Document:

Exhibit 10.1

Exhibit 10.1

Change in Control

Protection and Severance Agreement

This CHANGE IN CONTROL PROTECTION AND SEVERANCE AGREEMENT is dated August 11, 2010 by and
between Stanley Furniture Company, Inc., a Delaware corporation (the “Company”), and Micah S.
Goldstein (the “Executive”).

PURPOSE

In order to induce the Executive to accept employment with the Company and to remain in the
employment of the Company, particularly in the event of the threat or occurrence of a Change in
Control (as hereafter defined), the Company desires to enter into this Agreement to provide the
Executive with certain benefits in the event the Executive’s employment is terminated as a result
of a Change in Control or in certain circumstances in the first year of employment.

NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein,
it is agreed as follows:

SECTION 1. Definitions

For purposes of this Agreement, the following terms have the meanings set forth below:

“Accrued Compensation” means an amount which includes all amounts earned or accrued by the
Executive through and including the Termination Date but not paid to the Executive on or prior to
such date, including (a) all base salary, (b) all vacation pay, and (c) all bonuses and incentive
compensation.

“Base Salary Amount” means the Executive’s annual base salary at the rate in effect on the
Termination Date.

“Board” means the Board of Directors of the Company.

“Bonus Amount” means the average of the annual cash bonuses paid to the Executive for the two
fiscal years immediately prior to the fiscal year in which the Termination Date occurs. Bonus
Amount includes only the annual cash bonus and does not include any multi-year cash bonus,
restricted stock awards, options or other long-term incentive compensation that may have been
awarded to the Executive.

“Cause” means gross or willful neglect of duty which is not corrected after 30 days’ written
notice thereof; misconduct, malfeasance, fraud or dishonesty which materially and adversely affects
the Company or its reputation in the industry; or the commission of a felony or a crime involving
moral turpitude.

 

 

 

“Change in Control” of the Company means, and shall be deemed to have occurred upon, any of
the following events:

(i) The acquisition by a Group of Beneficial Ownership of 35% or more of the Stock or the
Voting Power of the Company and Mr. Glenn Prillaman ceases to be the chief executive officer
of the Company, but excluding for this purpose: (A) any acquisition by the Company (or a
subsidiary), or an employee benefit plan of the Company; or (B) any acquisition of common
stock of the Company by management employees of the Company. “Group” means any individual,
entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the “Act”), “Beneficial Ownership” has the meaning in Rule 13d-3
promulgated under the Act, “Stock” means the then outstanding shares of common stock, and
“Voting Power” means the combined voting power of the outstanding voting securities entitled
to vote generally in the election of directors.

(ii) Individuals who constitute the Board on the effective date of this Agreement (the
“Incumbent Board”) cease to constitute at least a majority of the Board, provided that any
director whose nomination was approved by a majority of the Incumbent Board shall be
considered a member of the Incumbent Board unless such individual’s initial assumption of
office is in connection with an actual or threatened election contest (as such terms are used
in Rule 14a-12(c) of Regulation 14A promulgated under the Act).

(iii) Consummation of a reorganization, merger or consolidation, in each case, in which
the owners of more than 50% of the Stock or Voting Power of the Company do not, following such
reorganization, merger or consolidation, beneficially own, directly or indirectly, more than
50% of the Stock or Voting Power of the corporation resulting from such reorganization, merger
or consolidation.

(iv) A complete liquidation or dissolution of the Company or of its sale or other
disposition of all or substantially all of the assets of the Company.

“Code” means the Internal Revenue Code of 1986, as amended.

“Disability” means either of the following occurs:

(i) The Executive is unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment that can be expected to result in
death or can be expected to last for a continuous period of not less than 12 months, or

 

 

 

(ii) The Executive is, by reason of any medically determinable physical or mental
impairment that can be expected to result in death or can be expected to last for a continuous
period of not less than 12 months, receiving income replacement benefits for a period of not
less than three months under an accident and health plan covering employees of the Company.

“Good Reason” means any of the following events occur:

(i) A material diminution in the Executive’s base compensation.

(ii) A material diminution in the Executive’s authority, duties, or responsibilities.

(iii) A requirement that the Executive report to a corporate officer other than the Chief
Executive Officer of the Company.

(iv) A change of more than 75 miles in the geographic location at which the Executive
must perform the services from the Company’s offices in High Point, North Carolina.

(v) Any other action or inaction that constitutes a material breach by the Company or its
successor of this Agreement.

“Pro Rata Bonus” shall mean the annual bonus based on actual results for the year of
termination and the relative portion of the year during which the Executive provided services, paid
when the annual bonus would have been paid if the Executive had continued employment.

“Release” means a waiver and release by the Executive of claims against the Company in a form
reasonably determined by the Company (which shall have no post-employment obligation or limitation
in it and shall except out rights of indemnification, rights to directors and officers liability
insurance coverage and amounts due under this Agreement).

“Subsidiary” means any corporation with respect to which another specified corporation has the
power under ordinary circumstances to vote or direct the voting of sufficient securities to elect a
majority of the directors.

“Successor” means a corporation or other entity acquiring all or substantially all the assets
and business of the Company, whether by operation of law, by assignment or otherwise.

“Termination Date” means (a) in the case of the Executive’s death, the Executive’s date of
death, and (b) in all other cases, the final date of Executive’s employment with the Company.
Notwithstanding anything to the contrary herein, an Executive’s employment shall not be considered
to have terminated unless
the Executive has experienced a “separation from service,” as defined in Code Section 409A and
the regulations thereunder.

