Document:

exv10w1

Exhibit 10.1

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”) dated as of July 29, 2011 among Donegal Mutual
Insurance Company, a Pennsylvania mutual insurance company having its principal place of business
at 1195 River Road, Marietta, Pennsylvania 17547 (“Donegal Mutual”), Donegal Group Inc., a Delaware
corporation having its principal place of business at 1195 River Road, Marietta, Pennsylvania 17547
(“DGI,” and, together with Donegal Mutual, the “Employers”), and Donald H. Nikolaus, an individual
whose principal office address is 1195 River Road, Marietta, Pennsylvania 17547 (the “Executive”).

WITNESSETH:

     WHEREAS, the Employers desire, by this Agreement, to provide for the continued employment of
the Executive by the Employers, and the Executive desires to provide for the continued employment
of the Executive by the Employers, all in accordance with the terms and subject to the conditions
set forth in this Agreement; and

     WHEREAS, the parties are entering into this Agreement to set forth and confirm their
respective rights and obligations with respect to the Executive’s continued employment by the
Employers;

     NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this
Agreement, the Employers and the Executive, intending to be legally bound hereby, mutually agree as
follows:

     1. Employment and Term.

          (a) (i) Effective August 1, 2011 (the “Effective Date”), (i) Donegal Mutual agrees to continue
to employ the Executive, and the Executive agrees to continue the Executive’s employment, as the
President and Chief Executive Officer of Donegal Mutual and (ii) DGI agrees to employ the
Executive, and the Executive agrees to continue the Executive’s employment, as the President and
Chief Executive Officer of DGI, with the positions described in clauses (i) and (ii) collectively
referred to in this Agreement as the “Position”, in accordance with the terms and subject to the
conditions this Agreement sets forth. Donegal Mutual and DGI shall be jointly and severally liable
to the Executive with respect to (i) all liabilities of Donegal Mutual to the Executive under this
Agreement and (ii) all liabilities of DGI to the Executive under this Agreement; provided, however,
that Donegal Mutual shall not be responsible for any liability of DGI to the Executive to the
extent that DGI has discharged such liability, and DGI shall not be responsible for any liability
of Donegal Mutual to the Executive to the extent that Donegal Mutual has discharged such liability.

 

 

               (ii) The term of this Agreement, as the same may be extended from time to time pursuant to the
provisions of this clause (ii) or otherwise, shall commence on the Effective Date and end on the
fifth anniversary of the Effective Date, provided, however, that on the first anniversary of the
Effective Date and on each subsequent anniversary of the Effective Date (each, an “Extension
Date”), the Term shall automatically extend for one additional year so that on each such succeeding
Extension Date, this Agreement shall have a remaining Term of five years, unless either the
Executive or the respective board of directors of Donegal Mutual and DGI (together, the “Boards”)
give notice to the other, not less than six months in advance of the next succeeding Extension
Date, that such automatic extensions shall terminate as of such next succeeding Extension Date,
unless the Employers earlier terminate the employment of the Executive for Cause, as defined in
this Agreement, or because of the death or the Permanent Disability, as defined in this Agreement,
of the Executive.

          (b) Unless this Agreement otherwise provides or pursuant to the mutual agreement of the
Employers and the Executive, all of the terms and conditions of this Agreement shall continue in
full force and effect throughout the Term and, with respect to those terms and conditions that
apply after the Term, after the Term. Upon the retirement of the Executive as President and Chief
Executive Officer of Donegal Mutual and DGI or such earlier date on which the Employers terminate
the employment of the Executive under this Agreement for other than Cause or the Death or the
Permanent Disability of the Executive or the Executive’s termination of the Executive’s employment
under this Agreement for Good Reason, as defined in this Agreement, on such date, the term of the
Consulting Agreement dated as of July 29, 2011 (the “Consulting Agreement”) among the Employers and
the Executive, in substantially the form of Appendix A to this Agreement, shall commence and shall
continue for a period of five years thereafter.

          (c) Notwithstanding paragraph 1(a) of this Agreement, the Employers, by action of the Boards
and effective as specified in a written notice thereof to the Executive in accordance with the
terms of this Agreement, shall have the right to terminate the Executive’s employment under this
Agreement at any time during the Term, for Cause or other than for Cause or on account of the
Executive’s death or Permanent Disability, subject to the provisions of this paragraph 1.

               (i) As used in this Agreement, “Cause” shall mean (A) the Executive’s willful and continued
failure substantially to perform the Executive’s material duties with the Employers as set forth in
this Agreement, or the commission by the Executive of any activities constituting a willful
violation or breach under any material federal, state or local law or regulation applicable to the
activities of Donegal Mutual or DGI or their respective subsidiaries and affiliates, in each case,
after notice of such failure, breach or violation from the Employers to the Executive and a
reasonable opportunity for the Executive to cure such failure, breach or violation in all material
respects, (B) fraud, breach of fiduciary duty,

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dishonesty, misappropriation or other actions by the Executive that cause intentional material
damage to the property or business of Donegal Mutual or DGI or their respective subsidiaries and
affiliates, (C) the Executive’s repeated absences from work such that the Executive is
substantially unable to perform the Executive’s duties under this Agreement in all material
respects other than for physical or mental impairment or illness or (D) the Executive’s
non-compliance with the provisions of paragraph 2(b) of this Agreement after notice of such
non-compliance from the Employers to the Executive and a reasonable opportunity for the Executive
to cure such non-compliance. Notwithstanding the foregoing, the Employers may not terminate the
Executive’s employment under this Agreement for Cause unless the Employers provide the Executive
with (A) written notice of special meetings of the Boards of the Employers given in accordance with
the By-laws of the Employers to consider the termination of the Executive’s employment under this
Agreement for Cause and (B) the Boards provide the Executive with the opportunity to address such
special meetings.

               (ii) As used in this Agreement, “Permanent Disability” shall mean a physical or mental
disability of the Executive such that the Executive is substantially unable to perform those duties
that the Executive would otherwise reasonably be expected to continue to perform and the
Executive’s nonperformance of such duties has continued for a period of 240 consecutive days,
provided, however, that in order to terminate the Executive’s employment under this Agreement on
account of Permanent Disability, the Employers must provide the Executive with written notice of
the Boards’ good faith determinations to terminate the Executive’s employment under this Agreement
for reason of Permanent Disability not less than 30 days prior to such termination, and such notice
shall specify the date of termination. Until the specified effective date of termination by reason
of Permanent Disability, the Executive shall continue to receive compensation at the rates set
forth in paragraph 3 of this Agreement. No termination of the Executive’s employment under this
Agreement because of Permanent Disability shall impair any rights of the Executive under any
disability insurance policy the Employers maintained at the commencement of the aforesaid 240-day
period.

          (d) The Executive shall have the right to terminate the Executive’s employment under this
Agreement at any time during the Term for Good Reason or without Good Reason or in the event a
Change of Control occurs.

               (i) As used in this Agreement, “Good Reason” shall mean (A) a material diminishment of the
Executive’s Position or the scope of the Executive’s authority, duties or responsibilities as this
Agreement describes without the Executive’s written consent, excluding for this purpose any action
the Employers do not take in bad faith and that the Employers remedy promptly following written
notice thereof from the Executive to the Employers, or (B) a material breach by either Employer of
its respective obligations to the Executive under this Agreement, provided, that with respect to
any termination by the

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Executive for Good Reason, the Executive shall have provided the Employers with written notice
within 90 days of the date on which the Employers first had actual knowledge of the existence of
the Good Reason and which Good Reason shall not have been cured or otherwise rectified by the
Employers in all material respects to the reasonable satisfaction of the Executive within 30 days
after the Employers receive such written notice or (C) any termination of the Executive’s
employment under this Agreement without Cause.

