Rights Holder shall, if Registrable Securities held by
     or issuable to the Rights Holder are included in the securities as to which
     such registration is being effected, indemnify the Company, each of its
     directors and officers who sign such registration statement, each
     underwriter, if any, of the Company's securities covered by such a
     registration statement, each person who controls the Company within the
     meaning of the Act, and each other Rights Holder, each of such Rights
     Holder's officers and directors and each person controlling such Rights
     Holder, against all claims, losses, damages and liabilities (or actions in
     respect thereof) arising out of or based on any untrue statement (or
     alleged untrue statement) of a material fact contained in any such
     registration statement or related Prospectus, or any omission (or alleged
     omission) to state therein a material fact required to be stated therein or
     necessary to make the statements therein not misleading, and shall
     reimburse the Company, such Rights Holders, such directors, officers,
     persons, or underwriters for any legal or any other expenses reasonably
     incurred in connection with investigating or defending any such claim,
     loss, damage, liability, or action, in each case to the extent, but only to
     the extent, that such untrue statement (or alleged untrue statement) or
     omission (or alleged omission) is made in such registration statement or
     related Prospectus in reliance upon and in conformity with written
     information furnished to the Company in an instrument duly executed by such
     Rights Holder specifically for use therein.

                                       15
<PAGE>
 
               (c)  Each party entitled to indemnification under this Section
     9.5 (the "Indemnified Party") shall give notice to the party required to
     provide indemnification (the "Indemnifying Party") promptly after such
     Indemnified Party has actual knowledge of any claim as to which indemnity
     may he sought, and shall permit the Indemnifying Party to assume the
     defense of any such claim or any litigation resulting therefrom, provided
     that counsel for the Indemnifying Party, who shall conduct the defense of
     such claim or litigation, shall be approved by the Indemnified Party (whose
     approval shall not be unreasonably withheld), and the Indemnified Party may
     participate in such defense at such party's expense; and provided further
     that the failure of any Indemnified Party to give notice as provided herein
     shall not relieve the Indemnifying Party of its obligations under this
     Section 9.5. No Indemnifying Party, in the defense of any such claim or
     litigation, shall, except with the consent of each Indemnified Party,
     consent to entry of any judgment or enter into any settlement, which does
     not include as an unconditional term thereof, the giving by the claimant or
     plaintiff to such Indemnified Party of a release from all liability in
     respect to such claim or litigation.

          9.6  Rights Holder's obligations.  The Rights Holder shall furnish to
               ---------------------------                                     
the Company such written information regarding such Rights Holder and the
distribution proposed by such Rights Holder as the Company may reasonably
request in writing and as shall be required in connection with any registration
referred to in this Debenture.

          9.7  Assignment.  The rights granted to the Rights Holder pursuant to
               ----------                                                      
this Debenture may be assigned to a transferee or assignee of the Debenture or
any of the Registrable Securities, provided that the transferee or assignee is
an affiliated entity of the Rights Holder and the Company is given written
notice at the time of or within 10 days after said transfer, stating the name
and address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being assigned.

     10.  Miscellaneous.
          ------------- 

          10.1  Amendment.  The provisions of this Debenture may be amended or
                ---------                                                     
modified only with the written consent of the Company and the Holder.

          10.2  Entire Agreement.  This Debenture constitutes the entire 
                ----------------   
agreement among the parties with regard to the subject matter hereof, and
supersedes and replaces any and all prior to contemporaneous agreements, written
or oral. The terms and conditions of this Debenture shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties.
Nothing in this Debenture is intended to confer on any third party any rights,
liabilities or obligations, except as specifically provided.

                                       16
<PAGE>
 
          10.3  Headings.  The titles and subtitles used in this Debenture are
                --------                                                      
for convenience only and are not to be used in construing or interpreting this
Debenture.

          10.4  SEC Filings.  During the term of this Debenture the Company
                -----------                                                
shall promptly forward to the Holder annual and periodic reports and proxy
statements required to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.

          5.5   Governing Law.  This Debenture shall be governed by the internal
                -------------                                                   
laws of the State of California as applicable to transactions performed in
California between California residents.

          5.6   Attorneys' Fees.  The prevailing party in any action or
                ---------------                                        
proceeding between the parties arising out of or related to this Debenture shall
be entitled to recover all reasonable expenses, including without limitation
attorneys, fees and costs, incurred in connection with any such action or
proceeding.

          IN WITNESS WHEREOF, the undersigned have executed this Debenture on
the date first above written.


                         ANCHOR PACIFIC UNDERWRITERS, INC.



                         By: ______________________________
                              James R. Dunathan
                              President/CEO

                                       17
<PAGE>
 
                                  EXHIBIT "A"

                           Form of Conversion Notice


To Anchor Pacific Underwriters, Inc.:

The undersigned Holder hereby irrevocably exercises the option to convert this
Debenture, or portion hereof (which is in the amount of not less than $5,000 and
in increments of not less than $5,000 thereafter) below designated, into shares
of the Company's Common Stock, $.02 par value per share, in accordance with the
terms of the Debenture, and directs that the shares issuable and deliverable
upon such conversion, together with any check in payment for fractional shares
and any Debentures representing any unconverted principal amount hereof, be
issued and delivered to the undersigned unless a different name has been
indicated below.  If shares or Debentures are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto.  Any amount required to be paid by the undersigned
on account of interest accompanies this Debenture.

Dated:______________________                 _________________________________
                                             Signature


                                             _________________________________
                                             Taxpayer Identification Number


Principal Amount to be Converted: $_______________

If shares or Debentures are to be registered in the name of a person other than
the Holder, please print such person's name and address below:


Name:     ______________________________

Address:  ______________________________

          ______________________________

                                      A-1