 

 

 

SECTION 2. Term of Agreement

The term of this Agreement (the “Term”) will commence on the Executive’s first day of
employment with the Company, and will continue in effect until December 31, 2011; provided however
that on January 1, 2012 and on each January 1 thereafter, the Term shall automatically be extended
for an additional one (1) year, unless not later than October 1 prior to the end of one of the
periods, either the Company or the Executive shall have given notice to the other party not to
extend the Term. Notwithstanding the foregoing, the Term shall be deemed to have immediately
expired without any further action, and this Agreement will immediately terminate and be of no
further effect if, prior to a Change in Control, the Executive’s employment is terminated for any
reason or if Executive does not commence employment with the Company. For the avoidance of doubt,
notwithstanding termination of this Agreement after Executive has commenced employment, the
provisions of Section 4 shall survive in accordance with their terms. Additionally, in the event
that a Change in Control occurs during the Term, then the Term shall automatically extend for a
period of up to two additional years, if necessary, so that the Term coincides with the two-year
post-Change in Control period specified in Section 3.1 below.

SECTION 3. Termination of Employment after Change in Control

3.1 If the Executive’s employment with the Company is terminated within two (2) years
following a Change in Control that occurs during the Term, the Executive will be entitled to the
following compensation and benefits:

(a) If the Executive’s employment with the Company is terminated (i) by the Company for
Cause, (ii) by the Executive other than for Good Reason, or (iii) by reason of the Executive’s
death or Disability, then the Company will pay to the Executive the Accrued Compensation.

(b) If the Executive’s employment with the Company is terminated by the Company other
than for Cause, or the Executive terminates his employment for Good Reason, the Executive will
be entitled to the following:

(i) the Company will pay the Executive all Accrued Compensation and the Pro Rata
Bonus;

(ii) all unvested stock awards then held by the Executive shall accelerate and
become immediately vested to the extent that the awards would have been vested if
Executive had remained an employee for two (2) years following the Change in Control;
and

 

 

 

(iii) subject to the Executive providing the Company with a Release, the Company
will pay the Executive as severance pay, and in
lieu of any further compensation for periods subsequent to the Termination Date, in
a single payment an amount in cash equal to two times the sum of (A) the Base Salary
Amount and (B) the Bonus Amount.

(c) The Accrued Compensation and the amount provided for in Section 3.1(b)(iii) will be
paid in a single lump sum cash payment by the Company to the Executive within sixty (60) days
after the Termination Date, subject to the provisions of Section 11. The Pro Rata Bonus will
be paid when the bonus would have been paid if the Executive had continued in employment.

3.2 Except as otherwise noted herein, during the term of this Agreement the compensation to
be paid to the Executive hereunder will be in lieu of any similar severance or termination
compensation (i.e., compensation based directly on the Executive’s annual salary or annual salary
and bonus) to which the Executive may be entitled under any other Company severance or termination
agreement, plan, program, policy, practice or arrangement. The Executive’s entitlement to any
compensation or benefits of a type not provided in this Agreement will be determined in accordance
with the Company’s employee benefit plans and other applicable programs, policies and practices as
in effect from time to time.

3.3 The Executive shall not be required to mitigate any amounts payable under this Agreement
and no such amounts shall be offset or reduced by the amount of any compensation or benefits from
any subsequent employment.

SECTION 4. Termination of Employment During First Year of Term

4.1 If a Change in Control has not occurred and the Executive’s employment with the Company
is terminated during the first 12 months of the Term, the following provisions shall apply:

(a) If the Executive’s employment with the Company is terminated (i) by the Company for
Cause, (ii) by the Executive other than for Good Reason, or (iii) by reason of the Executive’s
death or Disability, then the Company will pay to the Executive the Accrued Compensation. If
the Executive’s employment with the Company is terminated by the Executive other than for Good
Reason, the Executive will either forfeit the right to the $75,000 bonus payable on February
1, 2011 or, if previously paid, repay the Company the $75,000 bonus. The Company may offset
the Accrued Compensation by the amount of the bonus that the Executive must repay the Company.

(b) Subject to Sections 4.4 and 4.5, if the Executive’s employment with the Company is
terminated by the Company other than for Cause, or the Executive terminates his employment for
Good Reason, the Executive will be entitled to the following:

 

 

 

(i) the Company will pay the Executive all Accrued Compensation and the Pro Rata
Bonus;

(ii) all unvested stock awards then held by the Executive shall accelerate and
become immediately vested to the extent that the awards would have been vested if
Executive had remained an employee for one (1) year following the Termination Date;

(iii) subject to the Executive providing the Company with a Release, the Company
will pay the Executive as severance pay, and in lieu of any further compensation for
periods subsequent to the Termination Date, in a single payment an amount in cash equal
to one times the sum of (A) the Base Salary Amount and (B) the Bonus Amount, and

(iv) if not previously paid, the Company will pay the Executive the $75,000 bonus
otherwise payable on February 1, 2011.

(c) The Accrued Compensation and the amounts provided for in Section 4.1(b)(iii) and
(iv) will be paid in a single lump sum cash payment by the Company to the Executive within
sixty (60) days after the Termination Date, subject to the provisions of Section 11. The Pro
Rata Bonus will be paid when the bonus would have been paid if the Executive had continued in
employment.

