Document:

Exhibit 4(c)

                        SUB-INVESTMENT ADVISORY AGREEMENT

      AGREEMENT dated October 2, 2006, between BlackRock Advisors, L.L.C., a
Delaware limited liability corporation (the "Advisor"), and BlackRock Financial
Management, Inc., a Delaware corporation (the "Sub-Advisor").

      WHEREAS, the Advisor has agreed to furnish investment advisory services to
the BlackRock Bond Fund, BlackRock High Income Fund and Intermediate Term
Portfolio (each a "Fund" and together the "Funds"), series of BlackRock Bond
Fund, Inc., a Maryland corporation (the "Corporation"), an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act");

      WHEREAS, the Advisor wishes to retain the Sub-Advisor to provide it with
certain sub-advisory services as described below in connection with Advisor's
advisory activities on behalf of the Funds;

      WHEREAS, the advisory agreement between the Advisor and the Corporation,
dated October 2, 2006 (such agreement or the most recent successor agreement
between such parties relating to advisory services to the Corporation is
referred to herein as the "Advisory Agreement") contemplates that the Advisor
may sub-contract investment advisory services with respect to the Funds to a
sub-advisor pursuant to a sub-advisory agreement agreeable to the Corporation
and approved in accordance with the provisions of the 1940 Act; and

      WHEREAS, this Agreement has been approved in accordance with the
provisions of the 1940 Act, and the Sub-Advisor is willing to furnish such
services upon the terms and conditions herein set forth;

      NOW, THEREFORE, in consideration of the mutual premises and covenants
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, it is agreed by and between the parties hereto as
follows:

      1. Appointment. The Advisor hereby appoints the Sub-Advisor to act as
sub-advisor with respect to the Funds and the Sub-Advisor accepts such
appointment and agrees to render the services herein set forth for the
compensation herein provided.

      2. Services of the Sub-Advisor. Subject to the succeeding provisions of
this section, the oversight and supervision of the Advisor and the direction and
control of the Corporation's Board of Directors, the Sub-Advisor will perform
certain of the day-to-day operations of the Funds, which may include one or more
of the following services, at the request of the Advisor: (a) acting as
investment advisor for and managing the investment and reinvestment of those
assets of the Funds as the Advisor may from time to time

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request and in connection therewith have complete discretion in purchasing and
selling such securities and other assets for the Funds and in voting, exercising
consents and exercising all other rights appertaining to such securities and
other assets on behalf of the Funds; (b) arranging, subject to the provisions of
paragraph 3 hereof, for the purchase and sale of securities and other assets of
the Funds; (c) providing investment research and credit analysis concerning the
Funds' investments, (d) assist the Advisor in determining what portion of the
Funds' assets will be invested in cash, cash equivalents and money market
instruments, (e) placing orders for all purchases and sales of such investments
made for the Funds, and (f) maintaining the books and records as are required to
support Fund investment operations. At the request of the Advisor, the
Sub-Advisor will also, subject to the oversight and supervision of the Advisor
and the direction and control of the Corporation's Board of Directors, provide
to the Advisor or the Funds any of the facilities and equipment and perform any
of the services described in Section 3 of the Advisory Agreement. In addition,
the Sub-Advisor will keep the Funds and the Advisor informed of developments
materially affecting the Funds and shall, on its own initiative, furnish to the
Funds from time to time whatever information the Sub-Advisor believes
appropriate for this purpose. The Sub-Advisor will periodically communicate to
the Advisor, at such times as the Advisor may direct, information concerning the
purchase and sale of securities for the Funds, including: (a) the name of the
issuer, (b) the amount of the purchase or sale, (c) the name of the broker or
dealer, if any, through which the purchase or sale is effected, (d) the CUSIP
number of the instrument, if any, and (e) such other information as the Advisor
may reasonably require for purposes of fulfilling its obligations to the Funds
under the Advisory Agreement. The Sub-Advisor will provide the services rendered
by it under this Agreement in accordance with each Fund's investment objectives,
policies and restrictions (as currently in effect and as they may be amended or
supplemented from time to time) as stated in the Funds' Prospectus and Statement
of Additional Information and the resolutions of the Corporation's Board of
Directors.

      3. Covenants. (a) In the performance of its duties under this Agreement,
the Sub-Advisor shall at all times conform to, and act in accordance with, any
requirements imposed by: (i) the provisions of the 1940 Act and the Investment
Advisers Act of 1940, as amended (the "Advisers Act") and all applicable Rules
and Regulations of the Securities and Exchange Commission (the "SEC"); (ii) any
other applicable provision of law; (iii) the provisions of the Charter and
By-Laws of the Corporation, as such documents are amended from time to time;
(iv) the investment objectives and policies of the Funds as set forth in the
Corporation's Registration Statement on Form N-1A and/or the resolutions of the
Board of Directors; and (v) any policies and determinations of the Board of
Directors of the Corporation and

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      (b) In addition, the Sub-Advisor will:

                  (i) place orders either directly with the issuer or with any
            broker or dealer. Subject to the other provisions of this paragraph,
            in placing orders with brokers and dealers, the Sub-Advisor will
            attempt to obtain the best price and the most favorable execution of
            its orders. In placing orders, the Sub-Advisor will consider the
            experience and skill of the firm's securities traders as well as the
            firm's financial responsibility and administrative efficiency.
            Consistent with this obligation, the Sub-Advisor may select brokers
            on the basis of the research, statistical and pricing services they
            provide to the Funds and other clients of the Advisor or the
            Sub-Advisor. Information and research received from such brokers
            will be in addition to, and not in lieu of, the services required to
            be performed by the Sub-Advisor hereunder. A commission paid to such
            brokers may be higher than that which another qualified broker would
            have charged for effecting the same transaction, provided that the
            Sub-Advisor determines in good faith that such commission is
            reasonable in terms either of the transaction or the overall
            responsibility of the Advisor and the Sub-Advisor to the Funds and
            their other clients and that the total commissions paid by each Fund
            will be reasonable in relation to the benefits to the Fund over the
            long-term. Subject to the foregoing and the provisions of the 1940
            Act, the Securities Exchange Act of 1934, as amended, and other
            applicable provisions of law, the Advisor may select brokers and
            dealers with which it or the Corporation is affiliated;

                  (ii) maintain books and records with respect to the Funds'
            securities transactions and will render to the Advisor and the
            Corporation's Board of Directors such periodic and special reports
            as they may request;

                  (iii) maintain a policy and practice of conducting its
            investment advisory services hereunder independently of the
            commercial banking operations of its affiliates. When the
            Sub-Advisor makes investment recommendations for the Funds, its
            investment advisory personnel will not inquire or take into
            consideration whether the issuer of securities proposed for purchase
            or sale for each Fund's account are customers of the commercial
            department of its affiliates; and

                  (iv) treat confidentially and as proprietary information of
            the Funds all records and other information relative to the Funds,
            and the Funds' prior, current or potential shareholders, and will
            not use such records and information for any purpose other than
            performance of its responsibilities and duties hereunder, except
            after prior notification to and approval in writing by each Fund,
            which approval shall not be unreasonably withheld and may not be
            withheld where the Sub-Advisor may be exposed to civil or criminal
            contempt

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<PAGE>

            proceedings for failure to comply, when requested to divulge such
            information by duly constituted authorities, or when so requested by
            the Funds.

      4. Services Not Exclusive. Nothing in this Agreement shall prevent the
Sub-Advisor or any officer, employee or other affiliate thereof from acting as
investment advisor for any other person, firm or corporation, or from engaging
in any other lawful activity, and shall not in any way limit or restrict the
Sub-Advisor or any of its officers, employees or agents from buying, selling or
trading any securities for its or their own accounts or for the accounts of
others for whom it or they may be acting; provided, however, that the
Sub-Advisor will undertake no activities which, in its judgment, will adversely
affect the performance of its obligations under this Agreement.

      5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Sub-Advisor hereby agrees that all records which it
maintains for the Corporation are the property of the Corporation and further
agrees to surrender promptly to the Corporation any such records upon the
Corporation's request. The Sub-Advisor further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act (to the extent such books and
records are not maintained by the Advisor).

      6. Expenses. During the term of this Agreement, the Sub-Advisor will bear
all costs and expenses of its employees and any overhead incurred by the
Sub-Advisor in connection with its duties hereunder; provided that the Board of
Directors of the Corporation may approve reimbursement to the Sub-Advisor of the
pro-rata portion of the salaries, bonuses, health insurance, retirement benefits
and all similar employment costs for the time spent on Fund operations
(including, without limitation, compliance matters) (other than the provision of
investment advice and administrative services required to be provided hereunder)
of all personnel employed by the Sub-Advisor who devote substantial time to Fund
operations or the operations of other investment companies advised or
sub-advised by the Sub-Advisor.

      7. Compensation.

            (a) The Advisor agrees to pay to the Sub-Advisor and the Sub-Advisor
agrees to accept as full compensation for all services rendered by the
Sub-Advisor as such, a monthly fee in arrears at an annual rate equal to the
amount set forth in Schedule A hereto. For any period less than a month during
which this Agreement is in effect, the fee shall be prorated according to the
proportion which such period bears to a full month of 28, 29, 30 or 31 days, as
the case may be.

            (b) For purposes of this Agreement, the net assets of the Funds
shall be calculated pursuant to the procedures adopted by resolutions of the
Directors of the

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<PAGE>

Corporation for calculating the value of the Funds' assets or delegating such
calculations to third parties.

      8. Indemnity.

            (a) The Corporation may, in the discretion of the Board of Directors
of the Corporation, indemnify the Sub-Advisor, and each of the Sub-Advisor's
directors, officers, employees, agents, associates and controlling persons and
the directors, partners, members, officers, employees and agents thereof
(including any individual who serves at the Sub-Advisor's request as director,
officer, partner, member, trustee or the like of another entity) (each such
person being an "Indemnitee") against any liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees (all as provided in accordance with applicable state
law) reasonably incurred by such Indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or investigative body in which such
Indemnitee may be or may have been involved as a party or otherwise or with
which such Indemnitee may be or may have been threatened, while acting in any
capacity set forth herein or thereafter by reason of such Indemnitee having
acted in any such capacity, except with respect to any matter as to which such
Indemnitee shall have been adjudicated not to have acted in good faith in the
reasonable belief that such Indemnitee's action was in the best interest of the
Corporation and furthermore, in the case of any criminal proceeding, so long as
such Indemnitee had no reasonable cause to believe that the conduct was
unlawful; provided, however, that (1) no Indemnitee shall be indemnified
hereunder against any liability to the Corporation or its shareholders or any
expense of such Indemnitee arising by reason of (i) willful misfeasance, (ii)
bad faith, (iii) gross negligence or (iv) reckless disregard of the duties
involved in the conduct of such Indemnitee's position (the conduct referred to
in such clauses (i) through (iv) being sometimes referred to herein as
"disabling conduct"), (2) as to any matter disposed of by settlement or a
compromise payment by such Indemnitee, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other expenses
shall be provided unless there has been a determination that such settlement or
compromise is in the best interests of the Corporation and that such Indemnitee
appears to have acted in good faith in the reasonable belief that such
Indemnitee's action was in the best interest of the Corporation and did not
involve disabling conduct by such Indemnitee and (3) with respect to any action,
suit or other proceeding voluntarily prosecuted by any Indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of such action, suit
or other proceeding by such Indemnitee was authorized by a majority of the full
Board of Directors of the Corporation.