               (ii) “Change of Control” shall mean (A) the acquisition of shares of DGI by any “person” or
“group,” as Rule 13d-3 under the Securities Exchange Act of 1934, as now or hereafter amended, uses
such terms in a transaction or series of transactions that result in such person or group directly
or indirectly first owning after the Effective Date more than 25% of the aggregate voting power of
DGI’s Class A common stock and Class B common stock taken as a single class, (B) the consummation
of a merger or other business combination transaction after which the holders of the outstanding
voting capital stock of DGI taken as a single class do not collectively own 60% or more of the
aggregate voting power of the entity surviving such merger or other business combination
transaction, (C) the sale, lease, exchange or other transfer in a transaction or series of
transactions of all or substantially all of the assets of DGI, but excluding therefrom the sale and
re-investment of the consolidated investment portfolio of DGI and its subsidiaries, (D) as the
result of or in connection with any cash tender offer or exchange offer, merger or other business
combination transaction, sale of assets or contested-election of directors or any combination of
the foregoing transactions or (E) the acquisition of “control” of Donegal Mutual as such term is
defined in the Pennsylvania Insurance Holding Companies Act (each, a “Transaction”), the persons
who constituted a majority of the members of the Boards on the Effective Date and persons whose
election as members of the Boards received the approval of such members then still in office or
whose subsequent election had been so approved prior to the date of a Transaction, but before the
occurrence of an event that constitutes a Change of Control, no longer constitute such a majority
of the Boards then in office. A Transaction constituting a Change of Control shall be deemed to
have occurred only upon the closing of the Transaction.

          (e) (i) If (A) the Employers terminate the Executive’s employment under this Agreement for any
reason other than for Cause and such termination occurs as of a date that is within 270 days
preceding or within 180 days after the consummation of a Change of Control (with such 270-day
period and such 180-day period collectively referred to in this Agreement as a “Change of Control
Period”, (B) the Employers terminate this Agreement as a result of the death or Permanent
Disability of the Executive, effective as of a date within a Change of Control Period, (C) the
Executive terminates the Executive’s employment under this Agreement within 180 days after the
consummation of a Change of Control or (D) the Executive terminates the Executive’s employment
under this Agreement for Good Reason, the Employers shall pay to the Executive or the Executive’s
estate promptly after the event giving rise to such payment occurs, an amount equal to the sum of
(x) (1) the Executive’s Base Salary, as defined in this Agreement, accrued through the date the
termination of the

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Executive’s employment under this Agreement is effective, (2) any incentive the Employers have
the obligation to pay to the Executive pursuant to paragraph 3(b) of this Agreement, (3) any
amounts payable under any of the Employers’ benefit plans in accordance with the terms of such
plans, except as Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) may
otherwise require and (4) any amount in respect of excise taxes the Employers have the obligation
to pay to the Executive pursuant to paragraph 1(e) of this Agreement, with such payments, rights
and benefits described in clauses (x)(1), (x)(2) and (x)(3) of this Agreement being collectively
referred to in this Agreement as the “Accrued Obligations,” (y) an amount equal to the aggregate
premiums that the Executive would have to pay to maintain in effect throughout the period (the
“Subsequent Period”) from the date of termination of the Executive’s employment under this
Agreement through the remainder of the Term had the Executive remained employed, assuming no
increase in insurance premium rates, the same medical, health, disability and life insurance
coverage the Employers provided to the Executive immediately prior to the date of such termination
(the “Benefit Obligations”) and (z) the Employers shall pay to the Executive or the Executive’s
estate, as a severance payment, for three years from the date of such termination, the Executive’s
annual Base Salary as of the effective date of termination of the Executive’s employment under this
Agreement and the incentive paid to the Executive during the last completed fiscal year of the
Employers before such termination. The Employers shall pay such amounts to the Executive in 36
equal monthly installments.

               (ii) If the Employers terminate the Executive’s employment under this Agreement for any reason
other than for Cause effective as of a date that is not within a Change of Control Period or (B)
the Executive terminates the Executive’s employment under this Agreement for Good Reason effective
as of a date that is not within a Change of Control Period, the Employers shall pay the Executive,
provided the Executive concurrently signs and delivers a general release in a commercially
reasonable form that is mutually acceptable to the Employers and the Executive in favor of the
Employers and their respective subsidiaries, an amount equal to the sum of (w) the Accrued
Obligations, (x) the Benefit Obligations and (y) the Executive’s Base Salary as of the effective
date of termination of the Executive’s employment under this Agreement the Executive would have
received had the Executive remained employed under this Agreement for the Subsequent Period.

               (iii) If (A) the Employers terminate the Executive’s employment under this Agreement for Cause
or because of the death or Permanent Disability of the Executive or (B) the Executive terminates
the Executive’s employment under this Agreement for any reason other than Good Reason, the
Executive’s death or Permanent Disability or (C) the Employers terminate this Agreement as a result
of the death or Permanent Disability of the Executive effective as of a date that is not within a
Change of Control Period, the sole obligation of the Employers to the Executive under this
Agreement shall be to pay the Accrued Obligations to the Executive or the Executive’s estate,
provided, however, that in the event the Employers terminate the employment of the Executive under
this Agreement

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because of the death of the Executive, the Employers shall pay to the personal representatives
of the Executive an amount equal to the Executive’s Base Salary and incentive for the remainder of
the Term. The Employers shall pay such amounts to the Executive at the same time and in the same
installments had the Executive remained employed under this Agreement for the remainder of the
Term.

               (iv) No provision of this Agreement shall adversely affect any vested rights of the Executive
under the Employers’ existing employee benefit plans or other plans the Employers may establish in
the future; provided, however, upon the termination of the employment of the Executive as provided
in this Agreement, all future vesting of the Executive’s rights under the existing and any future
employee benefit plans shall terminate without further action by the Employers.

               (v) The Employers and the Executive intend that this Agreement be drafted and administered in
compliance with section 409A of the Code, including, but not limited to, any future amendments to
Section 409A, and any other Internal Revenue Service (“IRS”) or other governmental rulings or
interpretations (together, “Section 409A”) issued pursuant to Section 409A so as not to subject the
Executive to payment of interest or any additional tax under Code section 409A. The Employers and
the Executive intend for any payments under paragraphs 1(e)(i), (ii) or (iii) to satisfy either the
requirements of Section 409A or to be exempt from the application of Section 409A, and the
Employers and the Executive shall construe and interpret this Agreement accordingly. In
furtherance of such intent, if payment or provision of any amount or benefit under this Agreement
that is subject to Section 409A at the time specified in this Agreement would subject such amount
or benefit to any additional tax under Section 409A, the Employers shall postpone payment or
provision of such amount or benefit to the earliest commencement date on which the Employers can
make such payment or provision of such amount or benefit without incurring such additional tax, but
not in excess of six months. In addition, to the extent that any IRS guidance issued under Section
409A would result in the Executive being subject to the payment of interest or any additional tax
under Section 409A, the Employers and the Executive agree, to the extent reasonably possible, to
amend this Agreement in order to avoid the imposition of any such interest or additional tax under
Section 409A. Any such amendment shall have the minimum economic effect necessary and be
determined reasonably and in good faith by the Employers and the Executive.