4.2 Except as otherwise noted herein, during the first 12 months of the Term the
compensation to be paid to the Executive hereunder will be in lieu of any similar severance or
termination compensation (i.e., compensation based directly on the Executive’s annual salary or
annual salary and bonus) to which the Executive may be entitled under any other Company severance
or termination agreement, plan, program, policy, practice or arrangement. The Executive’s
entitlement to any compensation or benefits of a type not provided in this Agreement will be
determined in accordance with the Company’s employee benefit plans and other applicable programs,
policies and practices as in effect from time to time.

4.3 The Executive shall not be required to mitigate any amounts payable under this Agreement
and no such amounts shall be offset or reduced by the amount of any compensation or benefits from
any subsequent employment.

4.4 In the event Executive receives payments pursuant to Section 4.1(b), except with the
prior consent in writing of the Company, the Executive shall not, for a period of one (1) year
after the Termination Date, directly or indirectly manage, operate, control, be employed by,
participate in, invest in or be connected in any manner with the management, operation, ownership
or control of any business or venture which is in competition in the United States with the
business of the Company, provided that nothing herein shall prohibit the
Executive from owning securities of the Company or up to 5% of the outstanding voting
securities of any issuer which is listed on the New York or American Stock Exchange or as to which
trading is reported or quoted on the NASDAQ System.

 

 

 

4.5 In the event Executive receives payments pursuant to Section 4.1(b), except with the
prior consent in writing of the Company, the Executive shall not, for a period of one (1) year
after the Termination Date, directly or indirectly hire or employ in any capacity or solicit the
employment of or offer employment to or entice away or in any other manner persuade or attempt to
persuade any person employed by the Company or any of its subsidiaries to leave the employ of any
of them.

4.6 It is agreed and understood by the parties hereto that, in view of the nature of the
business of the Company, the restrictions in Section 4.4 and 4.5 are reasonable and necessary to
protect the legitimate interests of the Company, monetary damages alone are not an adequate remedy
for any breach of such provisions, and any violation thereof would result in irreparable injuries
to the Company. The Executive therefore acknowledges that, in the event of his violation of any of
such restrictions, the Company shall be entitled to obtain from any court of competent jurisdiction
preliminary and permanent injunctive relief as well as damages and an equitable accounting of all
earnings, profits and other benefits arising from such violation, which rights shall be cumulative
and in addition to any other rights or remedies to which the Company may be entitled.

4.7 If the period of time or the area specified in Section 4.4 is determined to be
unreasonable in any proceeding, such period shall be reduced by such number of months or the area
shall be reduced by the elimination of such portion thereof, or both, so that such restrictions may
be enforced for such time and in such area as is determined to be reasonable. If the Executive
violates any of the restrictions contained in Section 4.4, the restrictive period shall not run in
favor of the Executive from the time of the commencement of any such violation until such time as
such violation shall cease.

SECTION 5. Successors; Binding Agreement. This Agreement will be binding upon and will inure to
the benefit of the Company and its Successors, and the Company will require any Successors to
expressly assume and agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment had taken place.
Neither this Agreement nor any right or interest hereunder will be assignable or transferable by
the Executive or by the Executive’s beneficiaries or legal representatives, except by will or by
the laws of descent and distribution. This Agreement will inure to the benefit of and be
enforceable by the Executive’s legal representatives.

 

 

 

SECTION 6. Notice. For the purposes of this Agreement, notices and all other communications
provided for in the Agreement will be in writing and will be deemed to have been duly given when
personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective addresses last given
by each party to the other, provided that all notices to the Company will be directed to the
attention of the Chief Executive Officer of the Company with a copy to the Secretary of the
Company. All notices and communications will be deemed to have been received on the date of
delivery thereof or on the third business day after the mailing thereof, except that notice of
change of address will be effective only upon receipt.

SECTION 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed by the Executive
and the Company. No waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to be performed by such
other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreement or representation, oral or otherwise, express or
implied, with respect to the subject matter hereof has been made by either party which is not
expressly set forth in this Agreement.

SECTION 8. Governing Law. This Agreement will be governed by and construed and enforced in
accordance with the laws of the Commonwealth of Virginia without giving effect to the conflict of
laws principles thereof.

SECTION 9. Severability. The provisions of this Agreement will be deemed severable and the
invalidity or unenforceability of any provision will not affect the validity or enforceability of
the other provisions hereof.

SECTION 10. Entire Agreement. This Agreement constitutes the entire agreement between the parties
hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or
written, between the parties hereto with respect to severance protection in connection with a
Change in Control or during the first year of the Term.

SECTION 11. Code Section 409A.

(a) It is intended that any amounts payable under this Agreement shall either be exempt
from or comply with Section 409A of the Code (including the Treasury regulations and other
published guidance relating thereto) (“ Code Section 409A ”) so as not to subject the
Executive to payment of any interest or additional tax imposed under Code Section 409A. To
the extent that any amount payable under this Agreement would trigger the additional tax,
penalty or interest imposed by Code Section 409A, this Agreement shall be modified to avoid
such additional tax, penalty or interest yet preserve (to the nearest extent reasonably
possible) the intended benefit payable to the Executive.

