Document:

exv10w13

 

Exhibit 10.13

SUBORDINATION AND NON-DISTURBANCE AGREEMENT

     This Agreement dated as of May 8, 2001 is made among Montreal Trust Company of Canada, in its
capacity as security trustee under a Security Trust Agreement dated as of May 8, 2001 (in such
capacity, the “Security Trustee”), Montreal Trust Company of Canada, in its capacity as trustee
under a Trust Indenture dated as of May 8, 2001 (in such capacity, the “Indenture Trustee”), Smith
& Nephew Inc., Smith & Nephew, Inc. and T.J. Smith
& Nephew Limited (collectively, “S&N”), and
Westaim Biomedical Corp. and Westaim Biomedical Inc.
(collectively, “Westaim”).

     WHEREAS, pursuant to a Security Trust Agreement dated as of May 8, 2001 (the “Security Trust
Agreement”), Westaim Biomedical Corp. (“WBC”) granted a security interest (the “Manufacturing
Security”) in favour of the Security Trustee, for and on behalf of S&N, in the Non-Patent
Collateral and in the Westaim Patent Rights as security for the Manufacturing Obligations (as each
of those terms are defined in Section 1 of this Agreement);

     AND WHEREAS, WBC granted the security interest in the Westaim Patent Rights for the sole
purpose of allowing the Security Trustee, in accordance with the Security Trust Agreement, to grant
a Replacement MT License (as defined in the Security Trust Agreement) in favour of S&N upon the
occurrence of an Event of Default (as defined in the Security Trust Agreement) and to allow S&N and
the Security Trustee to preserve their right, title and interest in and to the Non-Patent
Collateral;

     AND WHEREAS, pursuant to a Trust Indenture dated as of May 8, 2001 (the “Trust Indenture”),
Westaim granted a security interest (collectively, the “Patent Security”) in favour of the
Indenture Trustee, for and on behalf of the present and future Licensees (as defined in the Trust
Indenture), in the Westaim Patent Rights and related interests and in the proceeds thereof as
security for the Trust Obligations (as defined in Section 1 of this Agreement);

     AND WHEREAS, pursuant to both the Security Trust Agreement and the Trust Indenture, Westaim
deposited Assignments (as defined in the Security Trust Agreement) with Montreal Trust Company of
Canada, in its twin capacities as Security Trustee and Indenture Trustee;

     AND WHEREAS, the Security Trustee, S&N and the Indenture Trustee have entered into this
Agreement to establish the relative rights and priorities of the Manufacturing Security and the
Patent Security in the Westaim Patent Rights, and to ensure the preservation of any Manufacturing
License or Replacement MT License granted pursuant to the Supply Agreement (as defined in the
Security Trust Agreement).

     NOW THEREFORE, in consideration of the forgoing recitals and the mutual agreements herein
contained, and for other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

 

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	1.	 	The following capitalized terms herein and in the recitals hereto shall have the meanings set out below:

	 	1.1.	 	“Agreement” means this agreement, as amended, modified or restated from time to time;
	 
	 	1.2.	 	“Business Day” means a day on which banks and other financial institutions are
generally open for business in Calgary, Alberta, but does not in any event include
a Saturday or Sunday;
	 
	 	1.3.	 	“Joint Improvements” has the meaning set out in the Security Trust Agreement;
	 
	 	1.4.	 	“Manufacturing License” has the meaning set out in the Security Trust Agreement;
	 
	 	1.5.	 	“Manufacturing Obligations” has the meaning assigned to “Obligations” in the Security Trust Agreement;
	 
	 	1.6.	 	“Non-Patent Collateral” means the Westaim Manufacturing Technology, the
Joint Improvements, the Westaim Improvements and the Westaim Technical
Manuals (and any intangible property rights or confidential or proprietary
information relating thereto);
	 
	 	1.7.	 	“Security” means, collectively, the Manufacturing Security and the Patent Security;
	 
	 	1.8.	 	“Trust Obligations” has the meaning assigned to “Obligations” in the Trust Indenture;
	 
	 	1.9.	 	“Westaim Improvements” has the meaning set out in the Security Trust Agreement;
	 
	 	1.10.	 	“Westaim Manufacturing Technology” has the meaning set out in the Security Trust Agreement;
	 
	 	1.11.	 	“Westaim Patent Rights” has the meaning set out in the Trust Indenture; and
	 
	 	1.12.	 	“Westaim Technical Manuals” has the meaning set out in the Security Trust Agreement.

	2.	 	As against the Westaim Patent Rights, the Patent Security shall rank in all respects
and for all purposes in priority to the Manufacturing Security, to the extent of the
Trust Obligations.
	 
	3.	 	For greater certainty, as against the Non-Patent Collateral, the Manufacturing
Security shall rank in all respects and for all purposes in priority to the Patent
Security.
	 
	4.	 	The Security Trustee hereby postpones and subordinates the Manufacturing Security
to the Patent Security and the Indenture Trustee hereby postpones and subordinates
the Patent Security to the Manufacturing Security to the extent necessary to give
effect to the priority provisions set forth in Sections 2 and 3 of this Agreement.

 

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	5.	 	The priority provisions of this Agreement shall operate notwithstanding the time or
order of creation, execution, delivery, attachment or perfection of the Security or the
date of any enforcement thereof.
	 
