Document:

exv10w6

Exhibit 10.6

	 	 	 
	 	 	

	 
	

Munich American Reinsurance Company
	 	 

	 	 	 
	Reinsurance 

Agreement

	 	NO. 12-2720-0
	 
	 	 
	 

	 	PROPERTY PER RISK EXCESS OF LOSS
	 

	 	REINSURANCE AGREEMENT
	 

	 	(hereinafter referred to as the “AGREEMENT”)
	 
	 	 
	 

	 	entered into by and between
	 
	 	 
	 

	 	LEBANON MUTUAL INSURANCE COMPANY
	 

	 	Cleona, Pennsylvania
	 

	 	(hereinafter referred to as the “COMPANY”)
	 
	 	 
	 

	 	and
	 
	 	 
	 

	 	MUNICH AMERICAN REINSURANCE COMPANY
	 

	 	New York, New York
	 

	 	(hereinafter referred to as the “REINSURER”)
	 
	 	 
	 

	 	Effective:      January 1, 1996
	 
	 	 
	 

	 	Term:           Continuous

 

 

Table of Contents

	 	 	 	 	 	 	 
	Article	 	 	 	Page
	Article 1
	 	Business Covered

	 	 	1	 
	 
	Article 2
	 	Limit and Retention

	 	 	1	 
	 
	Article 3
	 	Commencement and Termination

	 	 	1	 
	 
	Article 4
	 	Territory

	 	 	2	 
	 
	Article 5
	 	Exclusions

	 	 	2	 
	 
	Article 6
	 	Definitions

	 	 	3	 
	 
	Article 7
	 	Ultimate Net Loss

	 	 	5	 
	 
	Article 8
	 	Net Retained Lines

	 	 	6	 
	 
	Article 9
	 	Other Reinsurance

	 	 	6	 
	 
	Article 10
	 	Extra Contractual Obligations

	 	 	6	 
	 
	Article 11
	 	Excess of Original Policy Limits

	 	 	7	 
	 
	Article 12
	 	Premium

	 	 	7	 
	 
	Article 13
	 	Special Termination

	 	 	9	 
	 
	Article 14
	 	Reports and Remittances

	 	 	10	 
	 
	Article 15
	 	Loss Notice and Settlements

	 	 	11	 
	 
	Article 16
	 	Offset

	 	 	11	 
	 
	Article 17
	 	Salvage and Subrogation

	 	 	12	 
	 
	Article 18
	 	Errors and Omissions

	 	 	12	 
	 
	Article 19
	 	Amendments

	 	 	12	 
	 
	Article 20
	 	Access to Records

	 	 	13	 
	 
	Article 21
	 	Taxes

	 	 	13	 
	 
	Article 22
	 	Currency

	 	 	13	 

(i) 

 

Table of Contents (Cont’d)

	 	 	 	 	 	 	 
	Article	 	 	 	Page
	Article 23
	 	Insolvency
	 	 	13	 
	 
	Article 24	 	Arbitration
	 	 	14	 

	 	 	 
	Attachments:

	 	Nuclear Incident Exclusion Clause – Physical Damage –Reinsurance (U.S.A.)
	 

	 	Pools, Associations and Syndicates Exclusion Clause
	 

	 	Insolvency Funds Exclusion Clause

(ii) 

 

			
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	 	Witnesseth:
	 
	 	 
	 

	 	In consideration of the mutual covenants hereinafter contained and upon the terms
and conditions hereinbelow set forth, the parties hereto agree as follows:
	 
	 	 
	Article 1

	 	Business Covered
	 
	 	 
	 

	 	A. By this AGREEMENT the REINSURER agrees to indemnify the COMPANY in respect of the
net excess liability which may accrue to the COMPANY as a result of losses occurring
during the term of this AGREEMENT under policies in force at the inception of this
AGREEMENT or hereafter issued or renewed and classified by the COMPANY as Property,
with respect to the following lines of business: Fire, Allied Lines, Farmowners
(Section I only), Homeowners (Section I only), Commercial Multiple Peril (Section I
only), Businessowners (Section I only), Inland Marine, Glass, Burglary and Theft.
	 
	 	 
	 

	 	B. This AGREEMENT is solely between the COMPANY and the REINSURER, and performance
of the obligations of each party hereto shall only be rendered to the other party.
However, if the COMPANY becomes insolvent, the REINSURER’s liability shall be
modified to the extent set forth in Article 23 — Insolvency. In no instance shall
any insured of the COMPANY or any claimant against an insured of the COMPANY have
any rights under this AGREEMENT.
	 
	 	 
	Article 2

	 	Limit and Retention
	 
	 	 
	 

	 	The COMPANY shall retain the first $50,000 of ultimate net loss each risk, each
occurrence. The REINSURER shall indemnify the COMPANY for 100% of the amount by
which the ultimate net loss exceeds the COMPANY’s retention, but the liability of
the REINSURER shall not exceed $200,000 ultimate net loss each risk, each
occurrence, nor more than $600,000 ultimate net loss for all risks in any one loss
occurrence.
	 
	 	 
	Article 3

	 	Commencement and Termination
	 
	 	 
	 

	 	A. This AGREEMENT shall become effective at 12:01 A.M. Standard Time, January 1,
1996 and shall remain in force thereafter for an unlimited period. Unless otherwise
mutually agreed, this AGREEMENT may be canceled at any December 31st by either party
giving to the other not less than 90 days’ prior written notice by Registered or
Certified Mail of its intention to do so.
	 
	 	 
	 

	 	B. During the running of such notice as stipulated in Paragraph A above, the
REINSURER shall participate in the business coming within the terms of this AGREEMENT until the date of termination of the AGREEMENT.

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	 	C. All reinsurance hereunder shall be automatically canceled as of the date of
termination of this AGREEMENT and the REINSURER shall be released of all liability
as respects losses occurring subsequent to the date of termination.
	 
	 	 
	Article 4

	 	Territory
	 
	 	 
	 

	 	This AGREEMENT applies to risks located in the United States of America and its
territories and possessions, except that with respect to Inland Marine and Multiple
peril policies covered hereunder, the territorial limits of this AGREEMENT shall be
those of the original policies when such policies are written to cover risks
primarily located in the United States of America and its territories and
possessions.
	 
	 	 
	Article 5

	 	Exclusions
	 
	 	 
	 

	 	No reinsurance indemnity will be afforded under this AGREEMENT for:

1. All reinsurance assumed.

2. Excess of Loss business.

3. Business derived from any Pools, Associations or Syndicates as per the
“Pools, Associations and Syndicates Exclusion Clause” attached hereto.

4. War risk, bombardment, invasion, insurrection, rebellion, revolution,
military or usurped power, or confiscation by order of any government or
public authority, as excluded under a standard policy containing a standard
war exclusion clause.

5. Nuclear risk, as per the “Nuclear incident Exclusion Physical Damage -
Reinsurance” clause (U.S.A.) attached hereto.

6. Accident and health, aviation, casualty, boiler and machinery, ocean
marine, fidelity, surety, automobile physical damage, and any other lines or
classes not specifically covered hereunder.

7. Financial guarantees, insolvency and credit business, or bankers blanket
bond.

8. Flood when written as such.

9. Earthquake when written as such.

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10. Mortgage impairment insurance and similar kinds of insurance, however
styled, providing coverage to an insured as respects its mortgagee interest
in property or its owner interest in foreclosed property.

11. Difference in conditions insurance.

12. Insurance on growing, standing or drying crops, and timber.

13. Inland marine policies covering railroad rolling stock, animal
mortality, jewelers’ and furriers’ block, and manufacturers’ output.

14. Products integrity or products tampering.

15. Underground mining.

16. Oil or gas drilling production rigs.

17. Space and space-related risks as of intentional ignition of the launch
vehicle.

18. Contingency risks of any kind (e.g.: share price, unemployment, computer
crime, contract frustration, legacy, confiscation or expropriation, recourse
indemnity, extended warranties, kidnap and ransom, residual value, equipment
value, appraisal value, asset value or similar covers).

19. Seepage and/or pollution and/or contamination and/or debris removal to
be agreed.

20. Insolvency or guaranty funds, as per the “Insolvency Funds Exclusion
Clause” attached hereto.

21. Transmission arid Distribution Lines.

	 	 	 
	Article 6

	 	Definitions
	 
	 	 
	 

	 	A. The term “policies” shall mean the COMPANY’s policies, binders and contracts
providing insurance on the lines of business covered under this AGREEMENT.
	 
	 	 
	 

	 	B. The term “risk” shall be defined solely by the COMPANY, provided that:

1. One risk shall always be determined from the standpoint of the peril of
fire, whether or not the fire insurance is written by the COMPANY.

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2. A building and its contents for a single insured shall never be
considered as constituting more than one risk, nor shall time element
coverages be considered a separate risk apart from the building and its
contents.