 

 

 

(b) To the extent a payment or benefit is nonqualified deferred compensation subject to
Code Section 409A, a termination of employment
shall not be deemed to have occurred for purposes of any provision of this Agreement
providing for the payment of any amounts upon or following a termination of employment unless
such termination is also a “separation from service” within the meaning of Code Section 409A
and, for purposes of any such provision of this Agreement, references to a “termination,”
“termination of employment” or like terms shall mean “separation from service.” If the
Executive is deemed on the date of a separation from service (within the meaning of Code
Section 409A) to be a “specified employee” (within the meaning of that term under Section
409A(a)(2)(B) of the Code and determined using any identification methodology and procedure
selected by the Company from time to time, or, if none, the default methodology and procedure
specified under Code Section 409A), then with regard to any payment or the provision of any
benefit that is “nonqualified deferred compensation” within the meaning of Code Section 409A
and which is paid as a result of the Executive’s “separation from service,” such payment or
benefit shall not be made or provided prior to the date which is the earlier of (A) the
expiration of the six (6)-month period measured from the date of such “separation from
service” of the Executive, and (B) the date of the Executive’s death (the “Delay Period”).
Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to this
clause (whether they would have otherwise been payable in a single sum or in installments in
the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum, and any
remaining payments and benefits due under this Agreement shall be paid or provided in
accordance with the normal payment dates specified for them herein.

(c) For purposes of Code Section 409A, the Executive’s right to receive any installment
payments pursuant to this Agreement shall be treated as a right to receive a series of
separate and distinct payments. Whenever a payment under this Agreement specifies a payment
period with reference to a number of days (e.g., “payment shall be made within thirty (30)
days following the date of termination”), the actual date of payment within the specified
period shall be within the sole discretion of the Company.

(d) With regard to any provision herein that provides for reimbursement of costs and
expenses or in-kind benefits, except as permitted by Code Section 409A, (i) the right to
reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another
benefit; (ii) the amount of expenses eligible for reimbursement, or in-kind benefits, provided
during any taxable year shall not affect the expenses eligible for reimbursement, or in-kind
benefits to be provided, in any other taxable year, provided, that the foregoing clause (ii)
shall not be violated with regard to expenses reimbursed under any arrangement covered by
Section 105(b) of the Internal Revenue Code solely because such expenses are subject to a
limit related to the period the arrangement is in effect; and (iii) such payments shall be
made on or before the last day of the Executive’s taxable year following the taxable year in
which the expense was incurred.

 

 

 

IN WITNESS WHEREOF, the parties have executed and delivered this Change in Control Protection
Agreement as of the date first above written.

	 	 	 	 	 
	 	Stanley Furniture Company, Inc.

 	 
	 	s/ Glenn Prillaman 	 
	 	Chief Executive Officer 	 
	 	 	 
	 
	 	Micah S. Goldstein

 	 
	 	s/ Micah S. Goldstein 	 
	 	Executive’s Signatureexv10w3

Exhibit 10.3

AMENDED AND RESTATED

REINSURANCE AGREEMENT

Reinsurance Agreement (“Agreement”) by and between PEERLESS INSURANCE COMPANY, a New Hampshire
stock insurance company (“PIC” or the “Accepting Company”) and LIBERTY MUTUAL INSURANCE COMPANY, a
Massachusetts stock insurance company (“LMIC” or the “Ceding Company”).

WHEREAS, the parties originally entered into the Liberty Mutual Surety Reinsurance Agreement
effective as of January 1, 2008 (“the 2008 Agreement”); and

WHEREAS, the parties desire to amend and restate the 2008 Agreement.

NOW, THEREFORE, IN CONSIDERATION OF the mutual promises and agreements contained herein and
intending to be legally bound hereby, the parties hereby agree as follows:

1. EFFECTIVE DATE

This Agreement is effective as of [INSERT DATE] (the “Effective Date”), and shall remain in force
unless modified by mutual agreement or terminated as provided herein.

2. CESSIONS AND ACCEPTANCES

     2.1. LMIC hereby cedes to PIC and PIC hereby assumes on a gross basis one hundred per cent
(100%) of LMIC’s risks under Policies issued through or underwritten by or on behalf of the Liberty
Mutual Surety business unit of Liberty Mutual Agency Corporation. For purposes of this Agreement,
“Policy” or “Policies” means any bond, undertaking, recognizance, guarantee, indemnity,
counter-indemnity, counter guarantee, binder, or other obligation, including riders and
endorsements and letters and agreements in connection therewith, at any time issued, assumed or
accepted by LMIC or an Affiliate of LMIC and ceded directly or indirectly to LMIC, and shall
include co-suretyship and reinsurance agreements at any time issued, assumed or accepted by LMIC or
an Affiliate of LMIC and ceded directly or indirectly to LMIC. For the purposes of this Agreement,
“Affiliate” shall mean any entity that directly or indirectly, through one or more intermediaries,
controls, is controlled by or is under common control with another entity.

     2.2. In addition to any amounts transferred by LMIC to PIC under Section 3.3 and Section 5
hereof, LMIC hereby cedes to PIC and PIC hereby assumes one hundred per cent (100%) of LMIC’s
uncollected premiums and agents’ balances under Policies issued through or underwritten by or on
behalf of the Liberty Mutual Surety business unit of Liberty Mutual Agency Corporation.