	6.	 	Westaim hereby consents to the priority arrangements set forth herein.
	 
	7.	 	The Indenture Trustee agrees that in the event that the Indenture Trustee enforces the
Patent Security or any other rights or remedies under the Trust Indenture against the
Westaim Patent Rights, the Indenture Trustee shall not terminate, repudiate or
disclaim the Manufacturing License or the Replacement MT License or take any
action to disturb or derogate from the rights, interests, remedies and powers of S&N
under the Manufacturing License or Replacement MT License, including without
limitation the exclusivity thereof.
	 
	8.	 	Any notice to Westaim, the Security Trustee, the Indenture Trustee or S&N under the
provisions hereof will be valid and effective if in writing and delivered to, or mailed
by registered letter, postage prepaid, or sent by facsimile, at the following addresses
and facsimile numbers set out below or such other addresses or facsimile number as
Westaim, the Security Trustee, the Indenture Trustee or S&N notifies the others of in
accordance with this section:

	 	8.1.	 	If to Westaim:

Westaim Biomedical Corp.

10102 — 114 Street

Fort Saskatchewan, Alberta T8L 3W4

Attention: President

Facsimile: (780) 992-5300

with a copy to:

Westaim Biomedical Corp.

1010, 144-4th Avenue S.W.

Calgary, Alberta T2P 3N4

Attention: President

Facsimile: (403) 237-8181

and a copy to:

Westaim Biomedical Corp.

One Hampton Road, Suite 302

Exeter, New Hampshire 03833

Attention: President

Facsimile: (603) 778-6393

 

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	 	8.2.	 	If to the Security Trustee or Indenture Trustee:

Montreal Trust Company of Canada

Corporate Trust Department

Suite 710, 530 — 8th Avenue S.W.

Calgary, Alberta T2P 3S8

Attention: Manager, Corporate Trusts

Facsimile:(403) 267-6598

	 	8.3.	 	If to S&N:

Smith & Nephew, Inc.

11775 Starkey Road

P.O. Box 1970

Largo, Florida 33799-1970

Attention: President

Facsimile: (727) 398-4206

with a copy to:

Smith & Nephew, Inc.

1450 Brooks Road

Memphis, Tennessee 38116

Attention: General Counsel

Facsimile: (901) 396-7824

	 	 	Such notice will be deemed to have been given at the time of delivery or sending by facsimile or
on the fifth Business Day after mailing. Any sending by facsimile transmission shall be followed
by an original copy thereof by mail, provided that the non-fulfilment of such requirement does
not affect the deemed delivery by facsimile transmission. Any deliver made or facsimile sent on
a day other than a Business Day, or after 4:30 p.m. (Calgary time) on a Business Day, will be
deemed to have been given on the next following Business Day. Any party hereto may from time to
time notify the others of a change in address or facsimile number which thereafter, until
changed by like notice, will be its address or facsimile number for all purposes of this
Agreement. In the case of disruption in postal services, any notice if given solely by mail
shall not be deemed to have been given until it is actually delivered.
	 
	9.	 	The parties agree that they shall at all times do, execute, acknowledge and deliver all
such acts, deeds and agreements as may be reasonably necessary or desirable to give
effect to this Agreement, including any and all acts, deeds or agreements as may be
necessary or desirable for the purpose of registering or filing notice of the terms and
provisions of this Agreement.
	 
	10.	 	Nothing contained in this Agreement is intended to or shall impair obligations of
Westaim to perform and pay the Manufacturing Obligations or the Trust Obligations

 

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	 	 	when due, nor shall anything contained in this Agreement prevent the Security Trustee or the
Indenture Trustee from exercising any and all rights and remedies otherwise permitted by
applicable law upon the Security Trustee and/or the Indenture Trustee becoming entitled to
enforce the same under the Security Trust Agreement and the Trust Indenture, respectively.
	 
	11.	 	This Agreement shall continue in full force until terminated by written agreement of
the Security Trustee, the Indenture Trustee and S&N.
	 
	12.	 	This Agreement contains the entire agreement among the Security Trustee, the
Indenture Trustee, S&N and Westaim with respect to the matters dealt with in this
Agreement and supersedes any prior agreements, undertakings, declarations or
written or oral representations in respect of such matters.
	 
	13.	 	This Agreement shall be governed by and interpreted in accordance with the laws of
Alberta and shall be treated in all respects as an Alberta contract.
	 
	14.	 	The Security Trustee and the Indenture Trustee agree not to assign the Manufacturing
Security or the Patent Security except in accordance with the Security Trust
Agreement and the Trust Indenture, as the case may be, and unless they give prior
written notice to the other and the assignee agrees to be bound by the provisions of
this Agreement.
	 
	15.	 	Where the context so requires, the singular number shall include the plural and vice
versa, and the use of any gender shall include the masculine, feminine and neuter
genders.

 

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	16.	 	This Agreement may be duly executed by facsimile signatures and in separate counterparts, each
of which shall constitute an original agreement and all of which together shall constitute one and
the same agreement.

IN WITNESS WHEREOF the parties have executed this agreement as of the date first mentioned above.