	 	 	 
	 

	 	C. The term “loss adjustment expense” shall mean the COMPANY’s expenses allocable to
losses under this AGREEMENT, including court costs and allocated investigation,
adjustment and legal expenses. “Loss adjustment expense” shall not include office
expenses and salaries of officials or employees of the COMPANY (other than salary
charges and travel expenses of the COMPANY’s staff adjusters, fieldmen or other
employees while actually engaged in the settlement of losses under this AGREEMENT).
	 
	 	 
	 

	 	D. The term “Loss Occurrence” shall mean the sum of all individual losses directly
occasioned by any one disaster, accident, or loss or series of disasters, accidents,
or losses arising out of one event, which occurs within the area of one state of the
United States or province of Canada and states or provinces contiguous thereto and
to one another, However, the duration and extent of any one “loss occurrence” shall
be limited to all individual losses sustained by the COMPANY occurring during any
period of 188 consecutive hours arising out of and directly occasioned by the same
event except that the term loss occurrence” shall be further defined as follows:

1. As regards windstorm hail, tornado, hurricane, and cyclone, including
ensuing collapse and water damage, all individual losses sustained by the
COMPANY occurring during any period of 72 consecutive hours arising out of
and directly occasioned by the same event. However, the event need not be
limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism, and
malicious mischief, all individual losses sustained by the COMPANY occurring
during any period of 72 consecutive hours within the area of one
municipality or county and the municipalities or counties contiguous thereto
arising out of and directly occasioned by the same event. The maximum
duration of 72 consecutive hours may be extended in respect of individual
losses that occur beyond such 72 consecutive hours during the continued
occupation of an insured’s premises by strikers, provided such occupation
commenced during the aforesaid period.

3. As regards earthquake (the epicenter of which need not necessarily be
within the territorial confines referred to in the opening paragraph of this
Section D) and fire following directly occasioned by the earthquake, only
those individual fire losses

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which commence during the period of 168 consecutive hours may be included in
the COMPANY’s “loss occurrence”.

4. As regards “freeze,” only those individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting of frozen
pipes and tanks) may be included in the COMPANY’s “loss occurrence”.

	 	 	 
	 

	 	For all “loss occurrences” , the COMPANY may choose the date and time when any such
period of consecutive hours commences, provided that it is not earlier than the date
and time of the occurrence of the first recorded individual loss sustained by the
COMPANY arising out of that disaster, accident, or loss and provided that only one
such period of 168 consecutive hours shall apply with respect to one event, except
for those “loss occurrences” referred to in sub-paragraphs 1 and 2 above where only
one such period of 72 consecutive hours shall apply with respect to one event,
regardless of the duration of the event.
	 
	 	 
	 

	 	No individual losses occasioned by an event that would be covered by 72 hours
clauses may be included in any loss occurrence claimed under the 168 hours
provision.
	 
	 	 
	Article 7

	 	Ultimate Net Loss
	 
	 	 
	 

	 	A. The term “ultimate net loss” as used in this AGREEMENT shall mean the sum or sums
actually paid by the COMPANY in settlement of losses under policies covered
hereunder, including 80% of Extra Contractual Obligations and 80% of Losses in
Excess of Original Policy Limits, as defined in Articles 10 and 11 hereof. However,
in the event of the insolvency of the COMPANY “ultimate net loss” shall mean the
amount of loss which the COMPANY has incurred or for which it is liable, and payment
by the REINSURER shall be made to the liquidator, receiver or statutory successor of
the COMPANY in accordance with the provisions of Article 23 — Insolvency.
	 
	 	 
	 

	 	B. The ultimate net loss shall not include the COMPANY’s loss adjustment expenses,
as defined in Article 6 — Definitions, but rather the REINSURER shall pay its pro
rata share of the COMPANY’s loss adjustment expense in addition to its share of the
ultimate net loss hereunder.
	 
	 	 
	 

	 	C. All salvages, recoveries (including amounts recovered under reinsurances, whether
specific or general, which inure to the benefit of this AGREEMENT) and payments
recovered or received subsequent to loss settlement under this AGREEMENT shall be
applied as if recovered or received prior to said settlement, and all necessary
adjustments shall be made by the parties hereto. Nothing, however, in this
Article shall be

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	 	construed to mean losses are not recoverable hereunder until the COMPANY’s ultimate
net loss has been ascertained.
	 
	 	 
	Article 8

	 	Net Retained Lines
	 
	 	 
	 

	 	A. This AGREEMENT applies only to that portion of any insurance which the COMPANY
retains for its own account, and in calculating the amount of any loss hereunder and
also in computing the amount or amounts in excess of which this AGREEMENT attaches,
only loss or losses in respect of that portion of any insurance which the COMPANY
retains net for its own account shall be included.
	 
	 	 
	 

	 	B. The amount of the REINSURER’s liability in respect of any loss or losses shall
not be increased by reason of the inability of the COMPANY to collect from any other
reinsurers, whether specific or general, any amount which may have become due from
them whether such inability arises from the insolvency of such other reinsurers or
otherwise.
	 
	 	 
	 

	 	C. Notwithstanding the above, the COMPANY shall have the right to carry catastrophe
excess of loss reinsurance, recoveries under which shall inure solely to the benefit
of the COMPANY.
	 
	 	 
	Article 9

	 	Other Reinsurance
	 
	 	 
	 

	 	The COMPANY may purchase facultative reinsurance on any subject risk it deems
advisable, and the premium for that portion of the COMPANY’s policy reinsured
elsewhere will be deducted from the gross net written premium.
	 
	 	 
	Article 10

	 	Extra Contractual Obligations
	 
	 	 
	 

	 	A. This AGREEMENT shall protect the COMPANY within the limits hereof, where the
ultimate net loss includes any extra contractual obligations. “Extra contractual
obligations” are defined as those liabilities not covered under any other provisions
of this AGREEMENT and which arise from the handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited to, the following: failure by the COMPANY to
settle within the policy limit, or by reason of alleged or
actual negligence, fraud or bad faith in rejecting an offer of settlement or in the
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.
	 
	 	 
	 

	 	B. The date on which any extra contractual obligation is incurred by the COMPANY
shall be deemed, in all circumstances, to be the date of the original loss or loss
occurrence.

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	 	C. However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the COMPANY
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 or any claim covered hereunder.
	 
	 	 
	Article 11

	 	Excess of Original Policy Limits
	 
	 	 
	 

	 	A. This AGREEMENT shall protect the COMPANY, within the limits hereof, in connection
with ultimate net loss in excess of the limit of its original policy, such loss in
excess of the limit having been incurred because of failure by it to settle within
the policy limit or by reason of alleged or actual negligence, fraud or bad faith in
rejecting an offer of settlement or in the 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.
	 
	 	 
	 

	 	B. However, this Article shall not apply where the loss has been incurred due to
fraud by a member of the Board of Directors or a corporate officer of the COMPANY
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 hereunder.
	 
	 	 
	 

	 	C. For the purposes of this article, the word “loss” shall mean any amounts for
which the COMPANY would have been contractually liable to pay had it not been for
the limit of the original policy.
	 
	 	 
	Article 12

	 	Premium
	 
	 	 
	 

	 	A. Provisional Premium
	 
	 	 
	 

	 	For each annual period that this AGREEMENT remains in effect, the COMPANY shall pay
to the REINSURER a provisional premium equal to the product of the provisional rate
multiplied by the COMPANY’s Gross Net Written Premium Income applicable to subject
business for the accounting period.
	 
	 	 
	 

	 	Within 45 days after the end of each month, the COMPANY shall report its Gross Net
Written Premium Income, summarized by line of business, for the month just ended.
The provisional premium due the REINSURER, at the rate shown in the first paragraph,
shall be paid by the COMPANY within 60 days after the end of the month.
	 
	 	 
	 

	 	Unless otherwise mutually agreed, the provisional rates for each 3-year accounting period shall be as follows:

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1. For the first annual period within the accounting period, the provisional
rate shall be 9.50%. It is understood that each 12-month period from
January 1 through December 31st of each year that this AGREEMENT remains in
force shall constitute an “annual period” for the purposes of this
AGREEMENT, and that the first annual period hereunder shall be from
January 1, 1996 through December 31, 1996.

2. For the second annual period within the accounting period, the
provisional rate shall be equal to the loss cost percentage for the first
annual period, multiplied by a loss load of

3. For the third annual period within the accounting period, the provisional
rate shall be equal to the loss cost percentage for the first and second
12-month periods, multiplied by a loss load of 100/90ths.

	 	 	 
	 

	 	The provisional rates for the second and subsequent annual periods shall not be more
than 125% nor less than 75% of the provisional rate for the immediately preceding
annual period. The COMPANY shall calculate and report the rate to be used for the
next annual period on the December account for the annual period just ended, and
shall then pay the REINSURER at the revised provisional rate beginning with the
first monthly report of the next annual period.
	 