     2.3. It is understood and agreed that LMIC is a party to that certain Inter-Company
Reinsurance Agreement by and among LMIC and certain Affiliates dated as of January 1, 1999, as
amended, as well as other reinsurance agreements with Affiliates and that the reinsurance ceded
under this Agreement is deemed to apply after its Affiliates have ceded to LMIC their risks under
their Policies pursuant to such reinsurance agreements. Notwithstanding the foregoing, should any
such Affiliate cease to participate in such Inter-Company Reinsurance Agreement at any time during
the term of this Agreement or otherwise cease to cede to LMIC

1

 

Policies that otherwise would be covered by this Agreement, LMIC will require, at PIC’s request,
that such Affiliate enter into a reinsurance agreement that is substantially similar to this
Agreement with PIC or its designated Affiliate covering such Policies.

3. OBLIGATIONS OF ACCEPTING COMPANY

     3.1. The Accepting Company shall reimburse the Ceding Company for one hundred per cent (100%)
of all losses, expenses (including but not limited to commissions), assessments, taxes and
dividends attributable to the risks accepted and shall maintain reserves for 100% of the Ceding
Company’s liabilities attributable to the risks accepted.

     3.2. The cessions and acceptances agreed to in this Agreement take effect with respect to the
risk insured under in force Policies as well as all new or renewal Policies issued or bound on or
after the Effective Date.

     3.3. As provided in the 2008 Agreement, the Accepting Company shall maintain reserves for its
100% quota share of the Ceding Company’s residual liabilities attributable to Policies issued
through Liberty Mutual Surety in effect before the Effective Date As provided in the 2008
Agreement, the Accepting Company shall reimburse the Ceding Company for a 100% quota share of
payments made in discharging such liabilities. As used in this Agreement and the 2008 Agreement,
the residual liabilities include losses, loss adjustment expenses, unearned premiums and any other
assets and liabilities attributable to the risks accepted under this Agreement or the 2008
Agreement. As soon as practicable following the Effective Date, to the extent not already paid in
accordance with the 2008 Agreement, the Ceding Company shall pay the Accepting Company an amount
equal to its statutory reserves relating to such residual liabilities determined as of the date
immediately preceding the Effective Date.

4. TERM; TERMINATION

     4.1. The initial term of the Agreement shall be five (5) years from the Effective Date
(“Initial Term”), and shall continue thereafter unless terminated as provided in Section 4.2 below.

     4.2. This Agreement may be terminated as follows:

	 	4.2.1.	 	By either party providing the other with at least three hundred sixty-five
(365) days written notice; provided, however, if the Ceding Company provides
such notice more than three hundred sixty-five (365) days prior to the
expiration of the Initial Term, the termination will not be effective until the
expiration of the Initial Term.
	 
	 	4.2.2.	 	By the Ceding Company, with at least three hundred sixty-five (365) days
written notice given on or after the first date on which the members of the
Liberty Mutual Affiliated Group cease to Beneficially Own, in the aggregate,
shares entitled to more than fifty percent (50%) of the votes entitled to be
cast by the holders of the then outstanding Common Stock.
For the purposes of this Agreement, the following terms shall have the
following meanings:

2

 

	 	 	 	“Liberty Mutual Affiliated Group” shall mean the Ceding Company and all of
its affiliates now or hereafter existing, other than Liberty Mutual Agency
Corporation and its Subsidiaries (now or hereafter existing).
	 
	 	 	 	“Beneficially Own” shall mean beneficial ownership within the meaning of
Rule 16a-1(a)(2) promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934
	 
	 	 	 	“Common Stock” shall mean means, collectively, the Class A Common Stock and
Class B Common Stock of Liberty Mutual Agency Corporation and any other
class or series of common stock of Liberty Mutual Agency Corporation.
	 
	 	 	 	“Subsidiaries” shall mean all corporations, partnerships, joint ventures,
limited liability companies, associations and other entities (a) in which
Liberty Mutual Agency Corporation owns, directly or indirectly, fifty
percent (50%) or more of the outstanding voting stock, voting power,
partnership interests or similar ownership interests, (b) of which Liberty
Mutual Agency Corporation otherwise directly or indirectly controls or
directs the policies or operations or (c) which would be considered
subsidiaries of Liberty Mutual Agency Corporation within the meaning of
Regulation S-K or Regulation S-X of the General Rules and Regulations under
the Securities Act of 1933.
	 
	 	4.2.3.	 	At any time upon the mutual written agreement of the parties hereto.
	 
	 	4.2.4.	 	By the non-breaching party, where the other party is in material breach of
its obligations under this Agreement, which breach is not cured within
forty-five (45) days of receipt of a written notice from the non-breaching
party providing a description of the material breach.

     In the event of termination of this Agreement under this Article, Accepting Company shall
remain liable hereunder with respect to all cessions made prior to the effective date of
termination.

5. REINSURANCE PREMIUMS

     LMIC shall pay PIC a reinsurance premium equal to one hundred per cent (100%) of the premiums
attributable to the Policies and collected by LMIC, net of any such premiums actually paid by LMIC
as reinsurance premiums for Other Reinsurance consented to by PIC pursuant to Section 7.1.