            (b) The Corporation shall make advance payments in connection with
the expenses of defending any action with respect to which indemnification might
be sought hereunder if the Corporation receives a written affirmation of the
Indemnitee's

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<PAGE>

good faith belief that the standard of conduct necessary for indemnification has
been met and a written undertaking to reimburse the Corporation unless it is
subsequently determined that such Indemnitee is entitled to such indemnification
and if the Directors of the Corporation determine that the facts then known to
them would not preclude indemnification. In addition, at least one of the
following conditions must be met: (A) the Indemnitee shall provide a security
for such Indemnitee undertaking, (B) the Fund shall be insured against losses
arising by reason of any unlawful advance, or (C) a majority of a quorum
consisting of Directors of the Corporation who are neither "interested persons"
of the Corporation (as defined in Section 2(a)(19) of the 1940 Act) nor parties
to the proceeding ("Disinterested Non-Party Directors") or an independent legal
counsel in a written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the Indemnitee ultimately will be found entitled to
indemnification.

            (c) All determinations with respect to the standards for
indemnification hereunder shall be made (1) by a final decision on the merits by
a court or other body before whom the proceeding was brought that such
Indemnitee is not liable by reason of disabling conduct, or (2) in the absence
of such a decision, by (i) a majority vote of a quorum of the Disinterested
Non-Party Directors of the Corporation, or (ii) if such a quorum is not
obtainable or even, if obtainable, if a majority vote of such quorum so directs,
independent legal counsel in a written opinion. All determinations that advance
payments in connection with the expense of defending any proceeding shall be
authorized shall be made in accordance with the immediately preceding clause (2)
above.

      The rights accruing to any Indemnitee under these provisions shall not
exclude any other right to which such Indemnitee may be lawfully entitled.

      9. Limitation on Liability. The Sub-Advisor will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Advisor or
by the Funds in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its duties under this Agreement. As used in this
Section 9(a), the term "Sub-Advisor" shall include any affiliates of the
Sub-Advisor performing services for the Funds contemplated hereby and partners,
directors, officers and employees of the Sub-Advisor and such affiliates.

      10. Duration and Termination. This Agreement shall become effective as of
the date hereof and, unless sooner terminated with respect to the Funds as
provided herein, shall continue in effect for a period of two years. Thereafter,
if not terminated, this Agreement shall continue in effect with respect to the
Funds for successive periods of 12 months, provided such continuance is
specifically approved at least annually by both (a) the vote of a majority of
the Corporation's Board of Directors or a vote of a majority of the outstanding
voting securities of each Fund at the time outstanding and entitled to vote and
(b) by the vote of a majority

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<PAGE>

of the Directors, who are not parties to this Agreement or interested persons
(as such term is defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. Notwithstanding the
foregoing, this Agreement may be terminated by the Corporation or the Advisor at
any time, without the payment of any penalty, upon giving the Sub-Advisor 60
days' notice (which notice may be waived by the Sub-Advisor), provided that such
termination by the Corporation or the Advisor shall be directed or approved by
the vote of a majority of the Directors of the Corporation in office at the time
or by the vote of the holders of a majority of the voting securities of each
Fund at the time outstanding and entitled to vote, or by the Sub-Advisor on 60
days' written notice (which notice may be waived by the Corporation and the
Advisor), and will terminate automatically upon any termination of the Advisory
Agreement between the Corporation and the Advisor. This Agreement will also
immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meanings of such terms
in the 1940 Act.)

      11. Notices. Any notice under this Agreement shall be in writing to the
other party at such address as the other party may designate from time to time
for the receipt of such notice and shall be deemed to be received on the earlier
of the date actually received or on the fourth day after the postmark if such
notice is mailed first class postage prepaid.

      12. Amendment of this Agreement. This Agreement may be amended by the
parties only if such amendment is specifically approved by the vote of the Board
of Directors of the Corporation, including a majority of those Directors who are
not parties to this Agreement or interested persons of any such party cast in
person at a meeting called for the purpose of voting on such approval and, where
required by the 1940 Act, by a vote of a majority of the outstanding voting
securities of each Fund.

      13. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of the parties hereto and their respective successors.

      14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York for contracts to be performed
entirely therein without reference to choice of law principles thereof and in
accordance with the applicable provisions of the 1940 Act. To the extent that
the applicable laws of the State of New York, or any of the provisions, conflict
with the applicable provisions of the 1940 Act, the latter shall control.

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      15. Counterparts. This Agreement may be executed in counterparts by the
parties hereto, each of which shall constitute an original counterpart, and all
of which, together, shall constitute one Agreement.

            IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their duly authorized officers designated below as of the day
and year first above written.