	 	 
	 

	 	B. Adjusted Premium
	 
	 	 
	 

	 	The provisional premium paid by the COMPANY shall be adjusted periodically in
accordance with the provisions set forth herein. “Accounting Period” shall refer to
each separate period of three consecutive years from inception, the first such
accounting period hereunder being from January 1, 1996 through December 31, 1998.
	 
	 	 
	 

	 	The adjusted premium for each accounting period under this AGREEMENT shall be
calculated by applying to the Gross Net Written Premium for the accounting period an
adjusted rate equal to the loss cost percentage for said accounting period,
multiplied by a loss load of 100/90ths. The final rate, including the loss load,
shall be no less than 5.50% nor more than 11.50%. The first calculation of the
adjusted rate and premium shall be made by the COMPANY as of December 31, 1998 in
accordance with the formula as outlined hereinabove.
	 
	 	 
	 

	 	Within 45 days after the end of each accounting period, and within 45 days after the
end of each annual period thereafter until all losses occurring during the
accounting period have been finally settled, the COMPANY shall calculate and report
the adjusted premium for the accounting period. If the adjusted premium exceeds the
reinsurance

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	 	premiums previously paid for the accounting period, the COMPANY shall remit the
difference to the REINSURER with its report. If the adjusted premium is less than
the reinsurance premiums previously paid for the accounting period, the REINSURER
shall remit the difference to the COMPANY as promptly as possible after receipt and
verification of the COMPANY’s report.
	 
	 	 
	 

	 	C. Debit Carry Forward
	 
	 	 
	 

	 	If the adjusted rate for any accounting period is greater than 11.50%, the
difference in percentage points between the actual adjusted rate and 11.50% shall be
multiplied by the Gross Net Written Premium Income applicable to the subject
business hereunder for the accounting period and the product shall be carried
forward to the next accounting period as a debit to losses incurred. This debit
will be added to the REINSURER’s losses incurred for the next accounting period only
after the “actual” losses incurred for the period have been multiplied by the
100/90ths loss load.
	 
	 	 
	 

	 	D. Definitions
	 
	 	 
	 

	 	“Losses Incurred”, as used herein, shall mean losses and loss adjustment expenses
paid by the REINSURER as of the effective date of calculation, plus the ceded
reserves for losses and loss adjustment expense outstanding as of the same date, all
as respects losses occurring during the accounting period under consideration. The
debit, if any, resulting from the rate adjustment for the preceding accounting
period shall be added to losses incurred for the current accounting period.
	 
	 	 
	 

	 	“Loss Cost Percentage”, as used herein for each accounting period, shall mean the
actual reinsurance losses incurred for the accounting period divided by the Gross
Net Written Premium Income applicable to subject business for the accounting period.
	 
	 	 
	 

	 	The term “Gross Net Written Premium” shall mean the COMPANY’s gross written premium
plus additional premiums, if any, less return premiums, if any, and less premiums
paid for other reinsurance, if any, which inures to the benefit of this AGREEMENT.
It is understood that 95% of the COMPANY’s indivisible premiums under Farmowners
Multiple Peril, 90% under Homeowners Multiple Peril, 80% under Boatowners policies
written as part of inland Marine, and 75% under
	 
	 	 
	 

	 	Commercial Multiple Peril policies shall be allocated to the perils covered under
this AGREEMENT.
	 
	 	 
	Article 13

	 	Special Termination
	 
	 	 
	 

	 	Should at any time the REINSURER or the COMPANY as regards to the applicability of
each condition to each or both of the respective parties:

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1. Default in payment due under the terms of this AGREEMENT;

2. Cause an intentional material breach of any term or condition of this
AGREEMENT;

3. Cease writing new or renewal business and/or withdraw from the business
of insurance;

4. Effect a reduction in the net retained liability without the consent of
the other party;

5. Reduce paid-in capital for any reason whatsoever;

6. Change its existing ownership, management or financial operating
structure by:

a. selling all or substantially all of its assets;

b. effecting a change in ownership of 10% or more of its stock;

c. effecting a pertinent change in management;

d. amalgamating with or having its shares purchased by any other
company, corporation, individual or individuals altering the control
of its existing ownership and/or management;

7. Have its financial condition impaired by a reduction in policyholder’s
surplus of 25% or more in any 12-month or less period from the inception
date of this AGREEMENT;

8. File a petition for bankruptcy or have proceedings instituted or filed
against them by any insurance regulatory authority for insolvency,
receivership, liquidation, rehabilitation, conservation, or dissolution;

9. Have a change in the management or ownership of the Managing General
Agent;

	 	 	 
	 

	 	this AGREEMENT may be terminated by either party sending to the other by registered
or certified mail to its principal office, notice stating the time and date when,
not less than 30 days after the date of mailing of such notice, termination shall be
effective. Upon termination of this AGREEMENT under the conditions set forth in
this article, the REINSURER shall not be liable for losses occurring on or after the
effective time and date of termination.
	 
	 	 
	Article 14

	 	Reports and Remittances
	 
	 	 
	 

	 	A. The COMPANY will provide the REINSURER with all data respecting premiums and
losses, including reserves thereon, as at dates and on forms mutually acceptable to
the COMPANY and the REINSURER.

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	 	B. The COMPANY shall render a monthly account within 45 days after the end of each
month summarizing the following information relating to reinsurance covered under
this AGREEMENT during the said month:

1. Statement of written premiums;

2. Statement of losses and loss adjustment expenses paid and outstanding;

3. Account Current summarizing premiums, commissions, losses and loss
adjustment expenses paid and salvages recovered;

	 	 	 
	 

	 	and the balance due either party, as indicated by the aforesaid Account Current,
shall be remitted to the other party with 60 days after the close of said month.
	 
	 	 
	Article 15

	 	Loss Notice and Settlements
	 
	 	 
	 

	 	A. The COMPANY will advise the REINSURER promptly of all losses in excess of 50% of
the COMPANY’s retention hereunder or that, in the opinion of the COMPANY, may
involve the REINSURER under this AGREEMENT and of all subsequent developments
pertaining thereto that may materially affect them as well. Inadvertent omission in
dispatching the aforementioned notices will in no way affect the obligation of the
REINSURER under this AGREEMENT, provided the COMPANY informs the REINSURER of such
omission promptly upon discovery.
	 
	 	 
	 

	 	B. The COMPANY will have the right to settle all claims under its policies. The
settlements, provided they are within the terms of this AGREEMENT, will be
unconditionally binding on the REINSURER in proportion to its participation in this
AGREEMENT. When so requested, however, the COMPANY will afford the REINSURER, at
its own expense, an opportunity to be associated with the COMPANY in the defense of
any claim, suit, or proceeding involving this AGREEMENT, and the COMPANY and the
REINSURER will cooperate in every respect in such defense. Amounts due the COMPANY
hereunder in the settlement of loss and loss expense will be payable by the
REINSURER immediately upon being furnished by the COMPANY with reasonable evidence
of the amount paid or to be paid in excess of the COMPANY’s retention as set forth
in the Retention and Limit Article of this AGREEMENT.
	 
	 	 
	Article 16

	 	Offset
	 
	 	 
	 

	 	The COMPANY or the REINSURER may offset any balance, whether on account of premium,
commission, claims or losses, loss adjustment expense, salvage, or otherwise, due
from one party to the other under this AGREEMENT or under any other AGREEMENT
heretofore or hereafter entered into between the COMPANY and the REINSURER.

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	Article 17

	 	Salvage and Subrogation
	 
	 	 
	 

	 	A. The REINSURER shall be subrogated, as respects any loss for which the REINSURER
shall actually pay or become liable, but only to the extent of the amount of payment
by or the amount of liability to the REINSURER, to all the rights of the COMPANY
against any person or other entity who may be legally responsible in damages for
said loss. The COMPANY hereby agrees to enforce such rights, but in case the
COMPANY shall refuse or neglect to do so the REINSURER is hereby authorized and
empowered to bring any appropriate action in the name of the COMPANY or its
policyholders, or otherwise to enforce such rights.
	 
	 	 
	 

	 	B. Any recoveries, salvages or reimbursements applying to risks covered under this
AGREEMENT shall always be used to reimburse the excess carriers (from the last to
the first, beginning with the carrier of the last excess), according to their
participation, before being used in any way to reimburse the COMPANY for its primary
loss.
	 
	 	 
	 

	 	C. All salvages, recoveries or reimbursements, recovered or received subsequent to a
loss settlement under this AGREEMENT shall be applied as if recovered or received
prior to the aforesaid settlement and all necessary adjustments shall be made by the
parties hereto, provided always that nothing in this Article shall be construed to
mean that losses under this AGREEMENT are not recoverable until the COMPANY’s
ultimate net loss has been ascertained.
	 