6. ACCOUNTS; DISBURSEMENTS; OFFSET

     The net amount owed by one party to another under this Agreement shall be determined no less
frequently than on a quarterly basis; and such amount shall be paid on presentation of an invoice
covering settlement within 45 days after the end of the calendar quarter to which the determination
applies. Advances may be made as needed to comply with statutory requirements. Reports of
premiums and losses, and payment of losses, shall be provided no less frequently than on a
quarterly basis. Quarterly reports shall consist of premiums, losses, dividends, taxes and other
expenses in such detail as to enable the party to comply with statutory accounting practices. The
party shall have and may exercise at any time and from time to time, the right to offset any
balance or balances whether on account of premiums, losses, expenses, assessments, taxes, dividends
or otherwise, due from such party to the other party under this

3

 

Agreement. Failure by the Accepting Company or Ceding Company to comply with their respective
payment obligations within the time periods as herein provided shall, as of that date, be subject
to an interest payment computed by multiplying the amount due by a variable rate consisting of the
U.S. Prime Rate as published in the Eastern Edition of The Wall Street Journal on the first
day of the calendar month in which the amount became past due, plus two percent (2%). The variable
rate shall be adjusted monthly thereafter to equal the U.S. Prime Rate as published in the Eastern
Edition of The Wall Street Journal on the first day of each successive month during which
the amount due remains unpaid, plus two percent (2%). The product shall then be multiplied by
1/365 for each day after the due date that the amount due and the interest amount remain unpaid.
Any interest owing may be waived by the party to which it is owed.

7. OTHER REINSURANCE

     7.1. Each party to this Agreement may obtain additional reinsurance (“Other Reinsurance”),
whether treaty or facultative, on the risks covered under this Agreement as provided in this
Section 7.1; provided, however, Ceding Company may not obtain Other Reinsurance without Accepting
Company’s prior written consent, which consent may not unreasonably be withheld. All Other
Reinsurance obtained by the Ceding Company shall apply before this Agreement and any amounts
collectible under such Other Reinsurance shall inure to the benefit of this Agreement. Accepting
Company may obtain Other Reinsurance in its sole and absolute discretion. The obligations of the
Accepting Company under this Agreement shall apply without regard to any amounts of Other
Reinsurance obtained by Accepting Company which are determined to be uncollectible.

     7.2. Any party which is unable to obtain credit for Other Reinsurance on its statutory
financial statements shall bear its own penalty for such Other Reinsurance.

8. ACCESS TO RECORDS

     Each party and its designated representatives shall have free and reasonable access at any
reasonable time to all records of the other party to the extent that such records pertain to the
reinsurance provided under this Agreement.

9. SUBROGATION

     9.1. The Ceding Company for itself and on behalf of its Affiliates hereby agrees to enforce
such subrogation rights as may be obtained by virtue of payments made under the Policies, but in
case it or its Affiliates shall refuse or neglect to do so, the Accepting Company is hereby
authorized and empowered to bring any appropriate action to enforce such rights. and Ceding
Company shall reasonably cooperate with and assist Accepting Company in bringing any such action.
Accepting Company shall reimburse Ceding Company for any actual costs incurred by Ceding Company at
the request of Accepting Company in connection with the enforcement of any subrogation rights
pursuant to this Section 9.1.

     9.2. All subrogation recoveries, other recoveries, salvage or payments made subsequent to the
settlement of losses hereunder shall be applied as if made before such settlement and all necessary
adjustments to that end shall be made as soon as practicable.

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     9.3. The Ceding Company shall have the right, before the happening of an occurrence, to waive
its right of subrogation.

10. INSOLVENCY

     In the event of the insolvency of the Ceding Company, the reinsurance under this Agreement
shall be payable by the Accepting Company on the basis of reported claims allowed in the
liquidation proceedings, subject to court approval, without diminution because of the insolvency of
the Ceding Company. As permitted by Mass. Gen. Laws Ch. 175 § 20A(4)(A), in the event of the
insolvency of the Ceding Company, such payments by the Accepting Company shall be made directly to
the policyholders, insureds or others to whom payments are owed by the Ceding Company under the
Policies.

     The domiciliary liquidator, receiver or statutory successor of the insolvent Ceding
Company shall give written notice to the Accepting Company of the pendency of the claim against the
insolvent Ceding Company on the Policy reinsured within a reasonable time after the claim is filed
in the liquidation proceeding. During the pendency of the claim, the Accepting Company shall have
the right to investigate the claim and interpose in the proceeding where the claim is to be
adjudicated, at the Accepting Company’s expense, any defenses that the Accepting Company considers
available to the Ceding Company, its liquidator, receiver or statutory successor. Subject to court
approval, the expense thus incurred by the Accepting Company shall be chargeable against the
insolvent Ceding Company as part of the expense of liquidation to the extent of a proportionate
share of the benefit which may accrue to the Ceding Company solely, as a result of the defense
undertaken by the Accepting Company.

11. DISPUTE RESOLUTION

     11.1 Any controversy, claim or dispute arising out of or relating to this Agreement, or the
breach, termination or validity hereof (each, a “Dispute”) shall be resolved as set forth in this
Section 11.

     11.2 Accepting Company and Ceding Company shall attempt in good faith to resolve any dispute
promptly by negotiation between each such party’s designated representatives. Within ten (10) days
after any party’s receipt of a notice of Dispute from the other party setting forth in detail and
together with supporting documentation, if any, the nature and basis of the Dispute (the “Dispute
Notice”), the general counsel and the chief financial officer of Accepting Company and the general
counsel and the chief financial officer of Ceding Company shall meet in person at a mutually
acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt in
good faith to resolve the Dispute.