                                            BLACKROCK ADVISORS, L.L.C.

                                            By: ________________________________
                                                Name:
                                                Title:

                                            BLACKROCK FINANCIAL MANAGEMENT, INC.

                                            By: ________________________________
                                                Name:
                                                Title:

AGREED AND ACCEPTED
as of the date first set forth above

BLACKROCK BOND FUND, INC.

By: ______________________________
Name:
Title:

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                                   Schedule A

                           Sub-Investment Advisory Fee

   _____% of the monthly advisory fee received by the Advisor from each Fund.exv10w1

 

Exhibit 10.1

AMENDED AND RESTATED SERVICES ALLOCATION AGREEMENT

     THIS AMENDED AND RESTATED SERVICES ALLOCATION AGREEMENT (this “Agreement”) is entered into
this 20th day of July 2006 among DONEGAL GROUP INC., a Delaware corporation (“DGI”),
ATLANTIC STATES INSURANCE COMPANY, a Pennsylvania stock casualty insurance company (“Atlantic
States”), SOUTHERN INSURANCE COMPANY OF VIRGINIA, a Virginia stock casualty insurance company
(“Southern”), LE MARS INSURANCE COMPANY, an Iowa stock casualty insurance company (“Le Mars”), THE
PENINSULA INSURANCE COMPANY, a Maryland stock casualty insurance company (“Peninsula”), PENINSULA
INDEMNITY COMPANY, a Maryland stock casualty insurance company (“PIC”, and, together with Atlantic
States, Southern, Le Mars and Peninsula, the “Insurance Subsidiaries”) and DONEGAL MUTUAL INSURANCE
COMPANY, a Pennsylvania mutual fire insurance company (“Donegal Mutual”).

WITNESSETH:

     WHEREAS, Donegal Mutual formed DGI in August 1986 as part of a strategy to utilize a
downstream holding company as a means of providing alternative sources of capital for Donegal
Mutual’s insurance business;

     WHEREAS, DGI, Donegal Mutual and Atlantic States, a wholly owned subsidiary of DGI, are
parties to a Services Allocation Agreement dated September 29, 1986 (the “Prior Agreement”);

     WHEREAS, the purpose of the Prior Agreement was to provide for the allocation of shared costs
of certain employees of Donegal Mutual who have provided certain functions and services to DGI and
certain of its subsidiaries since October 1, 1986 in connection with an intercompany pooling
agreement between Donegal Mutual and Atlantic States;

     WHEREAS, since October 1, 1986, DGI has acquired, and may in the future acquire, insurance
companies for which employees of Donegal Mutual provide full-time services and Donegal Mutual is
reimbursed on a direct basis for such services;

     WHEREAS, Donegal Mutual has provided such services to DGI and the Insurance Subsidiaries in an
efficient and effective manner;

 

 

     WHEREAS, Donegal Mutual and DGI wish to continue a mutually beneficial relationship among
Donegal Mutual and DGI for the respective benefit of Donegal Mutual and DGI and the Insurance
Subsidiaries; and

     WHEREAS, DGI, Atlantic States and Donegal Mutual wish to amend the Prior Agreement to remove
Atlantic States as a party, to reflect developments in the respective businesses of DGI and the
Insurance Subsidiaries and Donegal Mutual since the date of execution of the Prior Agreement and
the interrelated nature of their businesses as conducted under the name Donegal Insurance Group and
to provide for the appropriate allocation and payment of expenses in accordance with the current
practices of Donegal Mutual, DGI and the Insurance Subsidiaries;

     NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained and
intending to be legally bound hereby, Donegal Mutual, DGI and the Insurance Subsidiaries agree as
follows:

     1. Effective Date. The effective date of this Agreement shall be August 1, 2006 (the
“Effective Date”). This Agreement shall continue in effect unless and until terminated pursuant to
Section 5.

     2. Services To Be Provided.

          (a) Donegal Mutual agrees to provide employees who shall perform the services described in
Section 2(d) for and on behalf of and in the name of Atlantic States, and Donegal Mutual and
Atlantic States agree that all of the costs and expenses of Donegal Mutual in providing those
services and employees to Atlantic States shall be allocated between Donegal Mutual and Atlantic
States in proportion to their respective participation from time to time under the Proportional
Reinsurance Agreement dated as of September 29, 1986 and most recently amended as of April 20, 2000
between Donegal Mutual and Atlantic States.

          (b) Donegal Mutual agrees to provide employees who shall, directly or indirectly, perform the
services described in Section 2(d) for and on behalf of DGI and the Insurance Subsidiaries other
than Atlantic States, and DGI and the Insurance Subsidiaries other than Atlantic States, agree
either to reimburse Donegal Mutual or to allocate among Donegal Mutual, on the one hand, and DGI
and the Insurance Subsidiaries other than Atlantic States, on the other hand, the costs and
expenses of Donegal Mutual in providing such services and employees to DGI and the Insurance
Subsidiaries other than Atlantic States.

          (c) Donegal Mutual, DGI and the Insurance Subsidiaries agree that the fundamental purposes of
this Agreement are (i) to secure the provision of the services described in Section 2(d) to DGI and
the Insurance Subsidiaries and (ii) to assure that

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Donegal Mutual receives appropriate payments from DGI and the Insurance Subsidiaries so that
Donegal Mutual has no net cost for providing the services and employees, or, in the case of
Atlantic States, for providing Atlantic States’ proportionate share of such services and employees
as described in Section 2(a), pursuant to this Agreement. Exhibit A to this Agreement provides
specific but non-exclusive guidelines as to how such allocations and reimbursements shall be
calculated and settled, and Exhibit A may be amended from time to time by the mutual agreement of
Donegal Mutual, DGI and the Insurance Subsidiaries.

