Document:

exv10wpp

Exhibit (10)(PP)

QUOTA SHARE REINSURANCE AGREEMENT

     THIS QUOTA SHARE REINSURANCE AGREEMENT (this “Agreement”) is dated as of this 6th
day of December, 2010, but effective as of December 1, 2010 (the “Effective Date”) between MICHIGAN
INSURANCE COMPANY, a Michigan corporation with its principal office in Grand Rapids, Michigan
(“MICO”), and DONEGAL MUTUAL INSURANCE COMPANY, a Pennsylvania mutual fire insurance company with
its principal office in Marietta, Pennsylvania (“Donegal Mutual”).

WITNESSETH:

     WHEREAS, Donegal Mutual has offered to provide reinsurance to MICO to the extent and on the
terms and conditions and subject to the exceptions, exclusions and limitations set forth in this
Agreement and nothing stated in this Agreement shall in any manner create any obligations or
establish any rights against Donegal Mutual in favor of any person not a party to this Agreement;

     WHEREAS, MICO has agreed to place such reinsurance with Donegal Mutual to the extent and on
the terms and conditions and subject to the exceptions, exclusions and limitations set forth in
this Agreement; and

     WHEREAS, this Agreement shall constitute the entire contract between Donegal Mutual and MICO
related to such reinsurance and provides no guarantee of profit, directly or indirectly, to either
Donegal Mutual or MICO;

     NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, and
intending to be legally bound hereby, Donegal Mutual and MICO agree as follows:

ARTICLE 1

DEFINITIONS

     1.1 Definitions.

     As used in this Agreement:

     “Allocated Loss Adjustment Expenses” shall mean all court costs, interest upon judgments and
mitigation, investigation, adjustment and legal expenses chargeable to or incurred in (i) the
mitigation, investigation, negotiation, settlement of or defense against a Loss under a Covered
Policy, (ii) loss prevention mitigation or investigation in respect of any Covered Policy as to
which MICO has posted a loss reserve, (iii) the investigation, prevention and workout of a
potential Loss under a Covered Policy, (iv) the protection, perfection and exercise of any
subrogation or salvage or rights of reimbursement with respect to any

 

 

Covered Policy or (v) any deficiency resulting from the loss settlement or the workout of a
potential Loss under a Covered Policy. Allocated Loss Adjustment Expenses shall exclude all
office expenses and salaries of officers and employees of MICO. All loss adjustment expenses that
are not Allocated Loss Adjustment Expenses shall constitute Unallocated Loss Adjustment Expenses.

     “Ceding Commission” shall have the meaning set forth in Section 8.1.

     “Covered Policies” shall mean an insurance policy first issued by MICO on or after 12:01 a.m.
on December 1, 2010. Donegal Mutual is not assuming any liability from any insurance policy MICO
first issued on or before 12:01 a.m. on December 1, 2010.

     “Donegal Mutual” shall have the meaning set forth in the introductory paragraph of this
Agreement.

     “Effective Date” shall have the meaning set forth in the Preamble.

     “Exclusions” shall have the meaning set forth in Section 3.2.

     “Extra Contractual Obligations” shall mean all liabilities (i) for compensatory,
consequential, exemplary, punitive or similar damages which directly relate to any alleged or
actual act, error, omission, fraud or misrepresentation by any Person, any of its affiliates or any
of its or its affiliates’ officers or employees, whether intentional or otherwise, in connection
with the Covered Policies or (ii) from any alleged or actual reckless conduct or bad faith by any
Person, any of its affiliates or any of its or its affiliates’ officers or employees in connection
with such Person’s handling of any claim under any of the Covered Policies, including the
settlement, defense of or appeal of any claim or in connection with the issuance, offer, sale,
delivery, cancellation or administration by any Person or any of its affiliates or any of its or
its affiliates’ officers or employees under any of the Covered Policies.

     “Insolvency Fund” shall mean any guaranty fund, insolvency fund, plan, pool, association or
other arrangement, however denominated, established or governed, which provides for any assessment
of or payment or assumption by MICO of part or all of any claim, debt, charge, fee or other
obligation of an insurer or its successors or assigns which any competent authority has declared to
be insolvent or which is otherwise deemed unable to meet any claim, debt, fee, charge or other
obligation in whole or in part.

     “Loss” shall mean (i) amounts incurred by MICO in settlement or satisfaction of claims under
or in respect of the Covered Policies, (ii) any and all Allocated Loss Adjustment Expenses MICO
incurs under or in respect of the Covered Policies, (iii) amounts payable to reinsurers other than
Donegal Mutual under or with respect to the Covered Policies and (iv) Extra Contractual Obligations
arising after the Effective Date from the acts of Donegal Mutual, in each case net of amounts
actually collected by Donegal Mutual or MICO under Third Party Reinsurance Agreements.

 

 

     “Occurrence” shall be the definition of said term as set forth in MICO’s Covered Policies,
provided, however, in the event “Occurrence” is not defined in any Covered Policy that is reinsured
pursuant to this Agreement, then, as to such policy, the term “each Occurrence” shall mean each
accident or Occurrence or series of accidents or Occurrences arising out of one event, and shall
include aggregate limits of liability for a period not exceeding 12 months when a Covered Policy
applies in excess of aggregate limits. If MICO and Donegal Mutual cannot specifically determine
the date of any Loss, accident, casualty or loss Occurrence, the date of such Loss, accident,
casualty or loss Occurrence shall be the inception date of the original Covered Policy reinsured
pursuant to this Agreement, provided that such policy period shall be deemed not to exceed 12
calendar months.