     11.3 If either the chief financial officer of Accepting Company or Ceding Company declares an
impasse, then within thirty (30) days after receipt of the Dispute Notice or as soon thereafter as
practicable, the respective chief executive officers of Accepting Company and Ceding Company shall
meet in person at a mutually acceptable time and place, and thereafter as often as they reasonably
deem necessary, to attempt in good faith to resolve the Dispute.

     11.4 If either the chief executive officer of Accepting Company or Ceding Company declares an
impasse, then within sixty (60) days after receipt of the Dispute Notice (or such longer period, if
the Parties so agree in writing), then, at the demand of either party, the Dispute

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shall be referred to, and finally settled by, confidential and binding arbitration in
accordance with the then-prevailing JAMS Streamlined Arbitration Rules and Procedures as modified
as follows (the “Rules”):

     i. There shall be three (3) neutral arbitrators of whom each party shall select one.
The claimant shall select its arbitrator in its demand for arbitration and the respondent
shall select its arbitrator within thirty (30) days after receipt of the demand for
arbitration. The two (2) arbitrators so appointed shall select a third arbitrator to serve
as chairperson within fourteen (14) days of the designation of the second of the two (2)
arbitrators. If any arbitrator is not timely appointed, at the request of any party such
arbitrator shall be appointed by JAMS pursuant to the listing, striking and ranking
procedure in the Rules.

     ii. Each arbitrator appointed by a party shall be either an attorney with substantial
experience with the property and casualty reinsurance and insurance industry and at least
ten (10) years admission to the bar, or a property and casualty reinsurance and insurance
industry professional of at least ten (10) years standing. The chair of the arbitral
tribunal shall either be a practicing attorney with no less than ten (10) years of practice
and experience as an arbitrator, with, if possible, experience relating to insurance or
reinsurance disputes, or be a retired judge.

     iii. The place of arbitration shall be Boston, Massachusetts, unless some other place
is mutually selected by the parties. The arbitral tribunal shall be required to follow the
law of the Commonwealth of Massachusetts. The decision and award of the arbitral tribunal
shall be final and binding on the parties and shall be the sole and exclusive remedy between
the parties regarding the matter presented to the arbitral tribunal, including any claims,
counterclaims, issues or accounting presented to the tribunal. Judgment upon the decision
and award may be entered in any court having jurisdiction. The arbitral tribunal is
empowered to award any remedy provided for under applicable law and the terms of this
Agreement, including injunction, specific performance or other forms of equitable relief.
The arbitral tribunal is not empowered to award damages in excess of compensatory damages.
Each party hereby irrevocably waives any right to recover punitive, exemplary or similar
damages with respect to any Dispute.

     iv. Any arbitration proceedings, decision or award rendered hereunder and the validity,
effect and interpretation of this arbitration agreement shall be governed by the Federal
Arbitration Act, 9 U.S.C. Section 1 et seq.

     11.5 Each party shall bear its own costs in any negotiations pursuant to Section 11.2 or
Section 11.3 and any arbitration, provided that the parties shall share the fees and expenses of
the arbitrators equally as well as any JAMS fees and expenses.

     11.6 All negotiations conducted pursuant to Section 11.2 or Section 11.3 shall be confidential
and shall be treated as compromise and settlement negotiations and may not be introduced as
evidence of an admission against interest of either party and shall not be admissible as evidence
in any other proceeding.

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     11.7 Notwithstanding the foregoing provisions, without first resorting to the negotiation
procedures set forth in Sections 11.2 and 11.3 herein, either party may seek the provisional
judicial remedy of a preliminary injunction or any other form of temporary injunctive relief
(including specific performance), if in its reasonable judgment such action is necessary to avoid
irreparable harm. Without prejudice to such provisional remedies as may be available under the
jurisdiction of such court, the arbitral tribunal shall have full authority to grant provisional
remedies and to direct the Parties to request that any court modify or vacate any temporary or
preliminary relief issued by such court, and to award damages for the failure of any party to
respect the arbitral tribunal’s orders to that effect.

     11.8 The parties hereby submit to the jurisdiction of the courts of the Commonwealth of
Massachusetts located in Boston, Massachusetts, for the purpose of seeking any provisional remedies
as contemplated by Section 11.7 or for any action to compel arbitration or in aid of arbitration or
for the enforcement of any arbitral award rendered thereunder. In any such action, suit or
proceeding, each of the parties irrevocably and unconditionally waives, and agrees not to assert by
way of motion, as a defense or otherwise, any claim that the party is not subject to the
jurisdiction of the above courts, that such action or suit is brought in an inconvenient forum or
that the venue of such action, suit or other proceeding is improper. To the fullest extent
permitted by applicable law, each of the parties irrevocably waives all rights to trial by jury in
any such action, suit or other proceeding.

12. SERVICE OF SUIT

     (This Article applies only in the event the Accepting Company becomes unauthorized in the
Ceding Company’s domiciliary state)

     This Service of Suit Article will not be read to conflict with or override the obligations of
the parties to resolve their disputes as provided for in the Dispute Resolution Article.