               (vi) If a payment under paragraph 1(e)(i), (ii) or (iii) of this Agreement does not qualify as
a short-term deferral under Section 409A or any similar or successor provisions, and the Executive
is a Specified Employee, as defined in this Agreement, as of the Executive’s Termination Date, the
Employers may not make such distributions to the Executive before a date that is six months after
the date of the Executive’s Termination Date or, if earlier, the date of the Executive’s death (the
“Six-Month Delay”). The Employers shall accumulate payments to which the Executive would otherwise
be entitled during the first six

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months following the Termination Date (the “Six-Month Delay Period”) and make such payments on
the first day of the seventh month following the Executive’s Termination Date. Notwithstanding the
Six-Month Delay set forth in this paragraph 1(e)(vi):

     (A) To the maximum extent Section 409A or any similar or successor
provisions permit, during each month of the Six-Month Delay Period, the
Employers will pay the Executive an amount equal to the lesser of (I) the
total monthly severance for which paragraph 1(e)(ii) and (iii) provide or (II)
one-sixth of the lesser of (1) the maximum amount that Section 401(a)(17)
permits to be taken into account under a qualified plan for the year in which
the Executive’s Date of Termination occurs and (2) the sum of the Executive’s
annualized compensation based upon the annual rate of pay for services
provided to the Employers for the taxable year of the Executive preceding the
taxable year of the Executive in which the Executive’s Termination Date
occurs, adjusted for any increase during that year that the parties expected
to continue indefinitely if the Executive’s Termination Date has not occurred
; provided that amounts paid under this sentence will count toward, and will
not be in addition to, the total payment amount the Employers have the
obligation to pay to the Executive under paragraphs 1(e)(i) and (ii) of this
Agreement; and

     (B) To the maximum extent Section 409A, or any similar or successor
provisions, permits within ten days following the Executive’s Termination
Date, the Employers shall pay the Executive an amount equal to the applicable
dollar amount under Section 402(g)(1)(B) for the year in which the Executive’s
Termination Date occurred; provided that the amount the Employers pay under
this sentence may include, and need not be in addition to, the total payment
amount this Agreement requires the Employers to pay to the Executive under
paragraph 1(b).

     (C) For purposes of this Agreement, “Specified Employee” has the meaning
given that term in Section 409A or any similar or successor provisions. The
Employers’ “specified employee identification date” as described in Section
409A will be December 31 of each year, and the Employers’ “specified employee
effective date” as described in Section 409A or any similar or successor
provisions) will be February 1 of each succeeding year.

          (f) In the event that the independent registered public accounting firm of either of the
Employers or the IRS determines that any payment, coverage or benefit provided to the Executive
pursuant to this Agreement is subject to the excise tax imposed by Sections 280G or 4999 or any
successor provisions of Sections 280G and 4999 or any interest

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or penalties the Executive incurs with respect to such excise tax, the Employers, within 30
days thereafter, shall pay to the Executive, in addition to any other payment, coverage or benefit
due and owing under this Agreement, an additional amount that will result in the Executive’s net
after tax position, after taking into account any interest, penalties or taxes imposed on the
amounts payable under this paragraph 1(f), upon the receipt of the payments for which this
Agreement provides be no less advantageous to the Executive than the net after tax position to the
Executive that would have been obtained had Sections 280G and 4999 not been applicable to such
payment, coverage or benefits. Except as this Agreement otherwise provides, tax counsel, whose
selection shall be reasonably acceptable to the Executive and the Employers and whose fees and
costs shall be paid for by the Employers, shall make all determinations under this paragraph 1(f)
requires.

          (g) In the event that the independent registered public accounting firm of either of the
Employers or the IRS determines that any payment, coverage or benefit due or owing to the Executive
pursuant to this Agreement is subject to the excise tax Section 409A imposes or any successor
provision of Section 409A or any interest or penalties, including interest imposed under Section
409(A)(1)(B)(i)(I) of the Code, the Executive incurs as a result of the application of such
provision, the Employers, within 30 days of the date of such impositions, shall pay to the
Executive, in addition to any other payment, coverage or benefit due and owing under this
Agreement, an additional amount that will result in the Executive’s net after tax position, after
taking into account any interest, penalties or taxes imposed on the amounts paid under this
paragraph 1(g), being no less advantageous to the Executive than the net after tax position the
Executive would have obtained had Section 409A not been applicable to such payment, coverage or
benefits. Except as this Agreement otherwise provides, tax counsel, whose selection shall be
reasonably acceptable to the Executive and the Employers and whose fees and costs the Employers
shall pay, shall make all determinations this paragraph 1(g) requires.

          (h) The Employers and the Executive shall give any notice of termination of this Agreement to
the Executive or the Employers, as the case may be, in accordance with the provisions of paragraph
12.

          (i) The Employers agree to reimburse the Executive for the reasonable fees and expenses of the
Executive’s attorneys and for court and related costs in any proceeding to enforce the provisions
of this Agreement in which the Executive is successful on the merits.

     2. Duties of the Executive.

          (a) Subject to the ultimate control and discretion of the Boards, the Executive shall serve in
the Position and perform all duties and services commensurate with the Position. Throughout the
Term of this Agreement as the same may be extended from time to time, the Executive shall perform
all duties reasonably assigned or delegated to the Executive under the By-laws of the Employers or
from time to time by the Boards consistent with the

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Position. Except for travel normally incidental and reasonably necessary to the business of
the Employers and the duties of the Executive under this Agreement, the duties of the Executive
shall be performed from an office location not greater than 35 miles from Marietta, Pennsylvania.

          (b) The Executive shall devote substantially all of the Executive’s business time and
attention to the performance of the Executive’s duties under this Agreement and, during the term of
the Executive’s employment under this Agreement, the Executive shall not engage in any other
business enterprise that requires any significant amount of the Executive’s personal time or
attention, unless granted the prior permission of the respective Boards, provided, however, that
this requirement for prior permission from the respective Boards shall not apply to any business or
profession in which the Executive is engaged on the Effective Date, provided, however, that the
Executive shall require the prior permission of the respective Boards to the extent the Executive
proposes to increase substantially the amount of time he devotes to such other businesses. The
foregoing provision shall not prevent the Executive’s purchase, ownership or sale of any interest
in, or the Executive’s engaging in, any business that does not compete with the business of the
Employers or the Executive’s involvement in charitable or community activities, provided, that the
time and attention that the Executive devotes to such business and charitable or community
activities does not materially interfere with the performance of the Executive’s duties under this
Agreement and that a material portion of the time the Executive devotes to charitable or community
activities are devoted to charitable or community activities within the Employers’ market area and
further provided that such conduct complies in all material respects with applicable policies of
the Employers.

          (c) The Executive shall receive 30 days of vacation leave during each calendar year with full
compensation, and which the Executive may take at such time or times, as the Executive and the
Employers shall mutually determine. The Employers shall accrue earned but unused vacation in
accordance with the Employers’ vacation policy.

     3. Compensation. For all services the Executive renders under this Agreement:

          (a) The Employers shall pay the Executive a base salary (the “Base Salary”) at the annual rate
that the Executive is currently receiving from the Employers, plus such other compensation as the
Employers may, from time to time, determine. The Employers shall pay such Base Salary and other
compensation in accordance with the Employers’ normal payroll practices as in effect from time to
time.