	 	 
	Article 18

	 	Errors and Omissions
	 
	 	 
	 

	 	Inadvertent delays, errors or omissions made by the COMPANY in connection with this
AGREEMENT shall not relieve either party from liability that would have attached had
such delay, error or omission not occurred, provided that upon discovery by the
COMPANY, the REINSURER is promptly notified and immediate corrective action is taken
by the COMPANY.
	 
	 	 
	Article 19

	 	Amendments
	 
	 	 
	 

	 	By mutual consent of the COMPANY and the REINSURER, any of the terms or conditions
of this AGREEMENT may be altered or amended by addenda hereto, or by exchange of
letters when required by the COMPANY for special acceptances purposes and/or for
underwriting information changes. Each such addendum and/or exchange of letters
will then constitute a part of this AGREEMENT.

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	Article 20

	 	Access to Records
	 
	 	 
	 

	 	The REINSURER shall have the right to inspect at any reasonable time, through its
designated representatives, all records of the COMPANY that pertain in any way to
this AGREEMENT.
	 
	 	 
	Article 21

	 	Taxes
	 
	 	 
	 

	 	A. The COMPANY shall pay all taxes on premiums ceded under this AGREEMENT.
	 
	 	 
	 

	 	B. If the REINSURER is obligated to pay any taxes on such premiums, the COMPANY
shall reimburse the REINSURER; however, the COMPANY shall not be required to pay the
same tax twice.
	 
	 	 
	Article 22

	 	Currency
	 
	 	 
	 

	 	Wherever the word “Dollars” or the “$” sign appears in this AGREEMENT, they shall be
construed to mean United States Dollars.
	 
	 	 
	Article 23

	 	Insolvency
	 
	 	 
	 

	 	A. In the event of the insolvency of the COMPANY, the reinsurance provided by this
AGREEMENT shall be payable by the REINSURER on the basis of the liability of the
COMPANY under the policy or policies reinsured, without diminution because of such
insolvency, directly to the COMPANY or its receiver, liquidator, or statutory
successor.
	 
	 	 
	 

	 	B. The reinsurance hereunder shall be payable as provided above, except as provided
by Section 4118(a)(1)(A) of the New York Insurance Laws or except (1) where this
AGREEMENT specifies another payee in the event of the insolvency of the COMPANY, and
(2) the REINSURER, with the consent of the direct insureds, and, as respects New
York risks, with the approval of the Superintendent of the New York Insurance
Department, has assumed such policy obligations of the COMPANY as its direct
obligations to the payees under such policies in substitution for the obligations of
the COMPANY to such payees.
	 
	 	 
	 

	 	C. In the event of the insolvency of the COMPANY, the liquidator, receiver,
conservator or other statutory successor of the COMPANY shall give written notice to
the REINSURER of the pendency of a claim against the insolvent COMPANY on the policy
or policies reinsured within a reasonable time after such claim is filed in the
insolvency proceeding. The REINSURER shall have the right to investigate each such
claim and interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses which it may deem available to the COMPANY or
its liquidator, receiver, conservator or other statutory successor. The expense
thus incurred by the REINSURER shall be

Page 13 of 15

 

			
	 	 	 
	Contract Wording
	 	12-2720-0

	 	 	 
	 

	 	chargeable, subject to court approval, against the insolvent COMPANY as part of the
expense of liquidation to the extent of a proportionate share of the benefit which
may accrue to the COMPANY solely as a result of the defense undertaken by the
REINSURER.
	 
	 	 
	Article 24

	 	Arbitration
	 
	 	 
	 

	 	A. Disputes between the parties that cannot be resolved by compromise, including any
controversy as to the validity of this AGREEMENT, shall be submitted to arbitration.
	 
	 	 
	 

	 	B. The board of arbitration shall consist of three arbitrators. One shall be
appointed by each of the two parties, and these arbitrators shall choose the third
arbitrator. If the two arbitrators cannot agree on the third arbitrator within 30
days after their appointment, each shall then nominate three, of whom the other
shall decline two, and the decision shall be made between the two remaining
candidates by drawing lots. If either party fails to choose an arbitrator within 30
days after a written request by the other party to do so, the latter shall choose
both arbitrators, who shall then choose the third arbitrator.
	 
	 	 
	 

	 	C. The members of the board of arbitration shall be active or retired disinterested
officials of insurance or reinsurance companies. The arbitrators shall be relieved
from all judicial formalities and shall make their decision according to the rules
of law and the custom and usage of the insurance and reinsurance business only. The
decision of the board shall be in writing and shall be based upon a hearing in which
oral or written testimony may be introduced without following strict rules of
evidence, but in which cross examination and rebuttal shall be allowed. The board
may request written briefs of the parties as required. The arbitration proceedings
shall be held at the times and places agreed upon by the arbitrators.
	 
	 	 
	 

	 	D. The majority decision of the board shall be final and binding upon the parties to
the proceedings and not subject to appeal.
	 
	 	 
	 

	 	E. Each party shall bear the expense of its own arbitrator and witnesses and shall
jointly and equally share with the other party the expense of the third arbitrator
and of the proceedings.
	 
	 	 
	 

	 	IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT to be executed in
duplicate by their duly authorized officers.
	 
	 	 
	 

	 	In Cleona, Pennsylvania, this 18th day of April, 1996.
	 
	 	 
	 

	 	LEBANON MUTUAL INSURANCE COMPANY

Page 14 of 15

 

			
	 	 	 
	Contract Wording
	 	12-2720-0

	 	 	 
	 

	 	Rollin Rissinger
	 

	 	 

	 
	 	 
	 

	 	 

	 
	 	 
	 

	 	And in New York, New York, this 10th day of April, 1996.
	 
	 	 
	 

	 	MUNICH AMERICAN REINSURANCE COMPANY
	 
	 	 
	 

	 	 

William A. Villany
	 

	 	Vice President
	 
	 	 
	 

	 	 

James E. Ryan, CPCU, ARe
	 

	 	Assistant Vice President

Page 15 of 15

 

Nuclear Incident Exclusion Clause -

Physical Damage – Reinsurance

(U.S.A.)

	I.	 	This AGREEMENT does not cover any loss or liability accruing to the COMPANY, directly or
indirectly and whether as insurer or reinsurer, from any pool of insurers or reinsurers formed
for the purpose of covering atomic or nuclear energy risks.
	 
	II.	 	Without in any way restricting the operation of Paragraph 1 of this clause, this AGREEMENT
does not cover any loss or liability accruing to the COMPANY, directly or indirectly and
whether as insurer or reinsurer, from any insurance against Physical Damage including business
interruption or consequential loss arising out of such Physical Damage) to:

	 	A.	 	Nuclear reactor power plants, including all auxiliary property on the site, or
	 
	 	B.	 	Any other nuclear reactor installation, including laboratories handling
radioactive materials in connection with reactor installations, and “critical
facilities” as such, or
	 
	 	C.	 	Installations for fabricating complete fuel elements or for processing
substantial quantities of “special nuclear material”, and for reprocessing, salvaging,
chemically separating, storing or disposing of “spent” nuclear fuel or waste materials,
or
	 
	 	D.	 	Installations other than those listed in Paragraph 2 (iii) above using
substantial quantities of radioactive isotopes or other products of nuclear fission.

	III.	 	Without in any way restricting the operations of Paragraphs 1 and 2 hereof, this AGREEMENT
does not cover any loss or liability by radioactive contamination accruing to the COMPANY,
directly or indirectly, and whether as insurer or reinsurer, from any insurance on property
which is on the same site as a nuclear reactor power plant or other nuclear installation and
which normally would be insured therewith, except that this Paragraph 3 shall not operate:

	 	A.	 	where the COMPANY does not have knowledge of such nuclear reactor power plant
or nuclear installation, or
	 
	 	B.	 	where said insurance contains a provision excluding coverage for damage to
property caused by or resulting from radioactive contamination, however caused.
However, on and after January 1, 1960 this sub-paragraph (b) shall only apply provided
the said radioactive contamination exclusion provision has been approved by the
Governmental Authority having jurisdiction thereof.

Page 1 of 2

 

	IV.	 	Without in any way restricting the operations of Paragraphs 1, 2 and 3 hereof, this AGREEMENT
does not cover any loss or liability by radioactive contamination accruing to the COMPANY,
directly or indirectly, and whether as insurer or reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
	 
	V.	 	it is understood and agreed that this clause shall not extend to risks using radioactive
isotopes in any form where the nuclear exposure is not considered by the AGREEMENT to be the
primary hazard.
	 
	VI.	 	The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act
of 1954 or by any law amendatory thereof.
	 
	VII.	 	COMPANY to be sole judge of what constitutes:

	 	A.	 	substantial quantities, and
	 
	 	B.	 	the extent of installation, plant or site.

	 	 	 
	NOTE:

	 	Without in any way restricting the operation of Paragraph 1 hereof, it is
understood and agreed that:

	I.	 	all policies issued by the COMPANY on or before 31st December 1957 shall be tree from the
application of the other provisions of this clause until expiration date or 31st
December 1960, whichever first occurs, whereupon all the provisions of this clause shall
apply.