     In the event of the failure of the Accepting Company to pay any amount claimed to be due
hereunder, the Accepting Company, at the request of the Ceding Company, will submit to the
jurisdiction of a Court of competent jurisdiction within the United States. Nothing in this
Article constitutes or should be understood to constitute a waiver of the Accepting Company’s right
to commence an action in any Court of competent jurisdiction in the United States, to remove an
action to a United States District Court, or to seek a transfer of a case to another Court as
permitted by the laws of the United States or of any state in the United States. The Accepting
Company, once the appropriate Court is selected, whether such court is the one originally chosen by
the Ceding Company and agreed upon by the Accepting Company or is determined by removal, transfer,
or otherwise, as provided for above, will comply with all requirements necessary to give said Court
jurisdiction and, in any suit instituted against it upon this Agreement, will abide by the final
decision of such Court or of any Appellate Court in the event of an appeal.

     Further, pursuant to any statute of any state, territory, or district of the United States
that makes provision therefore, the Accepting Company hereby designates the Superintendent,
Commissioner, or Director of Insurance, or other officer specified for that purpose in the statute,
or their successor(s) in office, as its true and lawful attorney upon whom may be served any lawful
process in any action, suit, or proceedings instituted by or on behalf of the Ceding

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Company or any beneficiary hereunder arising out of this Agreement, and hereby designates the
above-named as the person to whom the said officer is authorized to mail such process or a true
copy thereof.

13. ERRORS AND OMISSIONS

     Any inadvertent error or omission shall not relieve any party hereto from any liability which
would attach to it hereunder if such error or omission had not been made. Any such error or
omission shall he rectified as soon as may be reasonably practicable after discovery.

14. REINSURANCE FOLLOWS ORIGINAL POLICIES

     It is the intention of the parties that the Accepting Company shall follow the fortunes of the
Ceding Company with respect to the Policies in every respect; and the Accepting Company’s
reinsurance under this Agreement shall be subject to the same terms, rates, conditions, waivers,
modifications, alterations and cancellations as Policies.

15. CURRENCY

     All transactions under this Agreement shall be made in United States dollars.

16. TERRITORY

     The reinsurance provided under this Agreement shall be coextensive with the territory of the
Policies reinsured hereunder.

17. UNAUTHORIZED REINSURANCE

     17.1. Notwithstanding any other provision of this Agreement to the contrary, if PIC becomes
unauthorized in any State of the United States of America or the District of Columbia or any other
jurisdiction where authorization is required by insurance regulatory authorities in order for LMIC
to obtain credit on its statutory annual statements for the reinsurance being provided hereunder,
PIC will establish such escrow accounts, trust accounts for the benefit of LMIC, letters of credit,
funds withheld by LMIC, or a combination thereof, as may be required by applicable law or
regulation to permit LMIC to obtain full credit for such reinsurance upon the request of LMIC if a
penalty would accrue to LMIC on its statutory annual statement without such funding. PIC shall
have the option of determining the method of funding to be utilized.

     17.2. PIC shall promptly notify LMIC of any loss of license or authorization or other change
or condition that may affect the ability of LMIC to obtain credit for such reinsurance.

18. GOVERNMENTAL APPROVAL

     This Agreement is conditional upon obtaining any required approval of applicable governmental
insurance regulatory authorities. This Agreement shall not be effective until all required
regulatory approvals for the transactions contemplated hereby have been received.

19. ENTIRE AGREEMENT

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     This Agreement represents the entire agreement and understanding among the parties with
respect to the subject matter hereof. No other oral or written agreements or contracts relating to
the risks reinsured hereunder currently exist or are contemplated to be legally binding among the
parties. This Agreement may be executed in multiple counterparts, each of which, when so executed
and delivered shall be an original, but such counterparts shall together constitute one and the
same instrument and agreement.

20. THIRD PARTIES; ASSIGNMENT

     This Agreement shall not be deemed to give any right or remedy to any third party whatsoever
unless said right or remedy is specifically granted to such third party by the terms of this
Agreement. Neither party may assign or transfer this Agreement without the other’s prior written
consent, which consent may not be unreasonably withheld.

21. NOTICES

     All notices and other communications provided for hereunder shall be dated and in writing and
shall be deemed to have been given (i) when delivered, if delivered personally, sent by email or
sent by registered or certified mail, return receipt requested, postage prepaid, (ii) on the next
business day if sent by overnight courier or (iii) when received if delivered otherwise. Such
notices shall be delivered to the address set forth below, or to such other address or email
address as a party shall have furnished to the other party in accordance with this Article.

          If to Ceding Company:

Liberty Mutual Insurance Company

175 Berkeley Street

Boston, MA 02117

Attention: Chief Financial Officer

          With a copy to:

Liberty Mutual Insurance Company

175 Berkeley Street

Boston, MA 02117

Attention: General Counsel

          If to the Accepting Company:

Peerless Insurance Company

62 Maple Avenue

Keene, NH 03431

Attention: Reinsurance Department

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          With copies to:

Liberty Mutual Agency Corporation

10 St. James Avenue

Boston, MA 02117

Attention: Chief Financial Officer

          and

Liberty Mutual Agency Corporation

10 St. James Avenue

Boston, MA 02117

Attention: General Counsel

(The remainder of this page is intentionally left blank.)

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by
their duly authorized officers, as of the Effective Date.

	 	 	 	 	 
	LIBERTY MUTUAL INSURANCE COMPANY

 	 	 
	 	 	 
	Name:  	 	 	 
	Title:  	 	 	 
	 

	 	 	 	 	 
	PEERLESS INSURANCE COMPANY

 	 	 
	 	 	 
	Name:  	 	 	 
	Title:  	 	 	 
	 

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