	 	 	 	 	 
	SMITH & NEPHEW INC.	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	SMITH & NEPHEW INC.	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	T.J. SMITH & NEPHEW LIMITED	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	WESTAIM BIOMEDICAL CORP.	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	WESTAIM BIOMEDICAL INC.	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	MONTREAL TRUST COMPANY OF

CANADA, as Security Trustee	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

Authorized Signing Officer
	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

Authorized Signing Officer
	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	MONTREAL TRUST COMPANY OF

CANADA, as Indenture Trustee	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

Authorized Signing Officer
	 	 
	 
	 	 	 	 
	Per:

	 	/s/ Illegible
 

Authorized Signing Officer<PAGE>

                                                                   Exhibit 10.30

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 13th day of
December 2005 (the "Signing Date"), by and between CNA Surety Corporation, a
Delaware corporation (the "Company"), and John F. Welch ("Executive");

                                   WITNESSETH:

     WHEREAS,  the Company  wishes to employ  Executive as  President  and Chief
Executive  Officer of the Company;  and Executive  wishes to accept and agree to
such employment under the terms and conditions set forth hereinbelow.

     NOW, THEREFORE, in consideration of the foregoing premises and the promises
and covenants herein, the parties hereto agree as follows:

     1. EMPLOYMENT TERM. The Company and Executive agree that the Company shall
employ Executive to perform the duties of President and Chief Executive Officer,
for the period commencing on January 1, 2006 ("Effective Date") and ending on
December 31, 2008, or such earlier date as of which Executive's employment is
terminated in accordance with Section 6 hereof (said period the "Term"). The
covenants set forth in Sections 7, 8, 9, 10, 11, 12, 13, and 14 shall survive
the employment Term of this Agreement.

     2. DUTIES OF EXECUTIVE.

     (a) Executive shall perform the duties and responsibilities of President
and Chief Executive Officer of the Company as defined and directed by its Board
of Directors. As President and Chief Executive Officer of the Company, Executive
shall have responsibility for the day-to-day operations of the Company and for
development and implementation of the Company's business plans and strategies.
Executive shall report to the Board of Directors. Executive shall serve in such
other position or positions with the Company and its subsidiaries, commensurate
with his position as President and Chief Executive Officer and experience, as
the Board shall from time to time specify without additional compensation.

     (b) Executive shall diligently and to the best of his abilities assume,
perform, and discharge the duties and responsibilities of President and Chief
Executive Officer of the

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<PAGE>

     Company, as well as such other specific duties and responsibilities as the
Board shall assign or designate to Executive from time to time, not inconsistent
with Executive's position as President and Chief Executive Officer. Executive
shall devote substantially all of his working time to the performance of his
duties as set forth herein and shall not, without the prior written consent of
the Board, accept other employment or render or perform other services, nor
shall he have any ownership interest in any other business which is in direct or
indirect competition with the business of the Company, other than in the form of
publicly traded securities constituting less than five percent (5%) of the
outstanding securities of a corporation (determined by vote or value) or limited
partnership interests constituting less than five percent (5%) of the value of
any such partnership. The foregoing shall not preclude Executive from engaging
in charitable, professional, and personal investment activities, provided that,
in the judgment of the Board, such activities do not interfere with his
performance of his duties and responsibilities hereunder.

     3. COMPENSATION.

     (a) During the Term the Company shall pay to Executive, for the period he
is employed by the Company hereunder, an annual base salary of $435,000.00 (the
"Base Compensation"). The Base Compensation shall be payable not less frequently
than in monthly increments. At the discretion of the Board, such salary rate may
be increased annually during the term of the Agreement, beginning in 2006, based
on market considerations and Executive's performance and responsibilities. In no
event shall Executive's salary rate be reduced to an amount that is less than
the amount specified in this Section 3(a) without Executive's written consent,
or to a Base Compensation amount that is less than the amount that he was
previously receiving from the Company without Executive's written consent.

     (b) For each calendar year ending during the Employment Term, Executive may
earn an annual bonus ("Bonus") based on achievement of target levels of
performance during the calendar year. Each year, the Compensation Committee of
the Board of Directors ("Committee") in its sole discretion shall determine the
targets and the bonus percentage ("Bonus Target") for which Executive shall be
eligible. Subject to the approval of the Committee, the Executive's Bonus Target
during the Employment Term shall not be less than the rate of one hundred
percent (100%) of his Base Compensation for each twelve month bonus period, with
payment in the amount of between 0% and 200% of Executive's Bonus Target based
upon the achievement of target levels of performance.

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<PAGE>

     (c) During the Employment Term, Executive shall be eligible to participate
in all of the Company's existing and future long-term incentive programs for key
executives at a level commensurate with his position at the Company and
consistent with the Company's then current policies and practices, as determined
by the Committee. The Committee, in its sole discretion, shall determine target
performance and other goals in relation to such programs. Subject to Committee
approval, the Executive's long term incentive compensation award target shall be
no less than fifty percent (50%) of each year's annual Base Compensation upon
the achievement of such goals.

     (d) Subject to the approval of the Committee, Executive shall be eligible
for an annual stock option grant with an estimated economic value equal to 50%
of Base Compensation beginning with the 2006 performance year, during the term
of Executive's employment under this Agreement, as determined by the Company.
Executive's awards of shares hereunder shall be, subject to the terms and
conditions of the Company's Stock Option Plan dated February 24, 1997, as
amended from time to time.