     “Person” shall mean any individual, corporation, limited liability company, association,
joint-stock company, business trust or other similar organization, partnership, joint venture,
trust, unincorporated association or government or any agency, instrumentality or political
subdivision of a government.

     “Quota Share” shall mean 25%.

     “Recovery shall mean any amount actually received by MICO in respect of any Loss covered by
Donegal Mutual under this Agreement, whether by subrogation, salvage, reimbursement or other
recovery.

     “Recovery Expenses” shall mean any expense, including court costs and legal expenses MICO
incurs for purposes of obtaining a Recovery with respect to Losses, but excluding the expenses and
salaries of the officers and employees of MICO or its affiliates or normal overhead expenses of
MICO and its affiliates and excluding any expense that would constitute an Allocated Loss
Adjustment Expense.

     “MICO” shall have the meaning set forth in the introductory paragraph of this Agreement.

     “Termination Date” shall have the meaning assigned to it in Section 16.1.

     “Third-Party Reinsurance Agreements” shall mean, to the extent such treaties or agreements
relate to Covered Policies, (i) all reinsurance treaties and agreements under which MICO is a
ceding party that were in force on the date of this Agreement, and (ii) any such treaty or
agreement that is terminated or expired but under which MICO may continue to receive reinsurance
coverage.

     “Unallocated Loss Adjustment Expenses” shall have the meaning set forth in the definition of
Allocated Loss Adjustment Expenses.

     “Ultimate Net Loss” as used in this Agreement means the actual loss MICO pays or that MICO
becomes liable to pay under the Covered Policies reinsured pursuant to this Agreement, including
all loss adjustment expense, 100% of any Extra Contractual Obligation and 100% of any Loss in
Excess of Policy Limits as defined in Sections 11.1 and 11.2 of this

 

 

Agreement. “Ultimate Net Loss” shall include any expenses of litigation, accrued interest
where such accrued interest is a part of any judgment, and all other loss expenses of MICO
including legal expenses and costs incurred in connection with coverage and validity issues and any
legal proceedings with respect thereto that are allocable to a Covered Policy.

ARTICLE 2

APPLICATION OF AGREEMENT

     2.1 Business Covered. This Agreement applies to all insurance policies MICO issues
after the Effective Date and which MICO issues during the term of this Agreement until 11:59 p.m.
on the Termination Date.

ARTICLE 3

COVER

     3.1 Quota Share Reinsurance. Subject to the terms and conditions of this Agreement:

          (a) MICO hereby cedes to Donegal Mutual, and Donegal Mutual hereby accepts and reinsures from
MICO, the Quota Share of any Losses under the Covered Policies net of any losses covered by the
Third-Party Reinsurance Agreements of MICO. Such Losses are sometimes referred to in this
Agreement as the “Reinsured Liabilities.” All liabilities of MICO other than the Reinsured
Liabilities under the Covered Policies shall remain the liabilities of MICO (the “Retained
Liabilities”), and Donegal Mutual shall have no responsibility for the Retained Liabilities by
reason of entering into this Agreement or otherwise. MICO hereby agrees to indemnify Donegal
Mutual and hold Donegal Mutual harmless from and against the Retained Liabilities.

          (b) For the avoidance of doubt, Donegal Mutual hereby assumes the risk that any third-party
reinsurance maintained by MICO is not collected, and Donegal Mutual has no obligation to pay or to
reimburse MICO for losses MICO paid or liabilities MICO first incurred prior to the Effective Date
or after the Termination Date.

     3.2 Exclusions. This Agreement shall not apply to, and the Reinsured Liabilities
shall specifically exclude, loss, damage, cost or expense of any nature directly or indirectly
caused by, resulting from or in connection with any of the following liabilities of MICO,
regardless of any other cause or event contributing currently or in any other sequence to the loss,
damage, cost or expense (the “Exclusions”), all of which shall remain the exclusive responsibility
of MICO:

          (a) all liability of MICO arising by agreement, assessment, operation of law or otherwise from
MICO’s participation or membership, whether voluntary or involuntary, in any Insolvency Fund,
coastal or wind storm authority or similar association; and

 

 

          (b) all liability of MICO arising after the Effective Date arising from the acts, errors or
omissions of MICO.

ARTICLE 4

REINSURANCE FOLLOWS ORIGINAL POLICIES

     4.1 Follow the Fortunes. Except to the extent specifically otherwise provided in this
Agreement or as MICO and Donegal Mutual may agree in writing, all reinsurance under this Agreement
shall be subject in all respects to the same rates, terms, conditions, waivers and interpretations,
and to the same modifications, cancellations and alterations as the Covered Policies, the true
intent of this Agreement being that Donegal Mutual shall, in every case to which this Agreement
applies, follow the fortunes of MICO; provided, however, that the Agreement shall not be construed
to expand the liability of Donegal Mutual beyond the liabilities Donegal Mutual has specifically
assumed pursuant to this Agreement.

     4.2 Third-Party Rights. Except as set forth in Sections 6.1 or 12.1, nothing in this
Agreement shall in any manner create any obligations or establish any rights against Donegal Mutual
in favor of any Person not a party to this Agreement.

ARTICLE 5

CHANGE IN POLICY FORMS

     5.1 Policy Forms. MICO and Donegal Mutual have agreed on the forms of Covered
Policies that MICO will issue and that Donegal Mutual will reinsure pursuant to this Agreement.
MICO shall advise Donegal Mutual of any change in any form of any Covered Policy no less than 90
days prior to the implementation of any such change, and such change shall not be implemented
unless Donegal Mutual shall have approved such change in writing within 30 days after receipt of
such notice from MICO, such approval not to be unreasonably withheld by Donegal Mutual.