          (d) The services are as follows:

               (i) Underwriting — the development, implementation and administration of policies relating to
underwriting and the acceptance of risks, the maintenance of underwriting manuals and guidelines
and services relating to the development of insurance products and rates, the provision of all
actuarial services necessary or appropriate for the operation of the Insurance Subsidiaries, the
analysis of loss trends and reserve developments and risk concentrations and the arranging for
insurance, loss control and other reasonable risk management services in the underwriting process
to protect the Insurance Subsidiaries and their respective properties and other assets against
loss, damage and liabilities;

               (ii) Claims — the admitting, adjusting, compromising, rejection and settlement of claims
under insurance policies issued by the Insurance Subsidiaries and the collection of reinsurance and
recoverables;

               (iii) Reinsurance — the review, negotiation, monitoring and coordination of all reinsurance
contracts and placements, including the determination of the amounts, terms, types and structure of
reinsurance to be obtained and the selection of the reinsurers;

               (iv) Investments — the investment of all available funds in the name of DGI and the Insurance
Subsidiaries pursuant to their respective investment policies, and the management of the respective
investments of DGI and the Insurance Subsidiaries;

               (v) Information Services — the purchase and maintenance of computer hardware and software
systems and the creation, implementation and maintenance of computer programs utilized within those
systems. Such systems shall include, but not be limited to, accounting and bookkeeping systems,
automated underwriting and policy issuance systems, claims processing systems, premium billing
systems, electronic imaging systems, Internet web systems and storage and processing systems for
maintaining information to enable the preparation and analysis of daily, weekly and monthly
reports;

               (vi) Personnel and Professional Services — the appointment, direction, removal and
suspension, in the name of DGI and the Insurance Subsidiaries, of
employees

-3-

 

and agents, including the determination of the appropriate levels thereof, and the ongoing
review and analysis of professional services, including the retention of counsel, accountants,
actuaries and other consultants;

               (vii) Financial Reporting — the analysis and reporting of actual performance to budgeted
performance, including analysis of financial results through the budgeted period and the
preparation of all statements and reports necessary or appropriate for the respective businesses of
DGI and the Insurance Subsidiaries, including reports to insurance regulatory authorities and the
Securities and Exchange Commission;

               (viii) Tax Administration — the ordinary and necessary tax administration services for income
taxes, premium taxes, sales and use taxes, franchise and similar taxes and any other taxes
incurred;

               (ix) Accounting Services — the providing of routine accounting and bookkeeping services
relating to cash, cash equivalents, receivables, supplies and other inventory items, fixed assets
and other asset accounting, accounts payable, notes payable, other trade payables, payroll and
payroll taxes, other general ledger items, accounting services relating to investments and the
reconciliation of all bank accounts;

               (x) Policyholder Services — the maintenance of policyholders’ customer relation services and
the maintenance of policyholder information, including names, addresses, policy anniversary dates
and premiums due;

               (xi) Internal Audit and Compliance Services — the providing of internal audit and compliance
services to obtain an ongoing independent and objective evaluation of the internal control systems
designed to provide reasonable assurance regarding the efficiency and effectiveness of operations,
the reliability of financial reporting and compliance with applicable laws and regulations;

               (xii) Actuarial Services — the providing of actuarial services including review and analysis
of claims reserving assumptions, historical claims experience and trends such as reserving
patterns, loss payments, pending levels of unpaid claims and product mix, as well as court
decisions, economic conditions and public attitudes; and

               (xiii) Marketing, Sales and Advertising Services — the creation and development of marketing,
sales and advertising programs, media and agency co-op promotional materials to further increase
brand awareness and promote the sales of insurance products and services.

          (e) Donegal Mutual shall use its best efforts to provide the services described above and such
other or additional services as DGI or the Insurance Subsidiaries may from time to time request
pursuant to this Agreement. Notwithstanding the foregoing, DGI and the Insurance Subsidiaries
agree that Donegal Mutual shall have no obligation to

-4-

 

provide services to DGI and the Insurance Subsidiaries of a quality greater than the quality
of such services that Donegal Mutual maintains for its own operations.

          (f) Donegal Mutual shall, within 90 days after the expiration of each calendar year during the
term of this Agreement, furnish the Boards of Directors of DGI and the Insurance Subsidiaries with
a written report as to the allocations and reimbursements between Donegal Mutual, on the one hand,
and DGI and the Insurance Subsidiaries, on the other hand, during such year as shall be sufficient,
(i) in the discretion of the disinterested members of the Boards of Directors of DGI and the
Insurance Subsidiaries, to provide a commercially reasonable basis to reach the conclusion that the
transactions between Donegal Mutual, on the one hand, and DGI and the Insurance Subsidiaries, on
the other hand, have been fair to DGI and its stockholders under prevailing circumstances and (ii)
as shall be sufficient in the discretion of the disinterested members of Donegal Mutual’s Board of
Directors, to provide a commercially reasonable basis to reach the conclusion that the transactions
between Donegal Mutual, on the one hand, and DGI and the Insurance Subsidiaries, on the other hand,
have been fair to Donegal Mutual and its policyholders under prevailing circumstances.