          (b) The Employers agree that the Executive shall be entitled to participate in the Employer’s
annual incentive programs, in accordance in all material respects with applicable policies of the
Employers relating to incentive compensation for executive officers, including the objectives set
forth in the Employers’ Executive Incentive Plan.

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          (c) From and after the Effective Date and throughout the Term:

               (i) Subject to any required stockholder approval, DGI shall annually grant the Executive
options, which shall be non-qualified stock options, to purchase not less than 150,000 shares of
Class A common stock of DGI (the “Options”) at a price per share equal to the closing price of
DGI’s Class A common stock on the NASDAQ National Market System (“NASDAQ”) on the day before the
date of the annual stock option grant (the “Exercise Price”). The Options shall have the following
other additional terms:

     (A) Each Option shall become exercisable and be vested, and remain
exercisable and vested for a term of ten years after the date of grant of its
grant, in three cumulative installments as follows:

          (1) the first installment of each option, consisting of 50,000 shares of
DGI Class A common stock, shall become exercisable from and after the nine
months following the date of such grant;

          (2) the second installment of each option, consisting of 50,000 shares of
DGI Class A common stock, shall become exercisable from and after the second
anniversary of the date of such grant; and

          (3) the third installment of each option, consisting of 50,000 shares of
DGI Class A common stock, shall become exercisable from, and after the third
anniversary of the date of such grant.

               (ii) The Options shall become immediately vested and exercisable and shall remain exercisable
for the remainder of the original term of such options in the event of (A) a Change of Control, (B)
the Employers terminate this Agreement without Cause or (C) the Executive terminates this Agreement
for Good Reason;

               (iii) Any unvested Options shall terminate immediately in the event of (A) the Employers
terminate the employment of the Executive under this Agreement for Cause or (B) the Executive
terminates the Executive’s employment under this Agreement without Good Reason;

               (iv) The Options shall remain exercisable until the earlier of the expiration of their
respective terms or three years after the Employers terminate this Agreement because of the
Executive’s death, Permanent Disability or retirement, and the Options shall become immediately
vested and exercisable if such termination occurs during the 270 days the preceding consummation of
a Change of Control;

               (v) The Executive may transfer some or all of the Options by gift to members of the
Executive’s immediate family or to entities that such family members control or by will or by the
laws of descent and distribution;

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               (vi) In the event that, after the Effective Date, the outstanding shares of DGI’s Class A
common stock subject to the Options increase or decrease or are changed into or exchanged for a
different kind or number of shares of DGI or other securities of DGI or of another corporation by
reason of a reorganization, merger, consolidation, reclassification, stock split, reverse stock
split, stock dividend or combination of shares of DGI’s Class A common stock, the Board of
Directors of DGI shall make an appropriate and equitable adjustment in the number and kind of
shares as to which the Options or the remaining portion of the Options then unexercised shall be
exercisable and in the Exercise Price. DGI shall make such adjustment in the Options without any
change in the total price applicable to the unexercised portion of the Options, except for any
change in aggregate exercise price that results from the rounding-off of share amounts or prices
and with any necessary corresponding adjustment in the Exercise Price. In the event DGI from time
to time after the Effective Date DGI issues shares of its Class A common stock at a price less than
the then prevailing market price on NASDAQ on the date of any such issuance (the “Prevailing Market
Price”), the Board of Directors of DGI shall reduce the Exercise Price of that portion of the
Options not then exercised to the price determined by multiplying the Exercise Price as then in
effect by a fraction, the numerator of which shall be that price per share at which DGI issued its
Class A Common Stock at a price less than the Prevailing Market Price and the denominator of which
shall be such Prevailing Market Price. Any such adjustment that the Board of Directors of DGI
makes shall be final and binding upon the Executive, DGI and their respective successors in
interest;

               (vii) if DGI adopts an option plan for its employees and such option plan contains terms more
favorable to the optionees under such plan than the terms of the Options granted to the Executive
as set forth in this Agreement, then, in such event, the terms of the Options shall adjust so that
the terms of the Options incorporate the more favorable provision of such option plan; and

               (viii) Subject to any required stockholder approval, DGI shall promptly file a Form S-8
registration statement with the Securities and Exchange Commission and shall use its commercially
reasonable efforts to cause such registration statement to remain effective for as long as any of
the Options remain outstanding.

          (d) The compensation that the Employers agree to pay to the Executive in this paragraph 3
shall be in addition to such rights as the Executive may have, during the Executive’s employment
under this Agreement or after such employment, to participate in and receive benefits from or under
any benefit plans the Employers may in their discretion establish for their employees or
executives, including, but not limited to, employment benefit plans either of the Employers
maintain now or in the future, and specifically including the Stock Option Plan and group health
insurance, life insurance and disability insurance plans. To the extent the Executive incurs a tax
liability as a result of any of such benefits, the Executive shall be solely responsible for such
taxes.

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          (e) The parties acknowledge that Towers Watson is in the process of evaluating the
compensation and employee benefit plans the Employers make available to their senior executive
officers. To the extent the respective boards of directors of the Employers, based upon the
recommendations of Towers Watson, to approve the enhancement the compensation and other benefits
the Employers make available to their senior executive officers, the Employers and the Executive
agree to negotiate in good faith and to execute an amendment to this Agreement that would
appropriately reflect any such enhancements.

     4. Expenses. The Employers shall promptly reimburse the Executive for all reasonable
expenses the Executive pays or incurs in connection with the performance of the Executive’s duties
and responsibilities under this Agreement, upon presentation of expense vouchers or other
appropriate documentation therefor.

     5. Consulting Services. Unless the Employers have terminated the employment of the
Executive under this Agreement for Cause, the Death or the Permanent Disability of the Executive,
the Executive has terminated the Executive’s employment under this Agreement for Good Reason, or
the date on which the Executive no longer serves as President and Chief Executive Officer of the
Employers, and in the absence of the death or Permanent Disability of the Executive, the Employers
expressly contemplate that upon the earlier of the expiration of the Term of this Agreement or the
date on which the Executive terminates his employment under this Agreement for Good Reason, the
Executive shall serve as a consultant to the Employers under the terms and conditions of the
Consulting Agreement.

     6. Indemnification. Notwithstanding anything in the Employers’ respective
certificates or articles of incorporation or their By-laws to the contrary, the Employers shall at
all times indemnify the Executive during the Executive’s employment by the Employers or while the
Executive is providing consulting services to the Employers, and thereafter, to the fullest extent
applicable law permits for any matter in any way relating to the Executive’s employment by,
consultation with or other affiliation with the Employers or its subsidiaries; provided, however,
that if the Employers shall have terminated the Executive’s employment under this Agreement for
Cause, then, except to the extent otherwise required by law, the Employers shall have no
obligation whatsoever to indemnify the Executive for any claim arising out of the matter for which
the Employer shall have terminated Executive’s employment under this Agreement for Cause or for any
conduct of the Executive not within the scope of the Executive’s duties under this Agreement.

     7. Confidential Information. The Executive understands that, in the course of the
Executive’s employment by the Employers, the Executive will receive confidential information
concerning the business of the Employers and that the Employers desire to protect. The Executive
agrees that the Executive will not at any time during or after the period of the Executive’s
employment by the Employers reveal to anyone outside the Employers, or use for the Executive’s own
benefit, any such information that the Employers

-12-

 

have designated as confidential or that the Executive understood to be confidential without
specific designation by the Employers. Upon termination of the employment of the Executive under
this Agreement, and upon the request of the Employers, the Executive shall promptly deliver to the
Employers any and all written materials, records and documents, including all copies of such
written materials, documents and records, the Executive made or that come into the Executive’s
possession during the Term and that the Executive retained contain or concern confidential
information of the Employers and all other written materials the Employers furnished to the
Executive for the Executive’s use during the Term, including all copies of such written materials,
documents and records, whether of a confidential nature or otherwise.