ARTICLE 6

LOSSES AND LOSS ADJUSTMENT EXPENSES

     6.1 Payment to MICO for Ultimate Net Losses. Donegal Mutual shall pay to MICO the
Quota Share of sums actually paid by MICO in settlement of the Ultimate Net Losses under the
Covered Policies, on and after the Effective Date; provided, however, that in the event of the
insolvency of MICO, Donegal Mutual shall pay such amount to the liquidator, receiver or statutory
successor of MICO in accordance with the provisions of Article 12 of this Agreement.

     6.2 Expenses to be Borne by Donegal Mutual. Donegal Mutual shall bear its Quota Share
of all external loss adjustment expenses MICO incurs in the investigation, adjustment and
litigation of all claims under the Covered Policies.

 

 

     6.3 Salvage. Donegal Mutual shall receive its Quota Share of all salvage, recoveries
and payments received subsequent to a Loss settlement under this Agreement whether received before
or after the final adjudication of any claim under the Covered Policies.

     6.4 Loss Development. MICO shall advise Donegal Mutual promptly of all claims and any
subsequent developments pertaining to those claims that may develop into Losses under the Covered
Policies reinsured pursuant to this Agreement.

     6.5 Defense of Claims. MICO shall investigate and, to the extent that may be required
by the Covered Policies reinsured under this Agreement, defend any claim affecting the reinsurance
provided by this Agreement and pursue such claim to final determination.

     6.6 Donegal Mutual Participation. MICO agrees, upon the request of Donegal Mutual,
that when so requested, MICO will afford Donegal Mutual an opportunity to participate with MICO, at
the expense of Donegal Mutual, in the defense or control of any claim, suit or proceeding involving
the reinsurance provided pursuant to this Agreement; and MICO and Donegal Mutual shall cooperate in
all material respects in the defense of such suit, claim or proceeding.

ARTICLE 7

PREMIUM

     7.1 Payment of Direct Written Premium. During the term of this Agreement, Donegal
Mutual shall assume from MICO 25% of MICO’s net written premiums applicable to its liability under
the Covered Policies for the reinsurance provided pursuant to this Agreement. MICO shall pay such
premiums, net of any premiums for third-party reinsurance.

     7.2 Summary Statements. As soon as possible after the end of each month, MICO shall
submit to Donegal Mutual a statement that summarizes the net premiums ceded, return premiums and
conversions on MICO’s net written business, the actual premiums due, net of commission, and MICO
shall pay to Donegal Mutual any amount due within 15 days of MICO’s delivery of such statement to
Donegal Mutual. MICO shall furnish quarterly to Donegal Mutual, MICO’s unearned premium reserve on
the Covered Policies. MICO shall compute its unearned premium reserve on the daily pro rata basis.

     7.3 Payment of Losses. Donegal Mutual shall pay its proportion of Loss and loss
expenses paid by MICO to MICO within 15 days after MICO renders a monthly account summarizing the
Losses and loss expenses. Donegal Mutual shall have the right, at its option, to offset the amount
of such Loss or loss expense as provided in Article 13.

 

 

ARTICLE 8

CEDING COMMISSION

     8.1 Payment of Ceding Commission. Donegal Mutual shall pay a ceding commission of 33%
to MICO on the net written premiums MICO cedes to Donegal Mutual under this Agreement. On all
return premiums, MICO shall promptly return to Donegal Mutual the Ceding Commission applicable to
such returned premium.

     8.2 Statement of Ceding Commission. As soon as possible after the end of each month,
Donegal Mutual shall submit to MICO a statement that sets forth the Ceding Commission fees, and
Donegal Mutual shall pay any amount due within fifteen (15) days of Donegal Mutual’s receipt of the
monthly statements required by Section 7.2.

     8.3 Taxes. The Ceding Commission allowance that Donegal Mutual pays to MICO on the
Covered Policies reinsured pursuant to this Agreement includes provision for all premium taxes,
licenses and fees with the exception of service charges, assessments and any other expenses
whatsoever, except external loss adjustment expenses.

ARTICLE 9

INSPECTION

     9.1 Right of Inspection. MICO shall place at the disposal of Donegal Mutual and
Donegal Mutual shall have the right to inspect, through its authorized representatives, at all
reasonable times during the term of this Agreement and thereafter, the books, records and papers of
MICO pertaining to the reinsurance provided pursuant to this Agreement and all claims made in
connection therewith.

ARTICLE 10

RESERVES AND TAXES

     10.1 Maintenance of Reserves. Donegal Mutual shall maintain legal reserves with
respect to the unearned premiums and claims it assumed pursuant to this Agreement.

     10.2 Premium Taxes. MICO shall be liable for all taxes on premiums reported to
Donegal Mutual under this Agreement and MICO shall reimburse Donegal Mutual for such taxes where
Donegal Mutual is required to pay the same.

ARTICLE 11

EXTRA CONTRACTUAL OBLIGATIONS/EXCESS OF POLICY LIMITS

     11.1 Extra Contractual Obligations. The obligations reinsured pursuant to this
Agreement shall include Extra Contractual Obligations under the Covered Policies.

 

 

     11.2 Losses In Excess of Policy Limits. The obligations reinsured pursuant to this
Agreement shall include Loss in Excess of Policy Limits with respect to any Covered Policy. “Loss
in Excess of Policy Limits” shall mean losses in excess of the policy limit, having been incurred
because of, but not limited to, failure by MICO to settle within the Covered Policy limit or by
reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or
in preparation of the defense or in the trial of any action against its insured or reinsured or in
the preparation or prosecution of an appeal consequent upon such action.