          (g) Nothing in this Agreement shall constitute or be construed to be or create a partnership
or joint venture relationship between DGI and the Insurance Subsidiaries, on the one hand and
Donegal Mutual, on the other hand, and Donegal Mutual’s status under this Agreement shall be that
of an independent contractor. In connection with the performance of services under this Agreement,
neither DGI, the Insurance Subsidiaries nor Donegal Mutual shall make any statement or take any
action that is inconsistent with the provisions of this Section 2(g). It is understood and agreed
that the management, control and direction of the operations and policies of DGI and the Insurance
Subsidiaries shall remain at all times under the exclusive control of the respective boards of
directors of DGI and the Insurance Subsidiaries.

          (h) In the event that an issue or question arises in the future as to how this Agreement
should be interpreted or whether the provisions of this Agreement should or should not apply in a
particular set of circumstances as to a particular transaction between Donegal Mutual and DGI or
one of the Insurance Subsidiaries, the issue or question shall be referred, upon the request of any
of Donegal Mutual, DGI or the Insurance Subsidiary, for resolution to the Coordinating Committee
maintained by the Boards of Directors of Donegal Mutual and DGI, and the decision of the
Coordinating Committee with respect to such issue or question shall be final and binding on Donegal
Mutual, DGI and the Insurance Subsidiaries.

     3. Books and Records.

          (a) Donegal Mutual shall keep accurate records and accounts of all services provided pursuant
to this Agreement. Such records and accounts shall be maintained
in

-5-

 

accordance with sound business practices and shall be subject to such systems of internal
control as are required by law. All records and accounts shall be available for inspection by DGI,
the Insurance Subsidiaries and their respective representatives, including DGI’s independent
registered public accounting firm, at any time upon request during commercially reasonable hours.

          (b) All such records and accounts shall be the property of Donegal Mutual, subject to the
right of inspection of DGI and the Insurance Subsidiaries under Section 3(a) of this Agreement and
the examination rights of insurance and other applicable regulatory authorities.

          (c) DGI and the Insurance Subsidiaries, as the case may be, shall be solely responsible,
severally and not jointly, for, and shall hold harmless and indemnify Donegal Mutual, including its
successors, officers, directors, employees, agents and affiliates, from and against all losses,
claims, damages, liabilities and expenses, including any and all reasonable expenses and attorneys’
fees and disbursements incurred in investigating, preparing or defending against any litigation or
proceeding, whether commenced or threatened, or any other claim whatsoever, whether or not
resulting in any liability, suffered, incurred, made, brought or asserted by any person not a party
to this Agreement in connection with Donegal Mutual’s provision of services to DGI and the
Insurance Subsidiaries, unless such loss, claim, damage, liability or expense results from the
negligence, willful misconduct or fraud of Donegal Mutual or its officers, directors, employees,
agents or affiliates or any other person engaged by Donegal Mutual to provide services to DGI and
the Insurance Subsidiaries.

          (d) Donegal Mutual shall be solely responsible for, and shall hold harmless and indemnify DGI
and the Insurance Subsidiaries, as the case may be, including their respective successors,
officers, directors, employees, agents and affiliates, from and against all losses, claims,
damages, liabilities and expenses, including any and all reasonable expenses and attorneys’ fees
and disbursements incurred in investigating, preparing or defending against any litigation or
proceeding, whether commenced or threatened, or any other claim whatsoever, whether or not
resulting in any liability, suffered, incurred, made, brought or asserted by any person not a party
to this Agreement resulting from the negligence, willful misconduct or fraud of Donegal Mutual or
its officers, directors, employees, agents or affiliates or any other person engaged by Donegal
Mutual to provide services to DGI and the Insurance Subsidiaries.

     4. Approval by the Pennsylvania Department of Insurance. Donegal Mutual has submitted
this Agreement to the Pennsylvania Department of Insurance for its review and approval in
accordance with Chapter 14 of the Insurance Company Law of Pennsylvania, and such approval has been
obtained.

-6-

 

     5. Termination. This Agreement shall have a term that initially expires on December
31, 2011, provided, however, that, on each December 31 after the Effective Date of this Agreement,
the term of this agreement shall be extended by one year so that at all times this Agreement shall
have a then current term of five years; provided, however, that this Agreement may be terminated at
any time prior to its then termination date in any of the following events, subject, in all events,
to the receipt of any necessary insurance regulatory filings or actions:

          (a) By Donegal Mutual, upon 180 days prior written notice to DGI and the Insurance
Subsidiaries, if a Change of Control (as defined in this Agreement) of DGI shall have occurred. As
used herein, “Change of Control” shall mean (i) the acquisition of shares of DGI by any “person” or
“group,” as such terms are used in Rule 13d-3 under the Securities Exchange Act of 1934 as now or
hereafter amended, in a transaction or series of transactions that result in such person or group
directly or indirectly becoming the beneficial owner of 25% or more of the voting power of DGI’s
common stock after the date of this Agreement, (ii) the consummation of a merger or other business
combination after which the holders of voting common stock of DGI do not collectively own 60% or
more of such voting common stock of the entity surviving such merger or other business combination,
(iii) 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 reinvestment of the
investment portfolio of DGI and the Insurance Subsidiaries or (iv) as the result of or in
connection with any cash tender offer or exchange offer, merger or other business combination, sale
of assets or contested election of directors or any combination of the foregoing transactions
specified in clauses (i), (ii), (iii) and (iv), each, a “Transaction”, the persons who constituted
a majority of the members of the Board of Directors of DGI on the date of this Agreement and
persons whose election as members of the Board of Directors of DGI was approved by such members
then still in office or whose election was previously so approved after the date of this Agreement
but before the event that constitutes a Change of Control, no longer constitute such a majority of
the members of the Board of Directors of DGI then in office. A Transaction shall be deemed to
constitute a Change in Control only upon the consummation of the Transaction.