     8. Non-Competition.

          (a) For the purposes of this Agreement, the term “Competitive Enterprise” shall mean any
insurance company, insurance holding company, federal or state-chartered bank, savings and loan
association, savings bank, credit union, consumer finance company, bank holding company, savings
and loan holding company, unitary holding company, financial holding company or any of the
foregoing types of entities in the process of organization or application for federal or state
regulatory approval and shall also include other providers of financial services and entities that
offer financial services or products with which the Employers or their respective subsidiaries or
affiliates currently offer or may in the future offer.

          (b) For a period of two years (the “Restricted Period”) immediately following the Employers’
termination of the Executive’s employment under this Agreement for Cause or the Executive’s
termination of his employment under this Agreement for other than Good Reason, the Executive shall
not, provided that the Employers remain in compliance with their respective obligations under this
Agreement:

               (i) serve as a director, officer, employee or agent of, or act as a consultant or advisor to,
any Competitive Enterprise in any city or county in which the Employers or their respective
subsidiaries or affiliates are then conducting business or maintain an office or have publicly
announced their intention to conduct business or maintain an office;

               (ii) in any way, directly or indirectly, solicit, divert or contact any existing or potential
customer or business of the Employers or any of their respective subsidiaries or affiliates that
the Executive solicited, became aware of or transacted business with during the Employers’
employment of the Executive for the purpose of selling any financial services or products that
compete with the financial services or products the Employers or their respective subsidiaries and
affiliates currently offer or in the future, may offer or solicit or assist in the employment of
any employee of the Employers or their

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respective subsidiaries or affiliates for the purpose of becoming an employee of or otherwise
provide services for any Competitive Enterprise.

     9. Representation and Warranty of the Executive. The Executive represents and
warrants that the Executive is not under any obligation, contractual or otherwise, to any other
firm or corporation, which would prevent the Executive’s performance of the terms of this
Agreement.

     10. Entire Agreement; Amendment. This Agreement and the Consulting Agreement contain
the entire agreement between the Employers and the Executive with respect to the subject matter of
this Agreement, and may not be amended, waived, changed, modified or discharged except by an
instrument in writing executed by the Employers and the Executive.

     11. Assignability. The services of the Executive under this Agreement are personal in
nature, and the Employers may not assign the rights or obligations of the Executive under this
Agreement, whether by operation of law or otherwise, without the Executive’s prior written consent.
This Agreement shall be binding upon, and inure to the benefit of, the Employers and their
permitted successors and assigns under this Agreement. This Agreement shall not be assignable by
the Executive, but shall inure to the benefit of the Executive’s heirs, executors, administrators
and personal representatives.

     12. Notice. Any notice that a party to this Agreement may give under this Agreement
shall be in writing and be deemed given when hand delivered and acknowledged or, if mailed, one day
after mailing by registered or certified mail, return receipt requested, or if delivered by an
overnight delivery service, one day after the notice is delivered to such service, to the Employers
or the Executive at their respective addresses stated in the preamble to this Agreement, or at such
other address as either party may by similar notice designate.

     13. Specific Performance. The Employers and the Executive agree that irreparable
damage would occur in the event that any of the provisions of paragraphs 7 or 8 of this Agreement
were not performed in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the Employers and the Executive shall have the right to an injunction or
injunctions to prevent breaches of such paragraphs 7 or 8 and to enforce specifically the terms and
provisions of such paragraphs 7 or 8, this being in addition to any other remedy to which the
Employers or the Executive are entitled at law or in equity.

     14. No Third Party Beneficiaries. Nothing in this Agreement, express or implied,
shall confer upon any person or entity other than the Employers and the Executive (and the
Executive’s heirs, executors, administrators and personal representatives) any rights or remedies
of any nature under or by reason of this Agreement.

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     15. Successor Liability. The Employers shall require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the
business or assets of the Employers to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Employers would be required to perform it if no such
succession had taken place.

     16. Mitigation. The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise, nor shall the
amount of any payment or benefit provided for in this Agreement be reduced by any compensation the
Executive earns as the result of employment by another employer or by retirement benefits payable
after the termination of this Agreement, except that the Employers shall not be required to provide
the Executive and the Executive’s eligible dependents with medical insurance coverage as long as
the Executive and the Executive’s eligible dependents are receiving comparable medical insurance
coverage from another employer.

     17. Waiver of Breach. The failure at any time to enforce or exercise any right under
any of the provisions of this Agreement or to require at any time performance by the other parties
of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or
to affect either the validity of this Agreement or any part of this Agreement, or the right of any
party hereafter to enforce or exercise its rights under each and every provision in accordance with
the terms of this Agreement.

     18. No Attachment. Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance,
charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment
by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be
null, void and of no effect; provided, however, that nothing in this paragraph 18 shall preclude
the assumption of such rights by executors, administrators or other legal representatives of the
Executive or the Executive’s estate and their assigning any rights hereunder to the person or
persons entitled to such rights.

     19. Severability. The invalidity or unenforceability of any term, phrase, clause,
paragraph, restriction, covenant, agreement or other provision of this Agreement shall in no way
affect the validity or enforceability of any other provision, or any part of this Agreement, but
this Agreement shall be construed as if such invalid or unenforceable term, phrase, clause,
paragraph, restriction, covenant, agreement or other provision had never been contained in this
Agreement unless the deletion of such term, phrase, clause, paragraph, restriction, covenant,
agreement or other provision would result in such a material change as to cause the covenants and
agreements contained in this Agreement to be unreasonable or would materially and adversely
frustrate the objectives of the Employers and the Executive as expressed in this Agreement.

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     20. Construction. This Agreement shall be governed by and construed in accordance
with the internal laws of the Commonwealth of Pennsylvania, without giving effect to principles of
conflict of laws. All headings in this Agreement have been inserted solely for convenience of
reference only, are not to be considered a part of this Agreement and shall not affect the
interpretation of any of the provisions of this Agreement.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first
written above.

	 	 	 	 	 
	 	DONEGAL MUTUAL INSURANCE COMPANY

 	 
	 	By:  	/s/ Kevin G. Burke
 	 
	 	 	Kevin G. Burke, Senior Vice President, 	 
	 	 	Human Resources 	 
	 
	 	DONEGAL GROUP INC.

 	 
	 	By:  	/s/ Jeffrey D. Miller
 	 
	 	 	Jeffrey D. Miller, Senior Vice President and 	 
	 	 	Chief Financial Officer 	 
	 
	 	 	 
	 	/s/ Donald H. Nikolaus
 	 
	 	Donald H. Nikolaus 	 
	 	 	 
	 

-16-exv10w2

Exhibit 10.2

CONSULTING AGREEMENT

     THIS CONSULTING AGREEMENT (this “Agreement”) dated as of July 29, 2011 among Donegal Mutual
Insurance Company, a Pennsylvania mutual insurance company having its principal place of business
at 1195 River Road, Marietta, Pennsylvania 17547 (“Donegal Mutual”), Donegal Group Inc., a Delaware
corporation having its principal place of business at 1195 River Road, Marietta, Pennsylvania 17547
(“DGI,” and, together with Donegal Mutual, the “Companies”), and Donald H. Nikolaus, an individual
whose principal office address is 1195 River Road, Marietta, Pennsylvania 17547 (the “Consultant”).