     (e) For avoidance of doubt respecting awards to Executive under Section
3(b), 3(c) and 3(d) hereof, the Committee shall retain such discretion as may be
provided under the Incentive Compensation Plan to satisfy Section 162(m) of the
Internal Revenue Code of 1986 ("Code") or any successor provision as determined
by the Company. The Company may defer the payment of all compensation in any
form to which Executive is entitled hereunder or otherwise from the Company to
enable it to comply with Section 162(m) of the Code or any successor provision
with respect to deductibility of executive compensation. Subject to Section
162(m) of the Code and any other applicable laws or regulations as interpreted
by the Company, deferred compensation may be credited to the Executive's CNA
Surety Corporation 2005 Deferred Compensation Plan account and, if so credited,
shall be subject to the terms thereof and the Company's plan in relation
thereto.

     (f) All payments due under this Agreement shall be subject to withholding
as required by law as determined by the Company.

     (g) To the extent that any of the payments to be made under this Agreement,
including without limitation under Section 6 hereof, are governed by Section
409A of the Internal Revenue Code (the "Code") of 1986, as amended, the parties
will work together in good faith to amend

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<PAGE>

any provisions necessary for compliance in a manner that maintains the basic
financial provisions of this Agreement.

     4. OTHER BENEFITS. During the period of his employment with the Company
hereunder, Executive shall be entitled to continue to participate in the various
benefit plans, programs or arrangements established and maintained by the
Company from time to time and applicable to senior executives of the Company
such as, but not by way of limitation or required inclusion, paid time off,
medical benefits, dental benefits, life insurance, long-term disability
insurance, both qualified and supplemental retirement or savings plans, and
long-term incentive compensation plans, and to receive all fringe benefits as
available to senior executives of the Company, including payment of up to $5,000
per year for financial planning advice and services. Executive's entitlement to
participate in any and all such plans, programs or arrangements shall, in each
case, be subject to the terms and conditions of the Company's policies with
regard to such plans, programs or arrangements as adjusted by the Company from
time to time in its sole discretion. In the event of termination of his
employment, Executive's severance and benefits as referenced in this Paragraph 4
shall be determined solely in accordance with Section 6 hereof.

     5. EXPENSE REIMBURSEMENT. Executive shall continue to be entitled to
reimbursement by the Company for all reasonable and customary travel and other
business expenses incurred by Executive in carrying out his duties under this
Agreement, in accordance with the general travel and business reimbursement
policies adopted by the Company as adjusted from time to time in the Company's
sole discretion. Executive shall report all such expenditures not less
frequently than monthly accompanied by adequate records and such other
documentary evidence as required by the Company or by Federal or state tax
statutes or regulations governing the substantiation of such expenditures.

     6. TERMINATION OF EMPLOYMENT. If Executive's employment with the Company
shall terminate during the term of this Agreement, the following conditions set
forth herein shall apply with respect to the Executive's compensation and
benefits hereunder. Either party may terminate Executive's employment with the
Company during the term of this Agreement by written notice to the other party,
effective as of the date specified in such notice and Executive's employment
shall automatically terminate in the event of Executive's death. Upon
termination of Executive's employment during or at the end of the term of this
Agreement, the rights of the parties under this Agreement shall be determined
pursuant to this Section 6. All payments to be

                                                                               4
<PAGE>

made hereunder shall be made either to Executive or to his personal
representatives, heirs or beneficiaries, as the case may be. In the event of
Executive's termination during the term of this Agreement, unless otherwise
specified in this Agreement Executive's rights, if any, under any of the
Company's retirement, savings, benefit, pension, incentive or other plans of any
nature shall be governed by their terms.

     6.1 DEATH AND DISABILITY. In the event of the death of Executive or, at the
Company's election, in the event of his Permanent Disability (as defined below)
during the term of this Agreement, provided it has not already terminated,
Executive's employment shall terminate; provided, however, that:

     (a) The Company shall make payment to Executive or his personal
representatives, heirs or beneficiaries as the case may be, as follows: within
30 days after such termination his (i) unpaid base salary and current year's
target Bonus and long-term incentive compensation award prorated to the date of
termination; (ii) any previous year's earned but not paid Bonus; and (iii)
unpaid cash entitlements earned by Executive or payable to his beneficiaries as
of the date of termination which, pursuant to the terms of the applicable
Company plan or program, accrued prior to the date of termination.

     (b) For purposes of this Agreement, the term "Permanent Disability" means a
physical or mental condition of Executive which, as determined by the Board, in
its sole discretion based on and consistent with available medical information,
is expected to continue beyond 26 weeks and which renders Executive incapable of
performing any substantial portion of the services contemplated hereunder with
reasonable accommodation compatible with the fulfillment of his duties as
described in Section 2 hereinabove.

     6.2 TERMINATION FOR CAUSE BY THE COMPANY. In the event that Executive shall
engage in any conduct which the Board in its sole discretion shall determine to
be "CAUSE", as defined herein, he shall be subject to termination forthwith. For
purposes of this Agreement, Cause shall mean engaging in or committing: (i) any
act which would constitute a felony or other act involving fraud, dishonesty,
moral turpitude, unlawful conduct or breach of fiduciary duty;; (ii) a
substantial breach of any material provision of this Agreement; (iii) willful or
reckless material misconduct in the performance of the Executive's duties; or
(iv) the habitual neglect of duties; provided however, that, for purposes of
clauses (iii) and (iv), Cause shall not include any one or more of the
following: bad judgment, negligence or any act or omission believed by the

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<PAGE>

Executive in good faith to have been in or not opposed to the interest of the
Company (without any intent by the Executive to gain, directly or indirectly, a
profit to which he was not legally entitled). If the Executive agrees to resign
from his employment with the Company in lieu of being terminated for Cause, he
may be deemed to have been terminated for Cause for purposes of this Agreement.