     11.3 Date of Occurrence. An Extra Contractual Obligation and Loss in Excess of Policy
Limits shall be deemed to have occurred on the same date as the Loss covered under a Covered
Policy, and shall constitute part of the original Loss.

     11.4 Meaning of Loss. For the purposes of the Loss in Excess of Policy Limits
coverage under this Agreement, the word “Loss” shall mean any amount for which MICO would have been
contractually liable to pay had it not been for the limit of the Covered Policy.

     11.5 Loss Adjustment Expense. Loss adjustment expense in respect of Extra Contractual
Obligations and Loss in Excess of Policy Limits shall be covered under this Agreement in the same
manner as other loss adjustment expense.

     11.6 Fraud. However, this Article 11 shall not apply where the Loss has been incurred
due to final legal adjudication of fraud of a member of the board of directors or an officer of
MICO acting individually or collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or settlement of any claim
covered under this Agreement.

     11.7 Michigan Law. In no event shall Donegal Mutual provide reinsurance to MICO to
the extent not permitted under the laws of Michigan.

ARTICLE 12

INSOLVENCY CLAUSE

     12.1 Insolvency. In the event of the insolvency and the appointment of a conservator,
rehabilitator, liquidator or statutory successor of MICO,

          (a) the reinsurance provided by this Agreement and each and every reinsurance agreement
heretofore or hereafter entered into between Donegal Mutual and MICO shall be payable, subject to
Section 12.1(b), by Donegal Mutual directly to MICO or to its conservator, rehabilitator,
liquidator, receiver or statutory successor on the basis of the liability of MICO under the Covered
Policies without diminution because of the insolvency of MICO or because the conservator,
rehabilitator, liquidator, receiver, or statutory successor has failed to pay all or any portion of
any claims.

 

 

          (b) Donegal Mutual shall make the payments as set forth above directly to MICO or to its
conservator, rehabilitator, liquidator, receiver or statutory successor. If an insured under a
Covered Policy submits a claim to MICO’s conservator, rehabilitator, liquidator, receiver or
statutory successor, Donegal Mutual shall have the right, in lieu of making a payment to such
conservator, rehabilitator, liquidator, receiver or statutory successor, to make a payment on the
claim directly to the insured. Any such payment by Donegal Mutual shall discharge Donegal Mutual
from its related payment obligation under such Covered Policy.

          (c) In the event of the insolvency of MICO, the rehabilitator, liquidator, receiver,
conservator or statutory successor of MICO shall give written notice to Donegal Mutual of the
pendency of each claim against MICO on each Covered Policy within a reasonable time after such
claim is filed in the insolvency proceeding; and, during the pendency of such claim, Donegal Mutual
may investigate such claim and interpose, at its own expense, in the proceeding where such claim is
to be adjudicated, any defense which Donegal Mutual may deem available to MICO, its rehabilitator,
liquidator, receiver, conservator or statutory successor. The expense Donegal Mutual thus incurs
shall be chargeable, subject to court approval, against MICO as part of the expense of liquidation
or rehabilitation to the extent of the share of the benefit that may accrue to MICO solely as a
result of the defense undertaken by Donegal Mutual.

ARTICLE 13

OFFSET CLAUSE

     13.1 Offset. Except for payments to be made pursuant to Section 6.1, which may only
be offset against each other, Donegal Mutual and MICO shall each have, and may exercise at any time
and from time to time, the right to offset any balance or amount, whether on account of premiums,
premium adjustments, commissions, claims, Losses, Recoveries or otherwise, due from such party to
the other party hereto under this Agreement. The party asserting the right of offset shall have
and may exercise such right at any time whether the balance or balances due or to become due to
such party from the other are on account of premiums or on account of Losses or otherwise. If
Donegal Mutual is required to make a payment directly to an insured under a Covered Policy, no
offset shall be allowed between Donegal Mutual and the insured under a Covered Policy, provided,
however, that Donegal Mutual shall continue to maintain its offset rights against MICO pursuant to
this Agreement.

ARTICLE 14

ARBITRATION

     14.1 Arbitration. Should an irreconcilable difference of opinion arise between MICO
and Donegal Mutual as to the interpretation of this Agreement or the transactions this Agreement
contemplates, as a condition precedent to any right of action under this Agreement, such difference
shall be submitted to arbitration to the decision of a board of

 

 

arbitration composed of two arbitrators and an umpire, meeting in Lansing, Michigan under the
rules of the American Arbitration Association.

     14.2 Identity of Arbitrators. The members of the board of arbitration shall be active
or retired disinterested executive officers of insurance or reinsurance companies. Each party
shall appoint one arbitrator and the two arbitrators shall choose an umpire before they enter into
arbitration. If either party fails to appoint its arbitrator within four weeks after being
requested to do so, the other party shall also appoint the second arbitrator. If the two
arbitrators fail to agree upon the appointment of an umpire within four weeks after their
nominations, each of them shall name three nominees for umpire, of whom each arbitrator shall
decline two nominees and the decision among the two remaining nominees shall be made by the
claimant party drawing lots.

     14.3 Default Selection. In the event that either party shall fail to choose an
arbitrator within four weeks following a request by Donegal Mutual or MICO for arbitration, the
requesting party shall choose two arbitrators who shall choose the umpire.

     14.4 Submission of Initial Brief. The claimant shall submit its initial brief within
20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after
receipt of the claimant’s brief and the claimant may submit a reply brief within 10 days after
receipt of the respondent’s brief.