WITNESSETH:

     WHEREAS, the Consultant has served for many years as the President and Chief Executive Officer
of Donegal Mutual and DGI; and

     WHEREAS, upon the earlier of the retirement of the Consultant or the date on which the
Companies shall have terminated the employment of the Consultant under the Employment Agreement
dated as of July 29, 2011 among Donegal Mutual, DGI and the Consultant (the “Employment Agreement”)
for other than Cause, as defined in the Employment Agreement, the Death or the Permanent Disability
of the Consultant, as defined in this Agreement, or the Consultant shall have terminated the
Consultant’s employment as President and Chief Executive Officer of the Companies under the
Employment Agreement for Good Reason, as defined in the Employment Agreement, the Companies agree
to retain the Consultant to provide consulting services to the Companies and their respective
boards of directors (together, the “Boards”), and the Consultant agrees to render consulting
services to the Companies and the Boards, in each case in accordance with the terms and conditions
set forth in this Agreement;

     NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this
Agreement, the Companies and the Consultant, intending to be legally bound hereby, mutually agree
as follows:

     1. Consulting Services.

          (a) (i) Effective on the date of the retirement of the Consultant as the President and Chief
Executive Officer of Donegal Mutual and DGI or such earlier date on which the Companies shall have
terminated the employment of the Consultant as President and Chief Executive Officer of the
Companies under the Employment Agreement for other than Cause or the Death or Permanent Disability
of the Consultant or the date on which the Consultant shall have terminated the employment of the
Consultant as President and Chief

 

 

Executive Officer of the Companies under the Employment Agreement for Good Reason (the
“Effective Date”) and except as otherwise provided in this Agreement, this Agreement shall
supersede and replace the Employment Agreement and the Companies shall thereupon retain the
Consultant to provide consulting services to the Companies and the Boards in accordance with the
terms and conditions set forth in this Agreement and the Consultant agrees to provide consulting
services to the Companies and the Boards in accordance with the terms and conditions set forth in
this Agreement. Donegal Mutual and DGI shall be jointly and severally liable to the Consultant
with respect to (i) all liabilities of Donegal Mutual to the Consultant under this Agreement and
(ii) all liabilities of DGI to the Consultant under this Agreement; provided, however, that Donegal
Mutual shall not be responsible for any liability of DGI to the Consultant to the extent that DGI
has discharged such liability, and DGI shall not be responsible for any liability of Donegal Mutual
to the Consultant to the extent that Donegal Mutual has discharged such liability.

               (ii) The term of this Agreement shall commence upon the Effective Date and end on the fifth
anniversary of the Effective Date, unless the Companies earlier terminate the retention of the
Consultant for Cause, as defined in this Agreement, the death of the Consultant or the Permanent
Disability of the Consultant.

          (b) Unless this Agreement otherwise provides or pursuant to the mutual agreement of the
Companies and the Consultant, all of the terms and conditions of this Agreement shall continue in
full force and effect throughout the Term and, with respect to those terms and conditions that
apply after the Term, after the Term.

          (c) Notwithstanding paragraph 1(a) of this Agreement, the Companies, by action of the Boards
and effective as specified in a written notice thereof to the Consultant in accordance with the
terms of this Agreement, shall have the right to terminate the Consultant’s retention under this
Agreement at any time during the Term, for Cause or for other than for Cause or on account of the
Consultant’s Death or Permanent Disability, subject to the provisions of this paragraph 1.

               (i) As used in this Agreement, “Cause” shall mean (A) the Consultant’s willful and continued
failure substantially to provide consulting services to with the Companies as set forth in this
Agreement, or the commission by the Consultant of any activities constituting a willful violation
or breach under any material federal, state or local law or regulation applicable to the activities
of Donegal Mutual, DGI or their respective subsidiaries and affiliates, in each case, after notice
of such failure, breach or violation from the Companies to the Consultant and a reasonable
opportunity for the Consultant to cure such failure, breach or violation in all material respects,
(B) fraud, breach of fiduciary duty, dishonesty, misappropriation or other actions by the
Consultant that cause intentional material damage to the property or business of Donegal Mutual,
DGI or their respective subsidiaries and affiliates, or (C) the Consultant’s inability to render
consulting services such

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that the Consultant is substantially unable to perform the Consultant’s duties under this
Agreement in all material respects other than for physical or mental impairment or illness.

               (ii) As used in this Agreement, “Permanent Disability” shall mean a physical or mental
disability of the Consultant such that the Consultant is substantially unable to perform those
consulting services that the Consultant would otherwise reasonably have been expected to continue
to perform and the nonperformance of such consulting services continues for a period of 240
consecutive days, provided, however, that in order to terminate the Consultant’s retention under
this Agreement on account of Permanent Disability, the Companies must provide the Consultant with
written notice of the respective Boards’ good faith determinations to terminate the Consultant’s
retention under this Agreement for reason of Permanent Disability not less than 30 days prior to
such termination, which notice shall specify the date of termination. Until the specified
effective date of termination by reason of Permanent Disability, the Consultant shall continue to
receive the consulting fees at the rates set forth in paragraph 3 of this Agreement. No
termination of the Consultant’s retention under this Agreement because of Permanent Disability
shall impair any rights of the Consultant under any disability insurance policy the Companies
maintained at the commencement of the aforesaid 240-day period.

          (d) The Consultant shall have the right to terminate the Consultant’s retention under this
Agreement at any time during the Term for Good Reason or without Good Reason. As used in this
Agreement, “Good Reason” shall mean a material breach by either of the Companies of its respective
obligations to the Consultant under this Agreement, and the Companies do not cure such breach in
all material respects to the reasonable satisfaction of the Consultant, within 30 days, in each
case following written notice of such breach from the Consultant to the Companies, which notice the
Companies shall provide within 90 days of the date on which the Companies first have actual
knowledge of the existence of the breach.

          (e) Termination Obligations.

               (i) If (A) the Companies terminate the retention of the Consultant under this Agreement for
any reason other than Cause or the death or Permanent Disability of the Consultant or (B) the
Consultant terminates the retention of the Consultant under this Agreement for Good Reason, the
Companies shall pay the Consultant’s annual fee for the remainder of the Term at the same times and
in the same installments as the Companies paid the consulting fee to the Consultant until the
Companies shall have discharged such obligations.

               (ii) If (A) the Companies terminate the retention of the Consultant under this Agreement for
Cause or (B) the Consultant terminates the Consultant’s retention under this Agreement for any
reason other than Good Reason, the sole obligation of the Companies to the Consultant shall be to
pay to the Consultant any accrued obligation of the

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Companies to the Consultant pursuant to this Agreement within 30 days after the date of such
termination.

               (iii) No provision of this Agreement shall adversely affect any vested rights of the
Consultant under the Companies’ employee benefit plans or other plans the Companies have
established prior to the Effective Date of this Agreement.