     Upon terminating the Executive for Cause, other than paying the Executive
within 30 days of such termination his: (i) unpaid base salary prorated to the
date of termination; (ii) any previous year's earned but unpaid Bonus; and (iii)
unpaid cash entitlements earned and accrued pursuant to the terms of the
applicable Company plan or program prior to the date of the date of termination,
the Company shall have no further obligations whatsoever to Executive under this
Agreement. In the event of termination for Cause, Executive agrees to continue
to be bound by the covenants set forth herein at Sections 7, 8 and 10 through
13, subsequent to the termination date for such periods of time as provided for
in said Sections respectively.

     6.3 TERMINATION BY THE COMPANY WITHOUT CAUSE OR FOR CONVENIENCE/
TERMINATION BY EXECUTIVE FOR GOOD REASON. In the event Executive's employment is
terminated by the Company "WITHOUT CAUSE" (as that term is defined hereinbelow),
or "For Convenience" (as that term is defined hereinbelow) or in the event
Executive terminates his employment for "GOOD REASON" (as that term is defined
hereinbelow):

     (a) The Company shall pay to Executive severance consisting of an amount
equal to the sum of the Executive's Base Compensation, Bonus at target and
long-term incentive compensation award at target, prorated based on the total
number of months from the date of termination through December 31, 2008;
however, in no event shall the period of time for which such severance is
calculated be less than 12 months. Other than as set forth in this subset (a)
the Company shall have no further obligations under this Agreement in the event
of such termination. The severance shall be paid in equal monthly installments
following such termination. The Company shall also pay the Executive within 30
days of his termination: (i) any unpaid base salary and current year's target
Bonus and long term incentive compensation award prorated to the date of
termination; (ii) any previous year's earned but unpaid Bonus; and (iii) unpaid
cash entitlements earned and accrued pursuant to the terms of the applicable
Company plan or program prior to the date of the date of termination. Executive
agrees to be bound by the covenants set forth in Sections 7 through 13 hereof
prior to, as of and subsequent to the termination date for such periods of time
as provided for in said Sections respectively. In addition, Executive shall
continue to participate in such health benefit plans in which he was

                                                                               6
<PAGE>

enrolled prior to termination throughout the term of the payments set forth in
this Section 6.3(a), with said period of participation in any case to run
concurrently with any period of COBRA coverage to which Executive may be
entitled. Other than as set forth in this Section 6.3 (a), the Company shall
have no further obligations to Executive under this Agreement in the event of a
termination of Executive's employment by the Company Without Cause or any
termination of Executive's employment by Executive for Good Reason.

     (b) "Good Reason" as set forth herein is defined as a reduction in the rate
of Executive's base salary, annual incentive target or long-term incentive
compensation target compensation, or a required relocation of his personal
residence without Executive's consent.

     (c) "Without Cause" or "For Convenience" as set forth herein is defined as
a termination of the Executive's employment by the Company for any reason not
described or referenced in subsections 6.1 and 6.2.

     (d) In the event of any termination of employment as described in this
Section 6.3, Executive agrees to continue to be bound by the covenants set forth
herein at Sections 7 through 13 subsequent to the date of such termination for
such periods of time as provided for in said Sections respectively. Any term or
provision herein to the contrary notwithstanding, the timing and other
conditions of any severance or other payments to be made under this Agreement
shall be subject to the requirements of all applicable laws and regulations,
whether or not they are in existence or in effect when this Agreement is
executed by the parties hereto.

     6.4 VOLUNTARY RESIGNATION BY EXECUTIVE. In the event that Executive's
employment is voluntarily terminated by Executive other than pursuant to
subsection 6.3 or as a direct result of his death or Permanent Disability (as
described in subsection 6.1), the Company shall have no further obligations to
Executive under this Agreement other than paying the Executive within 30 days of
such termination his: (i) unpaid base salary prorated to the date of
termination; (ii) any previous year's earned but not paid Bonus; and (iii)
unpaid cash entitlements earned and accrued pursuant to the terms of the
applicable Company plan or program prior to the date of the date of termination.
In the event of termination of employment as described in this Section 6.4,
Executive agrees to continue to be bound by the covenants set forth herein at
Sections 7 through 13 subsequent to the date of such termination for such
periods of time as provided for in said Sections respectively.

                                                                               7
<PAGE>

     6.5 FAILURE TO EXTEND AGREEMENT.

     (a) Following December 31, 2008, if the Company fails to extend Executive's
employment for any reason other than for Cause, in which case Paragraph 6.2
(relating to termination for Cause) shall apply, or if the Company and
Executive, after good faith negotiations have not mutually agreed to the
essential terms of, and entered into a new employment agreement prior to March
31, 2009, Executive's employment shall terminate on April 1, 2009. Upon the
termination of Executive's employment pursuant to this Section, the Company
shall pay Executive severance consisting of the sum of: (i) Executive's then
current annual Base Compensation; (ii) Executive's then current annual target
Bonus; and (iii) Executive's then current Long Term Incentive Compensation
target award. The severance shall be paid in 12 equal monthly installments
following such termination. The Company shall also pay Executive within 30 days
of his termination: (i) any unpaid base salary and current year's target Bonus
and long-term incentive compensation award, prorated to the date of termination;
(ii) any previous year's earned but not paid Bonus; and (iii) unpaid cash
entitlements earned and accrued pursuant to the terms of the applicable Company
plan or program prior to the date of termination. In the event of any
termination of or failure to extend employment as described in this Section 6.5,
Executive agrees to continue to be bound by the covenants set forth herein at
Sections 7 through 13 subsequent to the date of such termination for such
periods of time as provided for in said Sections respectively. In addition,
Executive shall continue to participate in such health insurance plans in which
he was enrolled at the time his employment ends throughout the term of the
payments set forth in this Section 6.5(a), as if he were still employed by the
Company, said participation in any case to run concurrently with any period of
COBRA coverage to which Executive may be entitled.