	 	A.	 	with respect to any risk located in Canada, policies issued by the COMPANY on
or before 31st December 1958 while be free from the application of the other provisions
of this clause until expiration date of 31st December 1960, whichever first occurs,
whereupon all the provisions of this clause shall apply.

Page 2 of 2

 

Pools, Associations And Syndicates

Exclusion Clause

SECTION A

Excluding:

	 	(a)	 	All Business derived directly or indirectly from any Pool,
Association or Syndicate which maintains its own reinsurance facilities.
	 
	 	(b)	 	Any Pool or Scheme (whether voluntary or mandatory) formed
after March 1, 1968 for the purpose of insuring Property whether on a
country-wide basis or in respect of designated areas. This exclusion shall not
apply to so-called Automobile Insurance Plans or other Pools formed to provide
coverage for Automobile Physical Damage.

SECTION B

It is agreed that business written by the Company for the same perils, which is known at the time
to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or
Syndicates, whether by way of Insurance or reinsurance, Is excluded hereunder:

Industrial Risk Insurers; Associated Factory Mutuals; Improved Risk Mutuals.

Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or
Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.

United States Aircraft Insurance Group, Canadian Aircraft insurance Group, Associated
Aviation Underwriters, American Aviation Underwriters.

Section B does not apply:

	 	(a)	 	Where the Total Insured Value over ail interests of the risk in
question is less than $250,000,000.
	 
	 	(b)	 	To interests traditionally underwritten as Inland Marine or
Stock and/or Contents written on a Blanket basis.
	 
	 	(c)	 	To Contingent Business Interruption, except when the Company is
aware that the key location is known at the time to be insured in any Pool,
Association or Syndicate named above, other than as provided for under
Section B (a).
	 
	 	(d)	 	To risks as follows: Offices, Hotels, Apartments, Hospitals,
Educational Establishments, Public Utilities (other than Railroad Schedules) and Builders Risks on the classes of risks specified in this
subsection (d) only.

Page 1 of 1

 

Insolvency Funds Exclusion Clause

This AGREEMENT excludes all liability of the COMPANY arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or involuntary, in any
insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool,
association, fund or other arrangement, howsoever denominated, established or governed, which
provides for any assessment of or payment or assumption by the COMPANY of part or all of any claim,
debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been
declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet
any claim, debt, charge, fee or other obligation in whole or in part.

Page 1 of 1

 

ENDORSEMENT

ATTACHED TO and forming part of the PROPERTY PER RISK EXCESS OF LOSS REINSURANCE AGREEMENT No.
1650-0053 (hereinafter referred to as the “Agreement”) between LEBANON MUTUAL INSURANCE COMPANY, of
Cleona, Pennsylvania (hereinafter referred to as the “Company”) and the MUNICH REINSURANCE AMERICA,
INC., a Delaware Corporation with Administrative Offices in Princeton, New Jersey (hereinafter
referred to as the “Reinsurer”).

IT IS HEREBY MUTUALLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO that effective 12:01 a.m.,
Standard Time, January 1, 2007, as respects the Company’s in force, new and renewal policies
effective on or after said date, this Agreement is amended to read as follows:

	I.	 	ARTICLE II, LIMIT AND RETENTION, is amended to reflect the change in the company retention to
$90,000, the change in the reinsurance limit to $160,000, the change in the occurrence limit
to $480,000, and the change in the terrorism annual aggregate limit to $480,000 for the First
Layer. The Article reads in its entirety as follows:

ARTICLE II

	 	 	LIMIT AND RETENTION 

	 	A.	 	First Layer
	 
	 	 	 	The Company shall retain the first $90,000 of ultimate net loss each risk, each
occurrence. The Reinsurer shall indemnify the Company for 100% of the amount by
which the ultimate net loss exceeds the Company’s retention, but the liability of
the Reinsurer shall not exceed $160,000 ultimate net loss each risk, each
occurrence, and is further subject to the limits set forth below:
	 
	 	 	 	Loss Occurrence Limit
	 
	 	 	 	$480,000 ultimate net loss for all risks in any one loss occurrence.
	 
	 	 	 	Terrorist Activity Annual Aggregate Limit:
	 
	 	 	 	$480,000 ultimate net loss in the aggregate for all loss occurrences each calendar
year.
	 
	 	B.	 	Second Layer
	 
	 	 	 	The Company shall retain the first $250,000 of ultimate net loss each risk,
each occurrence. The Reinsurer shall indemnify the Company for 100% of the amount
by which the ultimate net loss exceeds the Company’s retention, but the liability of
the Reinsurer shall not exceed $750,000 ultimate net loss each risk, each
occurrence, and is further subject to the limits set forth below:

-1-

 

	 	 	 	Loss Occurrence Limit
	 
	 	 	 	$1,500,000 ultimate net loss for all risks in any one loss occurrence.
	 
	 	 	 	Terrorist Activity Annual Aggregate Limit:
	 
	 	 	 	$1,500,000 ultimate net loss in the aggregate for all loss occurrences each calendar
year.
	 
	 	C.	 	Both Layers
	 
	 	 	 	It is understood and agreed that the Terrorist Activity Aggregate Limit shall
be the Reinsurer’s maximum liability for each calendar year hereunder for all loss,
cost or expense caused directly or indirectly by Terrorist Activity, as defined in
the Agreement, including any action in hindering or defending against an actual or
expected incident of Terrorist Activity and regardless of any other cause or event
that in any way contributes concurrently or in any sequence to the loss, cost or
expense.

	II.	 	Exclusion 4 of ARTICLE V, EXCLUSIONS, is amended to read as follows:

	 	4.	 	All loss, cost or expense directly or indirectly arising out of, resulting as a
consequence of or related to War. “War”, as utilized herein, shall mean war whether
or not declared, civil war, martial law, insurrection, revolution, invasion,
bombardment or any use of military force, usurped power or confiscation,
nationalization or damage of property by any government, military or other
authority,
	 
	 	 	 	This exclusion shall apply whether or not there is another cause of loss which
may have contributed concurrently or in any sequence to a loss.

	III.	 	Exclusions 22 and 23 of ARTICLE V, EXCLUSIONS, are added and the exclusions read as follows:

	 	22.	 	The Company’s liability, including all loss, cost or expense, beyond
circumscribed policy provisions, including but not limited to, punitive, exemplary,
consequential or compensatory damages, resulting from a claim of an insured or an
insured’s assignee against the Company, its agent or employees, except as otherwise
provided in the Extra Contractual Obligations and Excess of Original Policy Limits
Articles.
	 
	 	23.	 	Insurance or reinsurance loss portfolio transfers of any kind.

	IV.	 	ARTICLE XII, PREMIUM, is amended to reflect the change in rate, the change in deposit premium
and the change in the minimum premium for the First and Second Layers. The Article reads in
its entirety as follows:

-2-

 

ARTICLE XII 

	 	PREMIUM	 	 
	 
	 	A.	 	First Layer

	 	1.	 	The premium for the reinsurance provided under this Agreement
shall be computed at the rate of 11.13% of the Company’s gross net written
premium on the business covered hereunder.
	 
	 	2.	 	The annual minimum premium for the reinsurance provided under
this Agreement is $764,000.
	 
	 	3.	 	The annual deposit premium for the reinsurance provided under
this Agreement is $898,000.

	 	B.	 	Second Layer

	 	1.	 	The premium for the reinsurance provided under this Agreement
shall be computed at the rate of 5.166% of the Company’s gross net written
premium on the business covered hereunder.
	 
	 	2.	 	The annual minimum premium for the reinsurance provided under
this Agreement is $354,000.
	 
	 	3.	 	The annual deposit premium for the reinsurance provided under
this Agreement is $416,000.

	 	C.	 	The term “Gross Net Written Premium” shall mean the Company’s gross written
premium plus additional premiums, if any, less return premiums, if any, and less
premiums paid for other reinsurance, if any, which inures to the benefit of this
Agreement. It is understood that 95% of the Company’s indivisible premiums under
Farmowners Multiple Peril, 90% under Homeowners Multiple Peril, 80% under Boatowners
policies written as part of Inland Marine, and 75% under Commercial Multiple Peril
policies shall be allocated to the perils covered under this Agreement.

Nothing herein contained shall alter, vary or extend any provision or condition of the Agreement
other than as above stated.

-3-

 

IN WITNESS WHEREOF the parties hereto have caused this Endorsement
to be executed in duplicate on
this 7th day of
February, 2007;

ACCEPTED: 

LEBANON MUTUAL INSURANCE COMPANY

Rollin
Rissinger 

And in
Princeton, New Jersey, this
1st day of
February, 2007.

	 	 	 
	 

	 	MUNICH REINSURANCE AMERICA, INC.
	 