          (f) The Companies and the Consultant intend that this Agreement be drafted and administered in
compliance with Section 409A of the Code, including, but not limited to, any future amendments to
Section 409A, and any other Internal Revenue Service (“IRS”) or other governmental rulings or
interpretations (together, “Section 409A”) issued pursuant to Section 409A so as not to subject the
Consultant to payment of interest or any additional tax under Section 409A. The Companies and the
Consultant intend for any payments under paragraphs 1(e)(i) or (ii) to satisfy either the
requirements of Section 409A or to be exempt from the application of Section 409A, and the
Companies and the Consultant shall construe and interpret this Agreement accordingly. In
furtherance of such intent, if payment or provision of any amount or benefit under this Agreement
that is subject to Section 409A at the time specified in this Agreement would subject such amount
or benefit to any additional tax under Section 409A, the Companies shall postpone payment or
provision of such amount or benefit to the earliest commencement date on which the Companies can
make such payment or provision of such amount or benefit can be made without incurring such
additional tax. In addition, to the extent that any IRS guidance issued under Section 409A would
result in the Consultant being subject to the payment of interest or any additional tax under
Section 409A, the Companies and the Consultant agree, to the extent reasonably possible, to amend
this Agreement in order to avoid the imposition of any such interest or additional tax under
Section 409A. Any such amendment shall have the minimum economic effect necessary and be
determined reasonably and in good faith by the Companies and the Consultant.

          (g) If a payment under paragraphs 1(e)(i) or (ii) of this Agreement does not qualify as a
short-term deferral under Section 409A or any similar or successor provisions, as of the
Consultant’s Termination Date, the Companies may not make such distributions to the Consultant
before the date that is six months after the date of the Consultant’s Termination Date or, if
earlier, the date of the Consultant’s death (the “Six-Month Delay”). The Companies shall
accumulate payments to which the Consultant would otherwise be entitled during the first six months
following the Termination Date (the “Six-Month Delay Period”) and make such payments on the first
day of the seventh month following the Consultant’s Termination Date. Notwithstanding the
Six-Month Delay set forth in this paragraph 1(g):

               (i) To the maximum extent Section 409A or any similar or successor provisions permit, during
each month of the Six-Month Delay Period, the Companies will pay the Consultant an amount equal to
one-sixth of the lesser of (1) the maximum amount that Code Section 401(a)(17) permits to be taken
into account under a qualified plan for the

-4-

 

year in which the Consultant’s Termination Date occurs and (2) the sum of the Consultant’s
annualized fees based upon the annual rate of pay for the consulting services provided to the
Companies for the taxable year of the Consultant preceding the taxable year of the Consultant in
which the Consultant’s Termination Date occurs, adjusted for any increase during that year that was
expected to continue indefinitely if the Consultant’s Termination Date has not occurred ; provided
that amounts paid under this sentence will count toward, and will not be in addition to, the total
payment amount the Companies have the obligation to pay to the Consultant under paragraphs 1(e)(i)
and (ii) of this Agreement; and

               (ii) To the maximum extent Section 409A, or any similar or successor provisions, permits
within ten days following the Consultant’s Termination Date, the Companies shall pay the Consultant
an amount equal to the applicable dollar amount under Code Section 402(g)(1)(B) for the year in
which the Consultant’s Termination Date occurred; provided that the amount the Companies pay under
this sentence may include, and need not be in addition to, the total payment amount this Agreement
requires the Companies to pay to the Consultant under paragraph 1(e).

          (h) In the event that the independent registered public accounting firm of either of the
Companies or the IRS determines that any payment, coverage or benefit provided to the Consultant
pursuant to this Agreement is subject to the excise tax imposed by Sections 280G or 4999 of the
Code or any successor provisions of Sections 280G and 4999 or any interest or penalties the
Consultant incurs with respect to such excise tax, the Companies, within 30 days thereafter, shall
pay to the Consultant, in addition to any other payment, coverage or benefit due and owing under
this Agreement, an additional amount that will result in the Consultant’s net after tax position,
after taking into account any interest, penalties or taxes imposed on the amounts payable under
this paragraph 1(h), upon the receipt of the payments for which this Agreement provides be no less
advantageous to the Consultant than the net after tax position to the Consultant that would have
been obtained had Sections 280G and 4999 of the Code not been applicable to such payment, coverage
or benefits. Except as this Agreement otherwise provides, tax counsel, whose selection shall be
reasonably acceptable to the Consultant and the Companies and whose fees and costs shall be paid
for by the Companies, shall make all determinations this paragraph 1(h) requires.

          (i) In the event that the independent registered public accounting firm of either of the
Companies or the IRS determines that any payment, coverage or benefit due or owing to the
Consultant pursuant to this Agreement is subject to the excise tax Section 409A of the Code imposes
or any successor provision of Section 409A or any interest or penalties, including interest imposed
under Section 409(A)(1)(B)(i)(I) of the Code, the Consultant incurs as a result of the application
of such provision, the Companies, within 30 days of the date of such impositions, shall pay to the
Consultant, in addition to any other payment, coverage or benefit due and owing under this
Agreement, an additional amount that will result in the Consultant’s net after-tax position, after
taking into account any interest, penalties or taxes

-5-

 

imposed on the amounts paid under this paragraph 1(i), being no less advantageous to the
Consultant than the net after-tax position the Consultant would have obtained had Section 409A of
the Code not been applicable to such payment, coverage or benefits. Except as this Agreement
otherwise provides, tax counsel, whose selection shall be reasonably acceptable to the Consultant
and the Companies, and whose fees and costs the Companies shall pay, shall make all determinations
this paragraph 1(i) require.

          (j) The Companies and the Consultant shall give any notice of termination of this Agreement to
the Consultant or the Companies, as the case may be, in accordance with the provisions of paragraph
9.

          (k) The Companies agree to reimburse the Consultant for the reasonable fees and expenses of
the Consultant’s attorneys and for court and related costs in any proceeding to enforce the
provisions of this Agreement in which the Consultant is successful on the merits.

     2. Services of the Consultant.

          (a) The Consultant agrees to provide services to the Companies in connection with the general
operations of the Companies and merger and acquisition activities, participating in meetings and
other activities of the Insurance Federation of Pennsylvania and such other projects and
assignments upon which the Companies and the Consultant shall from time to time mutually agree.
The Consultant shall report to the Boards of Directors of the Companies. The Consultant agrees to
perform such services faithfully, diligently and in accordance with the commercially reasonable
efforts of the Consultant. The Consultant shall provide, on an average weekly basis during the
course of any fiscal year of the Companies, up to 20 hours of consulting services per week. Except
for travel normally incidental and reasonably necessary to the business of the Companies and the
duties of the Consultant under this Agreement, the duties of the Consultant may be performed from
his residence in Silver Spring, Pennsylvania or from an office location the Companies provide that
is not more than 35 miles distance from Silver Spring, Pennsylvania.

          (b) The Companies and the Consultant intend that the Consultant shall render services under
this Agreement as an employee of the Companies, and no one shall construe this Agreement to be
inconsistent with that status. The Consultant shall be entitled to receive all benefits the
Companies provide to the executive officers of the Companies named in the annual proxy statement of
DGI, including health insurance and such benefits of the Consultant as became fully vested while
serving as President and Chief Executive Officer of the Companies under the Employment Agreement.
The fees, benefits and other compensation the Consultant receives under this Agreement shall be
subject to and net of any federal, state of local taxes or contributions imposed under any
employment insurance, social security, income tax or other tax law or regulation with respect to
the Consultant’s performance of consulting services under this Agreement.

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     3. Fees. For all services the Consultant renders under this Agreement:

          (a) As compensation for the Consultant’s services under this Agreement, the Companies shall
pay the Consultant annual compensation in an amount equal to the sum of 50% of the Base Salary, as
defined in the Employment Agreement, for the completed last fiscal year of the Companies before the
date the Consultant commences the provision of consulting services pursuant to this Agreement, but
in no event less than $600,000 plus such discretionary incentive payments as the Companies may from
time to time determine.