     (b) Notwithstanding the foregoing or any other term or provision of this
Agreement, if Executive's employment with the Company terminates following
Executive's rejection of an offer by the Company to extend the employment period
of the Agreement or to enter into a new Agreement on substantially the same
terms as prior to termination or expiration, with compensation that is not less
than Executive's yearly compensation prior to the termination or in the event
Executive voluntarily resigns, then Executive's employment shall be treated as
having been terminated in accordance with Section 6.4 (relating to voluntary
resignation), and the only payments to which he shall be entitled shall be
governed by said Section 6.4.

                                                                               8
<PAGE>

     (c) During such period as the Executive shall continue to be employed by
the Company between January 1, 2009 and April 1, 2009: (i), Executive shall be
paid under the same terms and at the same rate as was in effect on December 31,
2008; and (ii). until April 1, 2009 Executive shall continue to participate, at
the active employee rates, in such health benefits plans on the same basis as he
was participating as of December 31, 2008.

     6.6 RELEASE. Executive acknowledges that the severance benefits set forth
in each portion of Section 6 hereof represent significant additional benefits as
compared to those available to the Company's employees in general. As a
condition precedent to receiving any payments or other benefits pursuant to
Section 6 of this Agreement, Executive agrees to sign a full and complete
release in a form acceptable to the Company releasing the Company, its
subsidiaries and affiliates and their directors, officers and employees of any
and all claims, both known and unknown as of the date of Executive's termination
of employment with the Company. In the absence of Executive's execution and
delivery to the Company of such a release in a form satisfactory to the Company,
the Company shall have no obligation to Executive to make any payments or
provide any other benefits as provided for in said Section 6 of this Agreement.

     7. CONFIDENTIALITY. Executive agrees that while he is employed by the
Company, and at all times thereafter, Executive shall not reveal or utilize
"confidential information" (as that term is defined in Section 8 of this
Agreement) and learned during the course of or as a result of his employment
which relates to: (a) the Company and/or any other business or entity in which
the Company during the course of the Executive's employment has directly or
indirectly held a greater than a 10% equity interest whether voting or
non-voting; and (b) the Company's customers, employees, agents, brokers and
vendors. The Executive acknowledges that all such confidential information is
commercially valuable and is the property of the Company. Upon the termination
of his employment Executive shall return all confidential information and any
copies thereof to the Company, whether it exists in written, electronic,
computerized or other form.

     8. "CONFIDENTIAL INFORMATION" DEFINED. For purposes of this Agreement
"confidential information" includes all information, knowledge or data (whether
or not a trade secret or protected by laws pertaining to intellectual property)
not generally known outside the Company and its affiliates or subsidiaries
(unless as a result of a breach of any of the obligations imposed by this
Agreement) concerning the business operations, performance and other information
of the Company and/or its affiliates or subsidiaries or other entities as
described in Section 7 above. Such information may without limitation include
information relating to data, finances,

                                                                               9
<PAGE>

marketing, pricing, profit margins, underwriting, claims, loss control,
marketing and business plans, renewals, software, processing, vendors,
administrators, customers or prospective customers, products, brokers, agents
and employees.

     9. COMPETITION. Executive hereby agrees that, while he is employed by the
Company, and for a period of 12 months following the date of his termination of
employment with the Company pursuant to Sections 6.3 or 6.4, and for a period of
6 months following the date of his termination of employment with the Company
pursuant to Section 6.5, he will not, directly or indirectly, without the prior
written approval of the Board, enter into any business relationship (either as
principal, agent, board member, officer, consultant, stockholder, employee or in
any other capacity) with any business or other entity that at any relevant time
is engaged in the surety industry in the United States and Canada (a
"Competitor"); provided, however, that such prohibited activity shall not
include the ownership of less than 5% of the outstanding securities of any
publicly traded corporation (determined by vote or value) regardless of the
business of such corporation; and provided further that such prohibited activity
shall be expanded to include any business or other entity that is engaged in the
surety industry outside the United States and Canada should, during the term of
this Agreement, the Company do "substantial" business outside the United States
and Canada. Upon the written request of Executive, the Board will determine in
its sole discretion whether a business or other entity constitutes a
"Competitor" for purposes of this Section 9 or whether the Company is doing
"substantial" business outside the United States and Canada; provided that the
Board may require Executive to provide such information as the Board determines
to be necessary to make such determination; and further provided that the
current and continuing effectiveness of such determination may be conditioned on
the accuracy of such information, and on such other factors as the Board may
determine.