	 	 
	 

	 	 
	 

	 	Vice President

DATED: January 25, 2007

-4-

 

No. 1650-0053-E006

ENDORSEMENT 

ATTACHED TO and forming part of the PROPERTY PER RISK EXCESS OF LOSS REINSURANCE AGREEMENT No.
1650-0053 (hereinafter referred to as the “Agreement”) between LEBANON MUTUAL INSURANCE COMPANY,
of Cleona, Pennsylvania (hereinafter referred to as the “Company”) and the MUNICH REINSURANCE
AMERICA, INC., a Delaware Corporation with Administrative Offices in Princeton, New Jersey
(hereinafter referred to as the “Reinsurer”).

IT IS HEREBY MUTUALLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO that effective 12:01 a.m.,
Standard Time, January 1, 2008, as respects the Company’s in force, new and renewal policies
effective on or after said date, this Agreement is amended to read as follows:

	1.	 	ARTICLE II — LIMIT AND RETENTION, is amended to reflect the change in the
company retention to $100,000, the change in the reinsurance limit to $150,000, the change
in the occurrence limit to $450,000, and the change in the terrorism annual aggregate limit
to $450,000 for the First Layer. The Article reads in its entirety as follows:

ARTICLE II 

	 	 	LIMIT AND RETENTION

	 	A.	 	First Layer
	 
	 	 	 	The Company shall retain the first $100,000 of ultimate net loss each risk, each
occurrence. The Reinsurer shall indemnify the Company for 100% of the amount by
which the ultimate net loss exceeds the Company’s retention, but the liability of
the Reinsurer shall not exceed $150,000 ultimate net loss each risk, each
occurrence, and is further subject to the limits set forth below:
	 
	 	 	 	Loss Occurrence Limit 
	 
	 	 	 	$450,000 ultimate net loss for all risks in any one loss occurrence.
	 
	 	 	 	Terrorist Activity Annual Aggregate Limit: 
	 
	 	 	 	$450,000 ultimate net loss in the aggregate for all loss occurrences each calendar
year.
	 
	 	B.	 	Second Layer
	 
	 	 	 	The Company shall retain the first $250,000 of ultimate net loss each risk, each
occurrence. The Reinsurer shall indemnify the Company for 100% of the amount by which
the ultimate net loss exceeds the Company’s retention, but the liability of the
Reinsurer shall not exceed $750,000

-1-

 

No. 1650-0053-E006

	 	 	 	ultimate net loss ultimate net loss each risk, each occurrence and is further subject to
the limits set forth below:
	 
	 	 	 	Loss Occurrence Limit
	 
	 	 	 	S1,500,000 ultimate net loss for all risks in any one loss occurrence.
	 
	 	 	 	Terrorist Activity Annual Aggregate Limit: 
	 
	 	 	 	S1,500,000 ultimate net loss in the aggregate for all loss occurrences each calendar year.
	 
	 	C.	 	Both Layers 
	 
	 	 	 	It is understood and agreed that the Terrorist Activity Aggregate Limit shall be the
Reinsurer’s maximum liability for each calendar year hereunder for all loss, cost or
expense caused directly or indirectly by Terrorist Activity, as defined in the Agreement,
including any action in hindering or defending against an actual or expected incident of
Terrorist Activity and regardless of any other cause or event that in any way contributes
concurrently or in any sequence to the loss, cost or expense.

	II.	 	ARTICLE XII, PREMIUM, is amended to reflect the change in rate, the change in deposit
premium and the change in the minimum premium for the First and Second Layers. The Article
reads in its entirety as follows:

ARTICLE XII

	 	 	PREMIUM

	 	A.	 	First Layer

	 	1.	 	The premium for the reinsurance provided under this Agreement shall be computed
at the rate of 10.74% of the Company’s gross net written premium on the business
covered hereunder.
	 
	 	2.	 	The annual minimum premium for the reinsurance provided under this Agreement is
$697,000.
	 
	 	3.	 	The annual deposit premium for the reinsurance provided under this Agreement is
$820,000.

	 	B.	 	Second Layer

	 	1.	 	The premium for the reinsurance provided under this Agreement shall be computed
at the rate of 5.67% of the Company’s gross net written premium on the business
covered hereunder.
	 
	 	2.	 	The annual minimum premium for the reinsurance provided under this Agreement is
$368,000.

-2-

 

No. 1650-0053-E006

	 	3.	 	The annual deposit premium for the reinsurance provided
under this Agreement is S432,000.

	 	C.	 	The term “Gross Net Written Premium” shall mean the Company’s gross
written premium plus additional premiums, if any, less return premiums, if any, and
less premiums paid for other reinsurance, if any, which inures to the benefit of
this Agreement. It is understood that 95% of the Company’s indivisible premiums
under Farmowners Multiple Peril, 90% under Homeowners Multiple Peril, 80% under
Boatowners policies written as part of Inland Marine, and 75% under Commercial
Multiple Peril policies shall be allocated to the perils covered under this
Agreement.

Nothing herein contained shall alter, vary or extend any provision or condition of the
Agreement other than as above stated.

IN WITNESS WHEREOF the parties hereto have caused this Endorsement to be executed in duplicate
on this 17th day of January, 2008;

ACCEPTED:

LEBANON MUTUAL INSURANCE COMPANY

Rollin Rissinger
 

And in Princeton, New Jersey, this 8th day of January, 2008.

	 	 	 	 	 
	 	MUNICH REINSURANCE AMERICA, INC.

 	 
	 	
 	 
	 	Vice President 	 
	 	 	 
	 

DATED: January 7, 2008

RG/rg

	 	 	 
	 
	 	THIS COPY TO BE RETURNED TO

MUNICH REINSURANCE AMERICA, INC.

WHEN SIGNED

-3-

 

	 	 	ADDENDUM NO. 1
	 
	 	 	to the
	 
	 	 	PROPERTY PER RISK EXCESS OF LOSS

REINSURANCE AGREEMENT

NO. 12-2720-0

(hereinafter referred to as the “AGREEMENT”)
	 
	 	 	between
	 
	 	 	LEBANON MUTUAL INSURANCE COMPANY

Cleona, Pennsylvania

(hereinafter referred to as the “COMPANY”)
	 
	 	 	and
	 
	 	 	MUNICH AMERICAN REINSURANCE COMPANY

New York, New York

(hereinafter referred to as the “REINSURER”)

IT IS HEREBY mutually understood and agreed that effective January 1, 1997,
this AGREEMENT is amended as follows herein.

Article 12, Premium, Paragraph A, is revised and replaced as follows:

Article 12 Premium

	 	A.	 	Provisional Premium

	 	 	For each annual period that this AGREEMENT remains in effect, the
COMPANY shall pay to the REINSURER a provisional premium equal to the
product of the provisional rate multiplied by the COMPANY’s Gross Net
Written Premium Income applicable to subject business for the
accounting period.
	 
	 	 	Within 45 days after the end of each month, the COMPANY shall report
its Gross Net Written Premium Income, summarized by line of business,
for the month just ended. The provisional premium due the REINSURER,
at the rate shown in the first paragraph, shall be paid by the COMPANY
within 60 days after the end of the month. Unless otherwise mutually agreed, the provisional rates for each
3-year accounting period shall be as follows:

	 	1.	 	For the first annual
period within the accounting period, the provisional rate
shall be 9.50%. It is understood that each 12-month period
from January 1 through December

-4-

 

	 	 	 	31st of each year that this AGREEMENT remains in force
shall constitute an “annual period” for the purposes of
this AGREEMENT, and that the first annual period hereunder
shall be from January 1, 1996 through December 31, 1996.
	 
	 	2.	 	For the second annual
period within the accounting period, the provisional rate
shall be 11.33%.
	 
	 	3.	 	For the third annual
period within the accounting period, the provisional rate
shall be equal to the loss cost percentage for the first
and second 12-month periods, multiplied by a loss load of
100/90ths.

	 	 	The provisional rates for the second and subsequent annual
periods shall not be more than 125% nor less than 75% of the
provisional rate for the immediately preceding annual period.
The COMPANY shall calculate and report the rate to be used for
the next annual period on the December account for the annual
period just ended, and shall then pay the REINSURER at the
revised provisional rate beginning with the first monthly report
of the next annual period.
	 
	 	 	ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.

IN WITNESS WHEREOF, the parties hereto have caused this ADDENDUM to be
executed in duplicate by their duly authorized officers.

In Cleona, Pennsylvania, this 24th day of April 1997.

LEBANON MUTUAL INSURANCE COMPANY

Rollin Rissinger

 

 

And in New York, New York, this 16th day of April, 1997.