          (b) From and after the Effective Date and throughout the Term, the Companies shall provide the
Consultant with office facilities and secretarial services consistent with the Consultant’s stature
as the long-term former Chief Executive Officer of the Companies.

     4. Expenses. The Companies shall promptly reimburse the Consultant for all reasonable
expenses the Consultant pays or incurs in connection with the performance of the Consultant’s
duties and responsibilities under this Agreement, upon presentation of expense vouchers or other
appropriate documentation therefor.

     5. Indemnification. Notwithstanding anything in the Companies’ respective
certificates or articles of incorporation or their By-laws to the contrary, the Companies shall at
all times indemnify the Consultant during the Consultant’s retention by the Companies or while the
Consultant is providing consulting services to the Companies, and thereafter, to the fullest extent
applicable law permits for any matter in any way relating to the Consultant’s affiliation with the
Companies or its subsidiaries; provided, however, that if the Companies shall have terminated the
Consultant’s retention under this Agreement for Cause, then, except to the extent otherwise
required by law, the Companies shall have no obligation whatsoever to indemnify the Consultant for
any claim arising out of the matter for which the Companies have terminated the Consultant’s
retention for Cause.

     6. Confidential Information. The Consultant understands that in the course of the
Consultant’s retention by the Companies the Consultant will receive confidential information
concerning the business of the Companies and that the Companies desire to protect such confidential
information. The Consultant agrees that the Consultant will not at any time during or after the
period of the Consultant’s retention by the Companies reveal to anyone outside the Companies, or
use for the Consultant’s own benefit, any such information that the Companies have designated as
confidential or that the Consultant understood to be confidential without specific written
designation by the Companies. Upon termination of the retention of the Consultant under this
Agreement, and upon the request of the Companies, the Consultant shall promptly deliver to the
Companies any and all written materials, records and documents, including all copies of such
written materials, documents and records, the Consultant made or that come into the Consultant’s
possession during the Term and that the Consultant retained contain or concern confidential
information of the

-7-

 

Companies and all other written materials the Companies furnished to the Consultant for the
Consultant’s use during the Term, including all copies of such written materials, documents and
records, whether of a confidential nature or otherwise.

     7. Non-Competition.

          (a) For the purposes of this Agreement, the term “Competitive Enterprise” shall mean any
insurance company, insurance holding company, federal or state-chartered bank, savings and loan
association, savings bank, credit union, consumer finance company, bank holding company, savings
and loan holding company, unitary holding company, financial holding company or any of the
foregoing types of entities in the process of organization or application for federal or state
regulatory approval and shall also include other providers of financial services and entities that
offer financial services or products with which the Companies or their respective subsidiaries or
affiliates currently offer or may in the future offer.

          (b) For a period of two years (the “Restricted Period”) immediately following the Companies’
termination of the Consultant’s retention under this Agreement for Cause or the Consultant’s
termination of his consulting services under this Agreement for other than Good Reason, the
Consultant shall not, provided that the Companies remain in compliance with their respective
obligations under this Agreement:

               (i) serve as a director, officer, employee or agent of, or act as a consultant or advisor to,
any Competitive Enterprise in any city or county in which the Companies or their respective
subsidiaries or affiliates are then conducting business or maintain an office or have publicly
announced their intention to conduct business or maintain an office;

               (ii) in any way, directly or indirectly, solicit, divert or contact any existing or potential
customer or business of the Companies or any of their respective subsidiaries or affiliates that
the Consultant solicited, became aware of or transacted business with during the Companies’
retention the Consultant for the purpose of selling any financial services or products that compete
with the financial services or products the Companies or their respective subsidiaries and
affiliates currently offer or in the future, may offer or solicit or assist in the employment of
any employee of the Companies or their respective subsidiaries or affiliates for the purpose of
becoming an employee of or otherwise provide services for any Competitive Enterprise.

     8. Entire Agreement; Amendment. This Agreement and the Employment Agreement contain
the entire agreement between the Companies and the Consultant with respect to the subject matter of
this Agreement, and may not be amended, waived, changed, modified or discharged except by an
instrument in writing executed by the Companies and the Consultant.

-8-

 

     9. Notice. Any notice that a party to this Agreement may give under this Agreement
shall be in writing and be deemed given when hand delivered and acknowledged or, if mailed, one day
after mailing by registered or certified mail, return receipt requested, or if delivered by an
overnight delivery service, one day after the notice is delivered to such service, to the Companies
or the Consultant at their respective addresses stated in the preamble to this Agreement, or at
such other address as either party may by similar notice designate.

     10. Specific Performance. The Companies and the Consultant agree that irreparable
damage would occur in the event that any of the provisions of paragraphs 6 or 7 of this Agreement
were not performed in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the Companies and the Consultant shall have the right to an injunction or
injunctions to prevent breaches of such paragraphs 6 or 7 and to enforce specifically the terms and
provisions of such paragraphs 6 or 7, this being in addition to any other remedy to which the
Companies or the Consultant are entitled at law or in equity.

     11. No Third Party Beneficiaries. Nothing in this Agreement, express or implied,
shall confer upon any person or entity other than the Companies and the Consultant, and the
Consultant’s heirs, executors, administrators and personal representatives, any rights or remedies
of any nature under or by reason of this Agreement.

     12. Successor Liability. The Companies shall require any successor, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the
business or assets of the Companies to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Companies would be required to perform it if no such
succession had taken place.

     13. No Attachment. Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance,
charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment
by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be
null, void and of no effect; provided, however, that nothing in this paragraph 13 shall preclude
the assumption of such rights by executors, administrators or other legal representatives of the
Consultant or the Consultant’s estate and their assigning any rights under this Agreement to the
person or persons entitled to such rights.

     14. Severability. The invalidity or unenforceability of any term, phrase, clause,
paragraph, restriction, covenant, agreement or other provision of this Agreement shall in no way
affect the validity or enforceability of any other provision, or any part of this Agreement, but
this Agreement shall be construed as if such invalid or unenforceable term, phrase, clause,
paragraph, restriction, covenant, agreement or other provision had never been contained in this
Agreement unless the deletion of such term, phrase, clause, paragraph,

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restriction, covenant, agreement or other provision would result in such a material change as
to cause the covenants and agreements contained in this Agreement to be unreasonable or would
materially and adversely frustrate the objectives of the Companies and the Consultant as expressed
in this Agreement.

     15. Construction. This Agreement shall be governed by and construed in accordance
with the internal laws of the Commonwealth of Pennsylvania, without giving effect to principles of
conflict of laws. All headings in this Agreement have been inserted solely for convenience of
reference only, are not to be considered a part of this Agreement and shall not affect the
interpretation of any of the provisions of this Agreement.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first
written above.

	 	 	 	 	 
	 	DONEGAL MUTUAL INSURANCE COMPANY

 	 
	 	By:  	/s/ Kevin G. Burke
 	 
	 	 	Kevin G. Burke, Senior Vice President, 	 
	 	 	Human Resources 	 
	 
	 	DONEGAL GROUP INC.

 	 
	 	By:  	/s/ Jeffrey D. Miller
 	 
	 	 	Jeffrey D. Miller, Senior Vice President and 	 
	 	 	Chief Financial Officer 	 
	 
	 	 	 
	 	/s/ Donald H. Nikolaus
 	 
	 	Donald H. Nikolaus 	 
	 	 	 
	 

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