     10. SOLICITATIOn. Executive agrees that while he is employed by the
Company, and for a period of 24 months following his termination of employment
with the Company pursuant to Sections 6.2, 6.3 or 6.4, and for a period of 12
months following the date of his termination of employment with the Company
pursuant to Section 6.5, he will not employ, offer to employ, engage as a
consultant, or form an association with any person who is then, or who during
the preceding one year was, an employee of the Company or any subsidiary or
affiliate of the Company or any successor or purchaser of any portion thereof,
nor will he assist any other person or entity in soliciting for employment or
consultation any person who is then, or who during the preceding one year was,
an employee of the Company or any subsidiary or affiliate of the Company or any
successor or purchaser of any portion thereof..

                                                                              10
<PAGE>

     11. NON-INTERFERENCE. Executive agrees that while he is employed by the
Company, and for a period of 24 months following his termination of employment
with the Company pursuant to Sections 6.2, 6.3 or 6.4, and for a period of 12
months following the date of his termination of employment with the Company
pursuant to Section 6.5, he will not disturb or attempt to disturb or cause
anyone else to disturb any business relationship or agreement between either the
Company or any subsidiary or affiliate of the Company or any successor or
purchaser of any portion thereof, and any other person or entity.

     12. ASSISTANCE WITH CLAIMS. Executive agrees that, while he is employed by
the Company, and for a reasonable period (not less than 60 months from the date
of termination) thereafter, he will be available, on a reasonable basis, to
assist the Company and its subsidiaries and affiliates in the prosecution or
defense of any claims, suits, litigation, arbitrations, investigations, or other
proceedings, whether pending or threatened (collectively "Claims") that may be
made or threatened by or against the Company or any of its subsidiaries or
affiliates. Executive agrees, unless precluded by law, to promptly inform the
Company if he is requested (i) to testify or otherwise become involved in
connection with any Claim against the interests of the Company or any subsidiary
or affiliate or (ii) to assist or participate in any investigation (whether
governmental or private) of the Company or any subsidiary or affiliate or any of
their actions, whether or not a lawsuit has been filed against the Company or
any of its subsidiaries or affiliates relating thereto. For the period following
the 24-month anniversary of the date of Executive's termination of employment
with the Company, the Company agrees to provide reasonable compensation to
Executive for such assistance. Nothing in this Section 12 is intended or shall
be construed to prevent Executive from cooperation fully with any government
investigation or review as required by applicable law or regulation.

     13. RETURN OF MATERIALS. Executive shall, at any time upon the request of
the Company, and in any event upon the termination of his employment with the
Company, for any reason, immediately return and surrender to the Company all
originals and all copies, regardless of medium, of property belonging to the
Company created or obtained by Executive as a result of or in the course of or
in connection with his employment with the Company, including without limitation
all such originals and/or copies containing any confidential information,
regardless of whether such items constitute proprietary information, provided
that Executive shall be under no obligation to return written materials acquired
from third parties which are generally available to

                                                                              11
<PAGE>

the public. Executive acknowledges that all such materials are, and will at all
times remain, the exclusive property of the Company.

     14. SCOPE OF COVENANTS.

     (a) The Executive acknowledges that: (a) as a senior executive of the
Company he has and will have access to confidential information concerning the
entire range of businesses in which the Company was engaged; (b) that the
Company's businesses are conducted nation-wide; and (c) that the Company's
confidential information, if disclosed or utilized without its authorization
would irreparably harm the Company in: (i) obtaining renewals of existing
customers; (ii) selling new business; (iii) maintaining and establishing
existing and new relationships with employees, agents, brokers, vendors; and
(iv) other ways arising out of the conduct of the businesses in which the
Company is engaged.

     (b) To protect such information and such existing and prospective
relationships, and for other significant business reasons, the Executive agrees
that it is reasonable and necessary that: (a) the scope of this agreement be
nation-wide; (b) its breadth include the entire surety industry, except as
otherwise provided in Section 9; and (c) the duration of the restrictions upon
the Executive be as indicated therein.

     (c) The Executive acknowledges that the Company's customer, employee and
business relationships are long-standing, indeed, near permanent and therefore
are of great value to the Company. The Executive agrees that neither any of the
provisions in this Agreement nor the Company's enforcement of it alters or will
alter his ability to earn a livelihood for himself and his family and further
that both are reasonably necessary to protect the Company's legitimate business
and property interests and relationships, especially those which he was
responsible for developing or maintaining. The Executive agrees that his actual
or threatened breach of the covenants set forth in Paragraphs 7 through 13 above
would cause the Company irreparable harm and that the Company is entitled to an
injunction, in addition to whatever other remedies may be available, to restrain
such actual or threatened breach. The Executive agrees that if bond is required
in order for the Company to obtain such relief, if need only be in a nominal
amount and that he shall reimburse the Company for all costs of any such suit,
including the Company's reasonable attorneys' fees. The Executive consents to
the filing of any such suit against him in the state or federal courts located
in Illinois or any state in which he resides. He further agrees that in the
event of such suit or any other action arising out of or relating to this

                                                                              12
<PAGE>

Agreement, the parties shall be bound by and the court shall apply the internal
laws of the State of Illinois irrespective of rules regarding choice of law or
conflicts of laws.

     15. EFFECT OF COVENANTS. Nothing in Sections 7 through 14 is intended or
shall be construed to limit or otherwise adversely affect any rights, remedies
or options that the Company would possess in the absence of the provisions of
such Sections.