          (b) By DGI and the Insurance Subsidiaries, upon 30 days prior written notice to Donegal
Mutual, if Donegal Mutual shall have become insolvent or shall have become subject to any voluntary
or involuntary conservatorship, receivership, reorganization, liquidation or bankruptcy case or
proceeding.

          (c) By Donegal Mutual, DGI and the Insurance Subsidiaries at any time by mutual written
agreement.

          (d) The aforesaid respective rights of termination of DGI, the Insurance Subsidiaries and
Donegal Mutual may be exercised without prejudice to any other remedy
to

-7-

 

which DGI, the Insurance Subsidiaries or Donegal Mutual, as the case may be, is entitled in
law or in equity.

     6. Miscellaneous.

          (a) All notices, communications and deliveries under this Agreement shall (i) be made in
writing, signed by the party making the same to the address as specified below, (ii) specify the
section of this Agreement pursuant to which such notice is given, (iii) be deemed to be given if
delivered in person, on the date delivered, or if sent by facsimile, on the date sent (if the party
giving the notice, or its employee or agent, has no reason to believe that the facsimiled notice
was not made or received), or if sent by Federal Express or some other overnight express courier
with costs paid, on the date delivered to such express courier and (iv) be deemed received if
delivered in person, on the date of personal delivery, or if by facsimile, on the first business
day after sent (if the party giving the notice, or its employee or agent, has no reason to believe
that the facsimiled notice was not made or received), or if sent by Federal Express or some other
overnight express courier, on the first business day after delivered to such overnight express
courier:

if to DGI, to:

Donegal Group Inc.

1195 River Road

Marietta, Pennsylvania 17547

Attention: President

Facsimile: 717-426-7009

if to Donegal Mutual, to:

Donegal Mutual Insurance Company

1195 River Road

Marietta, Pennsylvania 17547

Attention: President

Facsimile: 717-426-7009

if to Atlantic States, to:

Atlantic States Insurance Company

1195 River Road

Marietta, Pennsylvania 17547

Attention: Chief Executive Officer

Facsimile: 717-426-7009

-8-

 

if to Southern, to:

Southern Insurance Company of Virginia

1195 River Road

Marietta, Pennsylvania 17547

Attention: Chief Executive Officer

Facsimile: 717-426-7009

if to Le Mars, to:

Le Mars Insurance Company

1195 River Road

Marietta, Pennsylvania 17547

Attention: Chief Executive Officer

Facsimile: 717-426-7009

if to Peninsula and/or PIC, to:

The Peninsula Insurance Company

1195 River Road

Marietta, Pennsylvania 17547

Attention: Chief Executive Officer

Facsimile: 717-426-7009

Such notice shall be given at such other address or to such other representative as a party to this
Agreement may furnish pursuant to this Section 6(a) to the other party to this Agreement.

          (b) No assignment, transfer or delegation, whether by merger or other operation of law or
otherwise, of any rights or obligations under this Agreement shall be made by a party to this
Agreement without the prior written consent of the other party to this Agreement and, if required
by applicable law, the Pennsylvania Commissioner of Insurance and any other insurance regulatory
authority having jurisdiction over this Agreement. This Agreement shall be binding upon the
parties hereto and their respective permitted successors and assigns.

          (c) This Agreement constitutes the entire agreement of the parties to this Agreement with
respect to its subject matter, supersedes all prior agreements, including the Prior Agreement, of
the parties to this Agreement with respect to its subject matter and may not be amended except in
writing signed by the party to this Agreement against whom the change is asserted. The failure of
any party to this Agreement at any time or times to require

-9-

 

the performance of any provision of this Agreement shall in no manner affect the right to
enforce the same and no waiver by any party to this Agreement of any provision or breach of any
provision of this Agreement in any one or more instances shall be deemed or construed either as a
further or continuing waiver of any such provision or breach or as a waiver of any other provision
or breach of any other provision of this Agreement.

     (d) In case any one or more of the provisions contained herein shall, for any reason, be held
to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision or provisions had never been
contained herein unless the deletion of such provision or provisions would result in such a
material change as to cause continued performance of this Agreement as contemplated herein to be
unreasonable or materially and adversely frustrate the objectives of the parties in originally
entering into this Agreement as expressed in the Recitals to this Agreement.

     (e) This Agreement shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first
above written.

	 	 	 	 	 	 	 
	DONEGAL MUTUAL INSURANCE COMPANY 	 	DONEGAL GROUP INC.
	 