     14.5 Arbitrator Decision. The board of arbitration shall make its decision with
regard to the custom and usage of the insurance and reinsurance business. The board of arbitration
shall issue its decision in writing based upon a hearing in which evidence may be introduced
without following strict rules of evidence but in which cross examination and rebuttal shall be
allowed. The board of arbitration shall make its decision within 60 days following the conclusion
of the hearings unless the parties consent to an extension. The majority decision of the board of
arbitration shall be final and binding upon all parties to the proceeding. Judgment may be
entered upon the award of the board of arbitration in any court having jurisdiction thereof.

     14.6 Multiple Reinsurers. If more than one reinsurer is involved in the same dispute,
all such reinsurers shall constitute and act as one party for purposes of this clause and
communications shall be made by MICO to each of the reinsurers constituting the one party,
provided, however, that nothing therein shall impair the rights of such reinsurers to assert
several, rather than joint defenses or claims, nor be construed as changing the liability of the
reinsurers under the terms of this Agreement from several to joint.

     14.7 Arbitration Expenses. Each party shall bear the expense of its own arbitrator
and shall jointly and equally bear with the other party the expense of the umpire. The remaining
costs of the arbitration proceedings shall be allocated by the board of arbitration.

 

 

     14.8 No Judicial Foundation. The arbitrators shall be relieved of all judicial
formalities and may abstain from strict rules of law, interpreting this Agreement as an honorable
obligation rather than as merely a legal obligation.

ARTICLE 15

GOVERNING LAW AND REGULATORY APPROVAL

     15.1 Governing Law. This Agreement shall be interpreted under and pursuant to the
laws of the State of Michigan in all respects.

     15.2 Regulatory Approval. Any changes or amendments to this Agreement shall be
subject to the receipt of prior written approval from the Michigan Office of Financial and
Insurance Regulation and the Pennsylvania Insurance Department.

ARTICLE 16

COMMENCEMENT AND TERMINATION

     16.1 Effective Time. This Agreement shall take effect as of 12:01 A.M. on the
Effective Date and is entered into for an unlimited term, but either party may terminate the term
of this Agreement at any time by giving not less than 90 days notice in writing to the other party
of a date of termination of this Agreement (the “Termination Date”).

     16.2 Participation Until Termination. Donegal Mutual shall participate in business
coming within the terms of this Agreement until the date of termination of this Agreement.

     16.3 Run-Off. In the event either party terminates this Agreement the reinsurance
assumed pursuant to this Agreement shall be provided on a “run-off” basis for all policies written
after the Effective Date of this Agreement and prior to the Termination Date until all liabilities
under the Covered Policies have been satisfied in full.

ARTICLE 17

CURRENCY OF PAYMENT

     17.1 Currency of Payment. All payments under this Agreement shall be made in the
currency of the United States of America.

ARTICLE 18

ACCESS TO RECORDS

     18.1 Access to Records. Donegal Mutual, by its duly appointed representatives, shall
have the right at any reasonable time, to examine all papers in the possession of MICO that relate
to the Covered Policies that Donegal Mutual has reinsured pursuant to this Agreement.

 

 

ARTICLE 19

STATISTICS

     19.1 Statistics. MICO shall furnish Donegal Mutual such statistics as may be
necessary to comply with statutory requirements and in such form as Donegal Mutual may reasonably
request from MICO.

ARTICLE 20

ERRORS AND OMISSIONS

     20.1 Errors and Omissions. Any inadvertent delay, omission or error by either party
shall not relieve the other party from any liability that would have attached under this Agreement,
provided that such delay, omission or error shall not impose any greater liability on Donegal
Mutual than would have attached under this Agreement if such act, delay, omission or error had not
occurred, and such act, delay, omission or error is promptly and reasonably rectified upon
discovery by the responsible party.

ARTICLE 21

MISCELLANEOUS

     21.1 Notices. All reports, remittances, notices, letters, financial statements or any
other communications between the parties to this Agreement shall be addressed as follows:

     To Donegal Mutual:

Donegal Mutual Insurance Company

1195 River Road

Marietta, Pennsylvania 17547

Attention: President

Facsimile: (717) 426-7009

     To MICO:

Michigan Insurance Company

1700 East Beltline N.E., Suite 100

Grand Rapids, Michigan 49525

Attention: President

Facsimile: (616) 447-9603

     21.2 Assignment. Neither this Agreement nor any rights or obligations under this
Agreement may be assigned or otherwise transferred by any party to this Agreement, including by
operation of law, without the consent of the other party to this Agreement and the prior approval
of the Commissioner of Insurance of the State of Michigan; provided,

 

 

however, that Donegal Mutual may assign its rights or obligations under this Agreement to any
entity that has a current A.M. Best rating equal to or greater than A.

     21.3 Severability. If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been part of this Agreement unless the
deletion of such provision would result in such a material change as to cause completion or
continuation of the transactions contemplated by this Agreement to be unreasonable or materially
frustrate the objectives of MICO and Donegal Mutual as expressed in this Agreement.

     21.4 Counterparts. This Agreement may be executed in any number of counterparts, each
of which shall be an original, but such counterparts together shall constitute one and the same
agreement.

     IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed in duplicate
and delivered as of the day and year first above written.

	 	 	 	 	 
	 	DONEGAL MUTUAL INSURANCE COMPANY

 	 
	 	By:  	/s/ Donald H. Nikolaus
 	 
	 	 	Donald H. Nikolaus, President 	 
	 	 	 	 
	 
	 	MICHIGAN INSURANCE COMPANY

 	 
	 	By:  	/s/ Ermil L. Adamson
 	 
	 	 	Ermil L. Adamson, Presidentexv10wqq

Exhibit (10)(QQ)

DONEGAL GROUP INC.

2011 EMPLOYEE STOCK PURCHASE PLAN

Section 1. Purpose.