     16. REVISION. The parties hereto expressly agree that in the event that any
of the provisions, covenants, warranties or agreements in this Agreement are
held to be in any respect an unreasonable restriction upon Executive or are
otherwise invalid, for whatsoever cause, then the court or arbitrator so holding
is hereby authorized to (a) reduce the territory to which said covenant,
warranty or agreement pertains, the period of time in which said covenant,
warranty or agreement operates or the scope of activity to which said covenant,
warranty or agreement pertains or (b) effect any other change to the extent
necessary to render any of the restrictions contained in this Agreement
enforceable.

     17. SEVERABILITY. Each of the terms and provisions of this Agreement is to
be deemed severable in whole or in part and, if any term or provision of the
application thereof in any circumstances should be invalid, illegal or
unenforceable, the remaining terms and provisions or the application thereof to
circumstances other than those as to which it is held invalid, illegal or
unenforceable, shall not be affected thereby and shall remain in full force and
effect.

     18. BINDING AGREEMENT; ASSIGNMENT. This Agreement shall be binding upon the
parties hereto and their respective heirs, successors (including but not limited
to any successor by reason of a merger, acquisition, sale or other business
combination involving the Company), personal representatives and assigns. The
Company shall have the right to assign this Agreement to any successor in
interest to the business, or any majority part thereof, of the Company or any
joint venture or partnership to which the Company is a joint venturer or general
partner which conducts substantially all of the Company's business. Executive
shall not assign any of his obligations or duties hereunder and any such
attempted assignment shall be null and void.

     19. CONTROLLING LAW; JURISDICTION. This Agreement shall be governed by,
interpreted and construed according to the laws of the State of Illinois
(without regard to choice of law or conflict of laws principles).

                                                                              13
<PAGE>

     20. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this
Agreement contains the entire agreement of the parties with regard to the
subject matter hereof, supersedes all prior agreements and understandings,
written or oral, and may only be amended by an agreement in writing signed by
the parties thereto.

     21. ADDITIONAL DOCUMENTS. Each party hereto shall, from time to time, upon
request of the other party, execute any additional documents which shall
reasonably be required to effectuate the purposes hereof.

     22. INCORPORATION. The introductory recitals hereof are incorporated in
this Agreement and are binding upon the parties hereto.

     23. FAILURE TO ENFORCE. The failure to enforce any of the provisions of
this Agreement shall not be construed as a waiver of such provisions. Further,
any express waiver by any party with respect to any breach of any provision
hereunder by any other party shall not constitute a waiver of such party's right
to thereafter fully enforce each and every provision of this Agreement.

     24. SURVIVAL. Except as otherwise set forth herein, the obligations
contained in this Agreement shall survive the termination, for any reason
whatsoever, of Executive's employment with the Company.

     25. HEADINGS. All numbers and headings contained herein are for reference
only and are not intended to qualify, limit or otherwise affect the meaning or
interpretation of any provision contained herein.

     26. NOTICES. Notices and all other communications provided for in this
Agreement shall be in writing and shall be delivered personally or sent by
registered or certified mail, return receipt requested, postage prepaid
(provided that international mail shall be sent via overnight or two-day
delivery), or sent by facsimile or prepaid overnight courier to the parties at
the addresses set forth below (or such other addresses as shall be specified by
the parties by like notice). Such notices, demands, claims and other
communications shall be deemed given:

                                                                              14
<PAGE>

     (a) in the case of delivery by overnight service with guaranteed next day
delivery, the next day or the day designated for delivery;

     (b) in the case of certified or registered U.S. mail, five days after
deposit in the U.S. mail;

or

     (c) in the case of facsimile, the date upon which the transmitting party
received confirmation of receipt by facsimile, telephone or otherwise;

provided, however, that in no event shall any such communications be deemed to
be given later than the date they are actually received. Communications that are
to be delivered by the U.S. mail or by overnight service or two-day delivery
service are to be delivered to the addresses set forth below:

If to the Company:

          CNA Surety Corporation
          CNA Center
          Chicago, IL 60685
          Attn: Corporate Secretary

If to Executive:

          John F. Welch
          [ADDRESS]

or to such other address as either party shall furnish to the other party in
writing in accordance with the provisions of this Section 26.

     27. GENDER. The masculine, feminine or neuter pronouns used herein shall be
interpreted without regard to gender, and the use of the singular or plural
shall be deemed to include the other whenever the context so requires.

     28. ARBITRATION OF ALL DISPUTES. Any controversy or claim arising out of or
relating to this Agreement (or the breach thereof) except as otherwise indicated
hereinbelow, shall be settled by final, binding and non-appealable arbitration
in Chicago, Illinois by three arbitrators. Except as otherwise expressly
provided in this Section 28, the arbitration shall be conducted in

                                                                              15
<PAGE>

accordance with the rules of the American Arbitration Association (the
"Association") then in effect. One of the arbitrators shall be appointed by the
Company, one shall be appointed by Executive, and the third shall be appointed
by the first two arbitrators. If the first two arbitrators cannot agree on the
third arbitrator within 30 days of the appointment of the second arbitrator,
then the third arbitrator shall be appointed by the Association. This Section 28
shall not be applicable with respect to any matter or controversy subject to
Sections 7 through 14 of this Agreement.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the Signing Date.

CNA SURETY CORPORATION

By: --------------------------------

Title: -----------------------------

------------------------------------
John F. Welch

                                                                              16

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