MUNICH AMERICAN REINSURANCE COMPANY

 

William A. Villany

Vice President

 

James E. Ryan, CPCP, ARe

Assistant Vice President

-5-

 

	 	 	ADDENDUM NO. 2
	 
	 	 	To the

PROPERTY PER RISK EXCESS OF LOSS

REINSURANCE AGREEMENT

NO. 12-2720-0

(hereinafter referred to as the “AGREEMENT”)
	 
	 	 	between
	 
	 	 	LEBANON MUTUAL INSURANCE COMPANY

Cleona, Pennsylvania

(hereinafter referred to as the “COMPANY”)
	 
	 	 	and
	 
	 	 	MUNICH AMERICAN REINSURANCE COMPANY

New York, New York

(hereinafter referred to as the “REINSURER”)

IT IS HEREBY mutually understood and agreed that effective June 1,
1997, this AGREEMENT is amended as follows herein:

1. Article 1, Business Covered, is revised and replaced as
follows:

Article 1 Business Covered

	 	A.	 	By this AGREEMENT the REINSURER agrees to indemnify the
COMPANY in respect of the net excess liability which may accrue
to the COMPANY as a result of losses occurring during the term
of this AGREEMENT under policies in force at the inception of
this AGREEMENT or hereafter issued or renewed and classified by
the COMPANY as Property, with respect to the following lines of
business: Fire, Allied Lines, Farmowners (Section I only),
Homeowners (Section I only), Commercial Multiple Peril

-6-

 

			
	Addendum No. 2
	 	Treaty No. 12-2720-0
	 

	 	 	(Section I only), Businessowners (Section I only), Inland Marine,
Glass, Burglary, Theft, Commercial Automobile Physical Damage
(Auto Dealers only), and Garagekeepers Insurance.

	 	B.	 	This AGREEMENT is solely between the COMPANY
and the REINSURER, and performance of the obligations of each
party hereto shall only be rendered to the other party. However,
if the COMPANY becomes insolvent, the REINSUER’s liability shall
be modified to the extent set forth in Article 23 — Insolvency. In
no instance shall any insured of the COMPANY or any claimant
against an insured of the COMPANY have any rights under this
AGREEMENT.

2. Article 5, Exclusions, Paragraph 6, is revised and
replaced as follows:

	 	6.	 	Accident and health,
aviation, casualty, boiler and machinery, ocean marine,
fidelity, surety, automobile physical damage (other than
Commercial Auto Dealers and Garagekeepers Insurance), and
any other lines or classes not specifically covered
hereunder.
	 
	 	 	 	ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED

-7-

 

			
	Addendum No. 2
	 	Treaty No. 12-2720-0
	 

IN WITNESS WHEREOF, the parties hereto have caused this ADDENDUM to be
executed in duplicate by their duly authorized officers.

In Cleona, Pennsylvania, this 22nd day of July 1997.

LEBANON MUTUAL INSURANCE COMPANY

Rollin Rissinger
 

 

And in New York, New York, this 11th day of July, 1997.

MUNICH AMERICAN REINSURANCE COMPANY

 

William A. Villany

Vice President

 

James E. Ryan, CPCU, ARe

Assistant Vice President

-8-exv10w7

Exhibit 10.7

MASTER SERVICE AGREEMENT

          This Master Service Agreement (“Agreement”) is made this First day of August 2005, by and
between FM Claims Management, Incorporated, a Pennsylvania Corporation with its principal place of
business at 150 Berkeley Rd., Glenside, PA 19038 (“FMCM”) and Lebanon Mutual Insurance Company, a
company with its principal place of business at 137 West Penn Avenue, Cleona, PA 17042-1322
(“Customer”).

          FMCM desires to provide certain insurance-related services to Customer, and Customer desires
to utilize these services for a designated fee.

          NOW, THEREFORE, in consideration of the mutual promises contained herein and intending to be
legally bound hereby, the parties hereto agree as follows:

	1.	 	SCOPE OF AGREEMENT

	 	A.	 	Services: FMCM will provide the services set forth in Schedule A
attached hereto and made a part hereof (the “Services”).

	 
	 	B.	 	Term: The term of this Agreement shall begin August 1st, 2005 and shall
continue until each party has fulfilled its obligations hereunder or until terminated
in accordance with its provisions.

	 
	 	C.	 	Termination: Either party may terminate this Agreement at any time upon
90 days advance written notice to the other party. FMCM may terminate this Agreement
upon 30 days advance written notice for (i) Customer’s failure to pay undisputed fees
owing to FMCM within ten (10) days after the time set forth in this Agreement or
(ii) Customer being delinquent three times in any consecutive twelve (12) month period
in payment of fees due FMCM. Fees shall be deemed undisputed in the absence of
Customer notice to FMCM prior to the due date. In any event, the balance of fees not
in dispute are payable.

	2.	 	FEES AND PAYMENT

	 	A.	 	Fees. In consideration of the Services to be performed by FMCM,
Customer shall pay FMCM the fees set forth in Fee Schedule B attached hereto and made a
part hereof. FMCM shall have the right to make changes in the fees and charges set
forth in the Fee Schedule by giving Customer 90 days advance written notice, but in
such event, Customer shall have the right to terminate this Agreement as provided in
Paragraph 1 hereof after receipt of notice from FMCM.

	 
	 	B.	 	Payment. Customer shall pay to FMCM the fees in accordance with the
Fee Schedule. FMCM shall invoice customer with details of Services performed.
Customer shall pay all fees and expenses owing to FMCM hereunder within 30 days after
FMCM has submitted to Customer an itemized invoice. If Customer fails to make payment
when due hereunder. Customer shall pay interest to FMCM at the rate of 1.5% per month
for any unpaid balance outstanding at the end of each calendar month after payment is
due.

1

 

	 	C.	 	Taxes. Customer is solely responsible for payment of any taxes
(including sales or use taxes, intangible taxes, and property taxes) resulting from
Customer’s acceptance of any Services provided hereunder, other than taxes based on
income to FMCM. FMCM reserves the right to have the Customer pay any such unpaid taxes
as they fall due to FMCM for remittance to the appropriate authority. Customer agrees
to pay any interest and/or penalties assessed as a result of any such taxes not
remitted when due. Customer agrees to hold harmless FMCM from all claims and liability
arising from Customer’s failure to report or pay such taxes.

	3.	 	PROPRIETARY RIGHTS

	 
	 	 	Each party acknowledges and agrees that any and all information emanating from the other’s
business in any form, including any compilations of otherwise public information, is
confidential and proprietary information (“Confidential Information”). Each party agrees
that it will not, during or after the term of this Agreement, permit any duplication, use,
or disclosure of any such Confidential Information to any person (other than its own
employee, agent or representative who must have such information for the performance of the
obligations hereunder), unless such duplication, use or disclosure is specifically
authorized in writing by the party who owns such information. Each party shall take
appropriate action with respect to its employees, agents and representatives to ensure that
the obligation of non-use and non-disclosure of Confidential Information under this
Agreement can be fully satisfied. Confidential Information shall include but not be limited
to lists, agreements, data, rates, procedures, supplies and forms provided by FMCM under
this Agreement. The term Confidential Information is not meant to include any information
which, at the time of disclosure, is generally known by the public and any competitors of
the Customer; information disclosed to the other party by third parties having a right to do
so and who have not imposed upon the party obligations of confidentiality in respect
thereof; and information which is, known to the other party prior to the disclosure.

	 
	 	 	Customer acknowledges that the lists, agreements, data, rates, procedures, supplies and
forms provided by FMCM under this Agreement are the exclusive property of FMCM and
constitute proprietary information of FMCM (“Proprietary Information”). Customer agrees not
to copy (directly or indirectly), allow to be copied, or to distribute any FMCM Proprietary
Information. Customer further agrees that any Proprietary Information provided under this
Agreement is for its own use and that Customer will not disclose this information to any
third party without FMCM’s prior written approval or use any Proprietary Information to form
its own preferred vendor program.

	 
	 	 	Each party acknowledges that any information which it receives from the other party about a
claimant or policyholder (“Confidential Consumer Information”) may be subject to state and
federal laws and regulations regarding privacy. Each party agrees that it will not disclose
Confidential Consumer Information which it receives from the other party without the express
written permission of the claimant or policyholder and the other party, except those
disclosures which are reasonably necessary to perform each party’s obligations under this
Agreement or as otherwise allowed by applicable law.

2

 

	 	 	The provisions of this paragraph 3 shall survive the termination of this Agreement.

	 
	4.	 	REPRESENTATIONS AND WARRANTIES

	 	A.	 	FMCM and Customer represent to each other that this Agreement has been duly
authorized, executed and delivered as a legal, binding and enforceable obligation.

	 
	 	B.	 	FMCM and Customer represent and warrant to each other that at all times during
the term of this Agreement they shall comply with all applicable laws and regulations
relating to the operations of their businesses and their performances of their
obligations hereunder.

	 
	 	C.	 	FMCM and Customer represent and warrant to each other that they have obtained
all required permits or certificates; that they are duly licensed as may be required
under statutes, rules and regulations of the jurisdictions in which they are located
and in which their obligations under this Agreement will be performed; and that such
permits, certificates and/or licenses shall be maintained in full force and effect
during the term of this Agreement.