     Donegal Group Inc. (the “Company”) has established this 2011 Employee Stock Purchase Plan
(this “Plan”) for the benefit of the eligible employees of the Company, its parent, Donegal Mutual
Insurance Company (“Donegal Mutual”), participating subsidiaries of the Company and of Donegal
Mutual and any company from which the Company or Donegal Mutual assumes 100% quota share
reinsurance.

     The purpose of this Plan is to provide each eligible employee with an opportunity to acquire
or increase his or her proprietary interest in the Company through the purchase of shares of the
Company’s Class A common stock (the “Class A common stock”) at a discount from the market prices
prevailing at the time of purchase. The Company intends that this Plan meet the requirements of
Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”).

Section 2. Eligible Employees.

     (a) Employees eligible to participate in this Plan (“Eligible Employees”) will consist of all
individuals: (i) who are full-time employees, as defined in Section 2(b) of this Plan, of the
Company, Donegal Mutual, any subsidiary, as defined in Section 424 of the Code, of the Company or
Donegal Mutual or any company from which the Company or Donegal Mutual assumes 100% quota share
reinsurance (a “Participating Company”), and (ii) who have completed one month of employment on or
prior to the date on which an Enrollment Period, as defined in Section 4 of this Plan, begins.

     (b) A “full-time employee” is an employee of the Company, Donegal Mutual or any Participating
Company who works or is scheduled to work at least 1,000 hours during any calendar year. The
Company will consider an employee who is not scheduled to work at least 1,000 hours during a
calendar year, but who in fact works at least 1,000 hours during a calendar year, a “full-time
employee” once the employee is credited with at least 1,000 hours during such year.

     (c) A person who is otherwise an Eligible Employee may not purchase any shares of Class A
common stock under this Plan to the extent that: (i) immediately after such person purchases Class
A common stock, the person would own shares of Class A common stock, including shares that would be
owned if all outstanding options to purchase Common Stock such person holds were exercised, that
possess 5% or more of the total combined voting power or value of all classes of stock of the
Company or any subsidiary of the Company or

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(ii) such right would cause such person to have purchase rights under this Plan and all other
stock purchase plans of the Company or any subsidiary of the Company or Donegal Mutual that meet
the requirements of Section 423 of the Code, that accrue at a rate that exceeds $25,000 of fair
market value of the stock of the Company, or any subsidiary of the Company, determined at the time
the right to purchase Class A common stock under this Plan is exercisable, for each calendar year
in which a purchase right under this Plan is outstanding. For this purpose, a right to purchase
Class A common stock accrues when such right first becomes exercisable during the calendar year,
but the rate of accrual for any calendar year may in no event exceed $25,000 of the fair market
value of Class A common stock subject to the right, and the number of shares of Class A common
stock under one right may not be carried over to any other right.

     (d) Notwithstanding other provisions in this Plan to the contrary, any officer of the Company,
Donegal Mutual or any Participating Company who is subject to Section 16 of the Securities Exchange
Act of 1934 (the “Exchange Act”) with respect to his or her ownership of shares of Class A common
stock (a “Section 16 officer”) will be subject to the restrictions and conditions set forth in
Sections 7(b) and 9 of this Plan.

Section 3. Duration of Plan and Subscription Periods.

     This Plan is effective as of July 1, 2011 through and including June 30, 2022. During the
term of this Plan, this Plan will have 20 semi-annual “Subscription Periods.” Each Subscription
Period will extend from July 1 through December 31 or from January 1 through June 30, respectively,
with the first Subscription Period beginning on July 1, 2011 and the last Subscription Period
ending on June 30, 2022.

Section 4. Enrollment and Enrollment Period.

     Enrollment for participation in this Plan will take place during the “Enrollment Period” that
precedes each Subscription Period. Enrollment Periods are in effect from June 1 through June 30
and from December 1 through December 31 of each year. In addition, the Company will deem each
individual who participates in the Company’s 2001 Employee Stock Purchase Plan and who is an
Eligible Employee as of May 31, 2011 as automatically enrolled in this Plan effective as of the
first Subscription Period. Except as provided regarding automatic enrollment in this Plan as of
the first Subscription Period, any person who is an Eligible Employee and who would like to
participate in this Plan should file a subscription agreement during an Enrollment Period, and that
eligible employee’s participation in this Plan will then commence as of the commencement of the
next Subscription Period. Once enrolled, an Eligible Employee will continue to participate in this
Plan for each succeeding Subscription Period until such Eligible Employee terminates his or her
participation, the Eligible Employee ceases to be an Eligible Employee or elects to withdraw from
this Plan, this Plan expires or the Company terminates this Plan. An Eligible Employee who desires
to change his or her rate of contribution may do so effective as of the beginning of the next
Subscription Period by submitting a properly completed and executed enrollment form to the Company

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during the Enrollment Period for the next Subscription Period. An Eligible Employee who is
not a Section 16 officer may also change his or her rate of contribution during a Subscription
Period only pursuant to Section 7(b) of this Plan.

Section 5. Total Number of Shares Available.

     The total number of shares available under this Plan is 300,000 shares of Class A common
stock. Such Class A common stock may be authorized and unissued shares or previously issued shares
that the Company reacquired. In the event the total number of shares available for purchase under
this Plan have been purchased prior to the expiration of this Plan, the Company may terminate this
Plan in accordance with Section 13 of this Plan.

Section 6. Subscription Price.

     The “Subscription Price” for each share of Class A common stock subscribed for purchase under
this Plan during each Subscription Period will be the lesser of (i) 85% of the fair market value of
such share as determined as of the last trading day before the first day of the Enrollment Period
with respect to such Subscription Period or (ii) 85% of the fair market value of such share as
determined on the last trading day of such Subscription Period. The fair market value of a share
will be the closing price the NASDAQ Stock Market reports for the applicable date.