	By:  	/s/ Jeffrey D. Miller
 	 	By:  	/s/
Donald H. Nikolaus
	 	Jeffrey D. Miller, Senior Vice
President
and Chief Financial Officer	 	 	Donald H. Nikolaus, President

and Chief Executive Officer 
	 
	ATLANTIC STATES INSURANCE COMPANY	 	SOUTHERN INSURANCE COMPANY OF VIRGINIA 
	 
	By:  	/s/ Donald H. Nikolaus
 	 	By:  	/s/
Donald H. Nikolaus
	 	Donald H. Nikolaus, President

and Chief Executive Officer	 	 	Donald H. Nikolaus, President

and Chief Executive Officer
	 
	LE MARS INSURANCE COMPANY	 	THE PENINSULA INSURANCE COMPANY
	 
	By:  	/s/ Donald H. Nikolaus
 	 	By:  	/s/
Donald H. Nikolaus
	 	Donald H. Nikolaus, President

and Chief Executive Officer	 	 	Donald H. Nikolaus, Chief

Executive Officer

-10-

 

	 	 	 	 	 	 	 
	PENINSULA INDEMNITY COMPANY	 	 
	 
	By:  	/s/ Donald H. Nikolaus
 	 	  	 
	 	Donald H. Nikolaus, Chief

Executive Officer	 	 	 

-11-

 

EXHIBIT A

Services Allocation Agreement

Allocation and Reimbursement Guidelines

The following information sets forth allocation and reimbursement guidelines to be followed for the
calculation and settlement of amounts pursuant to the Agreement.

			
	1.	 	Personnel Costs.

     Personnel Costs as used in this Exhibit A shall be defined to include salaries and payroll tax
expense. Calculation and settlement of allocations and reimbursements of personnel costs shall be
performed as follows:

     (a) For DGI and the Insurance Subsidiaries other than Atlantic States receiving services from
Donegal Mutual employees, DGI and the Insurance Subsidiaries shall reimburse Donegal Mutual for the
direct costs of the employees performing such services . Donegal Mutual may also recover an
administration fee to cover its costs of services rendered to maintain records and process payroll
for DGI and the Insurance Subsidiaries.

     (b) Atlantic States shall reimburse Donegal Mutual for its proportionate share of Donegal
Mutual’s personnel costs, after subtracting direct reimbursements from DGI and the Insurance
Subsidiaries other than Atlantic States as described in Section 1(a), in accordance with the
following allocation methods:

	 	(i)	 	Underwriting and general personnel costs shall be allocated in
proportion to Donegal Mutual’s and Atlantic States’ respective participation
under the Proportional Reinsurance Agreement.
	 
	 	(ii)	 	Claim personnel costs shall be allocated in proportion to Donegal
Mutual’s and Atlantic States’ respective average claim reserves and loss
payments
	 
	 	(iii)	 	Investment personnel costs shall be allocated in proportion to
Donegal Mutual’s and Atlantic States’ respective average invested assets. Such
costs shall include the proportionate amount of personnel costs for individuals
who perform duties related to Donegal Mutual’s and Atlantic States’ investment
portfolios.
	 
	 	(iv)	 	Information technology and operational services personnel costs
shall be allocated proportionately to the allocations calculated in (i) through
(iii)

A-1

 

	 	 	 	above to reflect the provision of information technology and operational
services to each of the respective functions.

     (c) Donegal Mutual shall provide to DGI and the Insurance Subsidiaries periodic calculations
of amounts pursuant to Section 1(a) and (b), and DGI and the Insurance Subsidiaries shall reimburse
Donegal Mutual in the normal course of business, generally within 30 days of receipt of such
calculations.

			
	2.	 	Information Services.

     To the extent that Donegal Mutual purchases and maintains the computer hardware and software
systems required to service the business underwritten by Donegal Mutual and one or more of the
Insurance Subsidiaries, calculation and settlement of allocations and reimbursements for such
services shall be performed as follows:

     (a) The estimated purchase price and development costs of computer hardware and software
systems required to provide such services shall be divided by the number of years those systems are
reasonably expected to serve the respective information services requirements of Donegal Mutual,
DGI and one or more of the Insurance Subsidiaries. Such estimated annual cost shall then be
allocated to the respective companies based upon their proportionate net written premiums in the
year prior to the establishment of the allocation amounts.

     (b) The Insurance Subsidiaries shall reimburse Donegal Mutual for the amounts so allocated on
a monthly basis.

			
	3.	 	Miscellaneous Expenses.

     (a) DGI and the Insurance Subsidiaries other than Atlantic States shall reimburse Donegal
Mutual for miscellaneous direct and allocated expenses including, but not limited to, postage,
in-house printing services and insurance purchased by Donegal Mutual on their behalf. DGI and the
Insurance Subsidiaries shall reimburse Donegal Mutual such allocation amounts in the normal course
of business, generally within 30 days of receipt of such allocations.

     (b) Atlantic States shall reimburse Donegal Mutual on a monthly basis for its proportionate
share of Donegal Mutual’s expenses other than information systems depreciation expense, charitable
contributions, real estate expenses and real estate taxes and any other expenses for services
solely benefiting Donegal Mutual and after subtracting direct reimbursements from DGI and the
Insurance Subsidiaries other than Atlantic States as described in Section 3(a) in accordance with
the following allocation methods:

A-2

 

	 	(i)	 	Underwriting and general expenses allocated to the underwriting
function shall be allocated in proportion to the respective participation of
Donegal Mutual and Atlantic States under the Proportional Reinsurance Agreement.
	 
	 	(ii)	 	Claim adjusting expenses and general expenses allocated to the
claim function shall be allocated in proportion to the respective average claim
reserves and loss payments of Donegal Mutual and Atlantic States.
	 
	 	(iii)	 	General expenses allocated to the investment function shall be
allocated in proportion to the respective average invested assets of Donegal
Mutual and Atlantic States.

A-3

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