	 
	 	D.	 	FMCM and Customer represent and warrant to each other that the execution of
this Agreement will not violate any restriction of any kind or character to which
either party is subject.

	5.	 	INDEMNIFICATION

	 
	 	 	Customer agrees to hold harmless and indemnify FMCM and its directors, officers, employees
and affiliates from and shall be liable for, any and all losses, claims, damages, injuries,
liabilities and/or expenses, including extra contractual and punitive damages and attorneys
fees, including all costs and expenses incidental thereto, which arise out of the Customer’s
performance under this Agreement, and are based on any of the following:

	 	a.	 	Any negligent, grossly negligent or reckless act or omission of
the Customer;

	 
	 	b.	 	Any misstatement, error or omission in any, or the breach of
any, of the Customer’s obligations, representations and warranties contained in
this Agreement;

	 
	 	c.	 	Any unauthorized disclosure by the Customer of
Policyholder/Claimant Information; or

	 
	 	d.	 	Any unauthorized disclosure by Customer of FMCM’s Proprietary
Information.

	 	 	In addition, Customer agrees to defend, indemnify and hold FMCM harmless from and against
all liabilities, demands, claims, suits, losses, damages, fines and judgments, including
costs, attorneys fees, and expenses incidental thereto, arising out
of or in connection with any claims related act or omission performed or omitted in accordance with
and pursuant to the express instructions of Customer.

3

 

	 	 	

	 	 	FMCM agrees to hold harmless and indemnify the Customer and its directors, officers,
employees and affiliates from and shall be liable for, any and all losses, claims, damages,
injuries, liabilities and/or expenses, including extra contractual and punitive damages and
attorneys fees, including all costs and expenses incidental thereto, which arise out of
FMCM’s performance under this Agreement, and are based on any of the following:

	 	a.	 	Any negligent, grossly negligent or reckless act or omission of
FMCM;

	 
	 	b.	 	Any misstatement, error or omission in any, or the breach of
any, of FMCM’s obligations, representations and warranties contained in this
Agreement;

	 
	 	c.	 	Any unauthorized disclosure by FMCM of Policyholder/Claimant
Information; or

	 
	 	d.	 	Any unauthorized disclosure by FMCM of Customer’s Proprietary
Information.

	6.	 	GENERAL

	 	A.	 	Notices. All notices or other communications required to be given
hereunder shall be in writing and delivered personally or mailed by prepaid registered
or certified mail (return receipt requested) or by telegram, telex, or overnight
delivery to the principal place of business as indicated on the first page hereof or
such other address of which the party has notified the other. Notice shall be
effective upon receipt.

	 
	 	B.	 	Parties in Interest. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.

	 
	 	C.	 	Dispute Resolution. In the event any dispute arises related to this
Agreement or any transaction governed by this Agreement, executive officers of both
parties, vested with authority to settle the dispute, agree to meet and attempt in good
faith to resolve the dispute before either party may resort to judicial proceedings.
The meeting will be held reasonably promptly at the request of either party in the
offices of the party requesting the meeting or by telephone conference. Each party
will bear its own costs related to said meeting.

	 
	 	D.	 	Agreement. It is expressly understood and agreed that FMCM, including
its employees, is performing services under this Agreement as an independent contractor
for Customer and that this Agreement does not create a joint venture, partnership or
employment relationship between the parties.

	 
	 	E.	 	Entire Agreement: Modification. This Agreement and Schedules attached
hereto represent the entire agreement between the parties and supersede all prior
written or oral agreements between the parties and shall be modified only by a written
amendment hereto.

4

 

	 	 	 	

	 
	 	F.	 	Effect of Termination – Except as otherwise provided herein, this
Agreement shall be of no further force or effect as of the date of termination except
that each party will remain responsible for all obligations or liabilities arising from
activities carried on by such party or its agents or employees during the period this
Agreement was in effect. Accordingly, Customer shall remain responsible for paying all
invoices outstanding as of the effective date of termination. Likewise, FMCM shall
remain obligated to fully perform all services on Claim Features which have been
accepted by FMCM and fully paid for by Customer, in accordance with the attached fee
schedule, as of the latter of the effective date of the termination of this Agreement
or the date payment is due pursuant to paragraph 2.B of this Agreement. FMCM shall
have no further obligation to provide any services on any Claim Feature for which it
has not received full payment in accordance with the attached fee schedule, plus all
interest due and expense cost incurred, by the latter of the effective date of the
termination of this Agreement or the date payment is due pursuant to paragraph 2.B of
this Agreement. FMCM’s obligation to perform services on any Claim Feature beyond the
effective date of the termination of this Agreement or the payment due date for
services performed, pursuant to this paragraph, will terminate upon Customer’s Allure
to pay any fee due, including expense costs, within the time period provided in
paragraph 2.B of this Agreement

IN WITNESS WHEREOF, the parties hereto have each by their duly authorized and acting officers
executed and delivered this Agreement this 28th day of July, 2005.

	 	 	 	 	 	 	 
	 	 	FM Claims Management, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	CUSTOMER:	 	 
	 
	 	 	 	 	 	 
	 	 	BY: LEBANON MUTUAL INSURANCE CO.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 

5

 

SCHEDULE A

CLAIMS ADMINISTRATION

SERVICES – FMCM will provide full service claim handling with regard to claim lines set forth in
Schedule B, Fee Structure, including:

	 	•	 	A file will be established within one business day of receipt of claim notification.

	 
	 	•	 	Customer contacts will be made within one business day of receipt of the claims report.
The order of priority will be phone, voice mail and other written correspondence.

	 
	 	•	 	Claims will be handled in accordance with the rules and regulations governing each
jurisdiction and in conformance with the procedures and policies established by FMCM and
Customer.

	 
	 	•	 	Customer will make all loss payments and all “expense payments” as that term is more
fully described below.

Management Services – FMCM will provide guidance and direction to Lebanon Mutual staff adjusters
on Lebanon Mutual retained claims, as well as FMCM-managed claims, as set forth below:

	 	A.	 	Lebanon Mutual Retained Files

Lebanon Mutual to retain all Workers’ Compensation, Personal Injury
Protection, Automobile Collision, Comprehensive and Property Damage
claims.

	 	—	 	Review and instructions on new losses when appropriate.

	 
	 	—	 	Provide direction and control when requested on coverage, liability and damages
issues.

	 
	 	—	 	Reserve and authority approval on losses over $25,000.

	 
	 	—	 	Transmittal of same to Lebanon Mutual Management.

	 
	 	—	 	Report on trends, issues and personnel issues noted during the normal course of
business.

	 
	 	—	 	Monthly on-site meetings with Lebanon Mutual claim staff and Management.

6

 

	 	B.	 	FMCM Managed Files

	 	—	 	FMCM will roundtable all liability files in excess of $10,000 anticipated
exposure. Should consensus not be reached, FMCM will utilize outside resources at
its own expense to facilitate reaching an agreement on reserving/handling.

	 
	 	—	 	FMCM will conduct quarterly reviews of 10% of the current FMCM-managed pending.
Files will be reviewed by a non-handling associate.

	 
	 	—	 	FMCM will conduct quarterly roundtable reviews of all cases in litigation for
the purposes of legal fees/costs/file life versus anticipated indemnity-paid
analysis.

Fees – Customer will pay FMCM claim-adjusting and management services fees. The fees will be
determined based on the attached schedule (Schedule B).

7

 

SCHEDULE A

PAGE 2

Expense Payments – FMCM will use its resources to adjust claims to every extent possible.
Notwithstanding this, in the event costs or fees of third party vendors or service providers,
including but not limited to field investigators, experts, appraisers, attorneys and medical
service providers, are incurred, Customer will be responsible for all such costs and fees.

Claim Audit – FMCM will allow Customer access to claims information at the FMCM location, upon
reasonable notice and during normal working hours sufficient to allow Customer or its designated
representative to determine compliance with this Agreement.

8

 

SCHEDULE
B

FEE STRUCTURE

First Party Property Claims Service, Liability Claims Service

(OBI, ABI, UM/UIM, All PD) and Management Services:

          2.75% of Net Earned Premium, exclusive of Worker’s Compensation Premium, to be paid on a
monthly basis

Supplemental Catastrophe pricing:

Catastrophes – “CAT” pricing is in effect based on “rolling twelve month” property loss activity.
CAT pricing is in effect when, in any given month, new property losses reach or exceed 200% of the
rolling twelve month average for new losses.

	 	 	 	 	 
	CAT pricing – personal property
	 	$150 per claim
	CAT pricing – commercial property
	 	$200 per claim

Subrogation

	 	 	 
	< $5,000

	 	20% of net recovery
	$5,000 - $10,000

	 	17.5% of net recovery
	> $10,000

	 	15% of net recovery
	Litigated files

	 	33 1/3% + expense

9

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