Section 7. Amount of Contribution and Method of Payment.

     (a) An Eligible Employee must pay the Subscription Price through a payroll deduction. The
maximum payroll deduction may not be more than 10% of an Eligible Employee’s Base Pay, as defined
in Section 7(c) of this Plan. An Eligible Employee must authorize a minimum payroll deduction,
based on such employee’s Base Pay at the time of such authorization, that will enable such employee
to accumulate by the end of the Subscription Period an amount sufficient to purchase at least ten
shares of Class A common stock. An Eligible Employee may not make separate cash deposits toward
the payment of the Subscription Price.

     (b) An Eligible Employee who is not a Section 16 officer may at any time during a Subscription
Period reduce the amount the Eligible Employee previously authorized the Company to deduct from his
or her Base Pay, provided the reduction conforms with the minimum payroll deduction set forth in
Section 7(a) of this Plan. To do so, an Eligible Employee should forward to the Company a properly
completed and executed written notice setting forth the requested reduction in his or her payroll
deduction. The change in payroll deduction will become effective on a prospective basis as soon as
practicable after the Company receives the change notice. An Eligible Employee may change his or
her payroll deduction under this Section 7(b), by forwarding to the Company a properly completed
and executed written notice setting forth such reduction in his or her payroll deduction only once
during any Subscription Period. Any such reduction will remain in effect for subsequent

3

 

Subscription Periods, subject to compliance with Section 7(a) of this Plan, until such
Eligible Employee terminates his or her participation in this Plan, the Eligible Employee ceases to
be an Eligible Employee, this Plan expires or the Company terminates this Plan. A Section 16
officer may not change his or her rate of contribution during a Subscription Period.

     (c) “Base Pay” means the straight-time earnings or regular salary paid to an Eligible
Employee. Base Pay will not include overtime, bonuses or other items that the committee
administering this Plan pursuant to Section 14 of this Plan does not consider to be regular
compensation. Payroll deductions will commence with the first paycheck issued during the
Subscription Period and, except as set forth in Sections 9 and 10, will continue with each paycheck
throughout the entire Subscription Period, except for pay periods for which the Eligible Employee
receives no compensation (i.e., uncompensated personal leave, leave of absence, etc.).

Section 8. Purchase of Shares.

     The Company will maintain a “Plan Account” on its books for recordkeeping purposes only in the
name of each Eligible Employee who authorized a payroll deduction (a “participant”). At the close
of each pay period, the Company will credit the amount deducted from the participant’s Base Pay to
the participant’s Plan Account. The Company will pay no interest on any Plan Account balance in
any circumstance. As of the last day of each Subscription Period, the Company will divide the
amount then in the participant’s Plan Account by the Subscription Price for such Subscription
Period as determined pursuant to Section 6 , and credit the participant’s Plan Account with the
number of whole shares that results. The Company will not credit fractional shares under this
Plan. The Company will issue and deliver share certificates to each participant within a
reasonable time thereafter. The Company will carry forward any amount remaining in a participant’s
Plan Account to the next Subscription Period. However, any amount the Company carries forward
pursuant to this Section 8 will not reduce the amount a participant may contribute pursuant to
Section 7 of this Plan during the next Subscription Period. If a participant does not accumulate
sufficient funds in his or her Plan Account to purchase at least ten shares of Class A common stock
during a Subscription Period, the Company will deem such participant to have withdrawn from this
Plan pursuant to Section 9 of this Plan.

     If the number of shares subscribed for purchase during any Subscription Period exceeds the
number of shares available for purchase under this Plan, the Company will allocate the remaining
shares available for purchase among all participants in proportion to their Plan Account balances,
exclusive of any amounts carried forward pursuant to the preceding paragraph. If the number of
shares that would be credited to any participant’s Plan Account in either or both of the
Subscription Periods occurring during any calendar year exceeds the limit specified in Section 2(c)
of this Plan, the Company will credit the participant’s Plan Account with the maximum number of
shares permissible, and refund the remaining amounts to the participant in cash without interest
thereon.

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Section 9. Withdrawal from This Plan.

     A participant, other than a Section 16 officer, may withdraw from this Plan at any time by
giving a properly completed and executed written notice of withdrawal to the Company. As soon as
practicable following the Company’s receipt of a notice of withdrawal, the Company will refund the
amount credited to the participant’s Plan Account in cash without interest thereon. The Company
will make no further payroll deductions with respect to such participant except in accordance with
an authorization for a new payroll deduction filed during a subsequent Enrollment Period in
accordance with Section 4 of this Plan. A participant’s withdrawal will not affect the
participant’s eligibility to participate during any succeeding Subscription Period. A withdrawal
by a Section 16 officer, other than a withdrawal under Section 10 of this Plan, will not become
effective until the Subscription Period that commences after the date the Company receives written
notice of such withdrawal.

Section 10. Separation from Employment.

     The Company will treat separation from employment for any reason, including death, disability
or retirement, as defined in this Section 10, as an automatic withdrawal pursuant to Section 9 of
this Plan. However, at the election of a participant who retires, or in the event of a
participant’s death at the election of the participant’s beneficiary, any cash balance in such
participant’s Plan Account may be used to purchase the appropriate number of whole shares of Class
A common stock at a Subscription Price determined in accordance with Section 6 of this Plan using
the date of the participant’s retirement or death as though it was the last day of the Subscription
Period. The Company will refund in cash any cash balance in the Plan Account after such purchase
to the participant, or in the event of the participant’s death to the participant’s beneficiary
without interest thereon. As used in this Section 10, “retirement” means a termination of
employment by reason of a participant’s retirement at or after the participant’s earliest
permissible retirement date pursuant to and in accordance with his or her employer’s regular
retirement plan or practice.

Section 11. Assignment and Transfer Prohibited.

     No participant may assign, pledge, hypothecate or otherwise dispose of his or her subscription
or rights to subscribe under this Plan to any other person, and any attempted assignment, pledge,
hypothecation or disposition will be void. However, a participant may acquire shares of Class A
common stock subscribed to under this Plan in the names of the participant and another person
jointly with the right of survivorship upon appropriate written notice to the Company. No
subscription or right to subscribe granted to a participant under this Plan will be transferable by
the participant otherwise than by will or by the laws of descent and distribution, and such
subscription rights will be exercisable only by the participant during the participant’s lifetime.

5

 

Section 12. Adjustment of and Changes in Class A Common Stock.

     In the event that the outstanding shares of Class A common stock of the Company are hereafter
increased or decreased or changed into or exchanged for a different number or kind of shares or
other securities of the Company, or of another corporation, by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split-up, stock dividend, either in shares
of Class A common stock or of another class of the Company’s stock, spin-off or combination of
shares, the committee appointed pursuant to Section 14 of this Plan will make appropriate
adjustments in the aggregate number and kind of shares that are reserved for sale under this Plan.

Section 13. Amendment or Termination of This Plan.

     The Board of Directors of the Company (the “Board”) will have the right to amend, modify or
terminate this Plan at any time without notice, provided that the amendment, modification or
termination of this Plan does not adversely affect any participant’s existing rights and provided
further that, without the approval of the stockholders of the Company in accordance with applicable
law and regulations, no such amendment will increase the benefits accruing to participants under
this Plan, increase the total number of shares subject to this Plan, change the formula by which
the price at which the shares will be sold is determined, or change the class of employees eligible
to participate in this Plan.

Section 14. Administration.

     A committee of three employees of the Company the Board appoints from time to time will
administer this Plan. The committee may from time to time adopt rules and regulations for carrying
out this Plan. Any interpretation or construction of any provision of this Plan by the committee
will be final and conclusive on all persons absent contrary action by the Board. Any
interpretation or construction of any provision of this Plan by the Board will be final and
conclusive on all persons.

Section 15. Designation of Beneficiary.

     A participant may file a written designation of a beneficiary who is to receive any cash
credited to the participant under this Plan in the event of such participant’s death prior to the
delivery to the participant of such cash. A participant may change such designation of a
beneficiary at any time upon written notice to the Company. Upon the death of a participant and
upon the committee’s receipt of proof of the participant’s death and of the identity and existence
of a beneficiary validly designated by the participant under this Plan, the Company will deliver
such cash to such beneficiary. In the event of the death of a participant and in the absence of a
beneficiary validly designated under this Plan who is living at the time of such participant’s
death, the Company will deliver such cash to the executor or administrator of the estate of the
participant, or if, to the knowledge of the Company, the participant has not appointed such
executor or administrator, the Company, in its sole discretion, may deliver

6

 

such cash to the spouse or to any one or more dependents or relatives of the participant, or
if no spouse, dependent, or relative is known to the Company, then to such other person as the
Company may designate. No designated beneficiary will, prior to the death of the participant by
whom the beneficiary has been designated, acquire any interest in the shares or cash credited to
the participant under this Plan.

Section 16. Employees’ Rights.

     Nothing contained in this Plan will prevent the Company, Donegal Mutual or any Participating
Company from terminating any employee’s employment. No employee will have any rights as a
stockholder of the Company by reason of participation in this Plan unless and until the Company has
issued and delivered certificates to the participant representing shares of Class A common stock
for which the participant has subscribed.

Section 17. Use of Funds.

     The Company may use all payroll deductions it receives or holds under this Plan for any
corporate purpose, and the Company will not be obligated to segregate such payroll deductions. Any
account established for a participant will be for recordkeeping purposes only.

Section 18. Government Regulations.

     The Company’s obligation to sell and deliver Class A common stock under this Plan is subject
to any prior approval or compliance that may be required to be obtained or made from or with any
governmental or regulatory authority in connection with the authorization, issuance or sale of such
Class A common stock.

Section 19. Titles.

     Titles are provided in this Plan for convenience only and are not to serve as a basis for
interpretation or construction of this Plan.

Section 20. Applicable Law.

     This Plan will be construed, administered and governed in all respects under the laws of the
Commonwealth of Pennsylvania and the United States of America.

Section 21. Compliance with Rule 16b-3.

     To the extent that Rule 16b-3 under the Exchange Act applies to purchases made under this
Plan, it is the Company’s intent that this Plan comply in all respects with the requirements of
Rule 16b-3, that the Company interpret any ambiguities or inconsistencies in the construction of
this Plan to give effect to such intention and that if this Plan will not so comply, whether on the
date of adoption or by reason of any later amendment to or

7

 

interpretation of Rule 16b-3, the provisions of this Plan will be deemed to be automatically
amended so as to bring them into full compliance with such rule.

Section 22. Approval of Stockholders.

     Prior to June 30, 2011, the Company will submit this Plan to its stockholders for approval in
accordance with applicable law and regulations. Subscriptions for the purchase of shares under
this Plan will be subject to the condition that the stockholders of the Company approve this Plan
prior to such date in the manner contemplated by Section 423(b)(2) of the Code. If the Company’s
stockholders do not approve this Plan prior to such date, this Plan will terminate, all
subscriptions under this Plan will be terminated and be of no further force or effect and the
Company shall promptly refund in cash, without interest, of all sums previously deducted from their
compensation pursuant to this Plan.

8

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