Document:

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                                                                    EXHIBIT 4.15

                        HIGHLANDS INSURANCE GROUP, INC.

                   Waiver of Certain Interest Payments on 10%

                  Convertible Debentures due December 31, 2005

                                 APRIL 13, 2001

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Parties:                            Highlands Insurance Group, Inc. (the "Company"), Insurance Partners,
                                    L.P. ("IP U.S."),  Insurance Partners Offshore (Bermuda), L.P. ("IP
                                    Bermuda", and together with IP U.S., "IP"), and Richard M. Haverland
                                    ("Haverland").

                                    Currently, IP U.S. and IP Bermuda hold an aggregate of approximately
                                    $57.15 million principal amount of the Company's 10% Convertible
                                    Debentures due December 31, 2005 (as amended, the "Debentures").
                                    Currently, Haverland holds $2.0 million principal amount of
                                    Debentures.

Waiver of Interest Payments:        IP U.S. and IP Bermuda hereby waive the Company's obligation to pay
                                    the interest on the Debentures held by them due on June 30, 2001 and
                                    December 31, 2001 in cash as provided currently in the Debentures
                                    (the "IP Waiver").  Haverland hereby waives the Company's obligation
                                    to pay the interest on the Debentures held by him due on June 30,
                                    2001 and December 31, 2001 in cash as provided currently in the
                                    Debentures (the "Haverland Waiver").

Issuance of New Debentures:         In consideration of the IP Waiver, the Company agrees to issue, and
                                    is hereby deemed to have issued, to each of IP U.S. and IP Bermuda
                                    (i) a newly issued 12.5% Convertible Debenture due December 31, 2005
                                    in a principal amount equal to $1,816,962.41, in the case of IP
                                    U.S., and in a principal amount equal to $1,001,393.75, in the case
                                    of IP Bermuda, which amounts, in the aggregate, equal the entire
                                    amount of the interest payments that would have otherwise been paid
                                    in cash on the Debentures held by IP on June 30, 2001 but for the IP
                                    Waiver (less $15,657.54 which was overpaid to IP in the interest
                                    payment paid to IP on June 30, 2000) (together, the "IP June 30
                                    Interest New Debentures"), and (ii) a newly issued 12.5% Convertible
                                    Debenture due December 31, 2005 in a principal amount equal to
                                    $1,857,339.35, in the case of IP U.S., and in a principal amount
                                    equal to $1,023,646.95, in the case of IP Bermuda, which amounts, in
                                    the aggregate, equal the entire amount of the interest payments that
                                    would have otherwise been paid in cash on the Debentures held by IP
                                    on December 30, 2001 but for the IP Waiver (together, the "IP
                                    December 31 Interest New Debentures").

                                    In consideration of the Haverland Waiver, the Company agrees to
                                    issue, and is hereby deemed to have issued, to Haverland (i) a newly
                                    issued 12.5% Convertible Debenture due December 31, 2005 in a
                                    principal amount equal to $98,630.14, which amount equals the entire
                                    amount of the interest payment that would have otherwise been paid
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                                    in cash on the Debenture held by Haverland on June 30, 2001 but for
                                    the Haverland Waiver (less $547.94 which was overpaid to Haverland
                                    in the interest payment to him on June 30, 2000 on the Debenture
                                    held by him) (the "Haverland June 30 Interest New Debenture" and,
                                    collectively with the IP June 30 Interest New Debentures, the "June
                                    30 Interest New Debentures"), and (ii) a newly issued 12.5%
                                    Convertible Debenture due December 31, 2005 in a principal amount
                                    equal to $100,821.92, which amount equals the entire amount of the
                                    interest payment that would have otherwise been paid in cash on the
                                    Debenture held by Haverland on December 30, 2001 but for the
                                    Haverland Waiver (the "Haverland December 31 Interest New Debenture"
                                    and, collectively with the IP December 31 Interest New Debentures,
                                    the "December 31 Interest New Debentures"; and the June 30 Interest
                                    New Debentures and the December 31 Interest New Debentures,
                                    collectively, the "New Debentures").

                                    The Company hereby agrees that, by amplification and not in
                                    limitation of the foregoing, notwithstanding the fact that, as
                                    contemplated under "Further Documentation" below, the actual New
                                    Debentures will not be issued concurrently with the execution and
                                    delivery of this agreement, as of the date hereof and upon the
                                    execution and delivery of this agreement by the parties hereto, the
                                    Company shall unconditionally be obligated to IP and Haverland for
                                    the amount to be represented by the New Debentures to be issued to
                                    them as contemplated hereby and on the terms hereof as if the New
                                    Debentures had actually been issued to them concurrently with the
                                    execution and delivery of this agreement.  Furthermore, each of the
                                    Company, IP U.S., IP Bermuda and Haverland agree not to enter into
                                    any agreement or take (or agree to take) any action (whether
                                    voluntary or involuntary) that is inconsistent or in conflict in any
                                    material respect with, or will interfere with or impair, the
                                    practical realization of the rights granted to the parties in this
                                    agreement.

                                    In the event a Change of Control (as defined in the Debentures) of
                                    the Company is consummated prior to December 31, 2001, the principal
                                    amount of each New Debenture shall be reduced automatically to an
                                    amount equal to the amount of interest that would have otherwise
                                    accrued or been paid or payable on the applicable Debenture through
                                    the date on which Change of Control transaction is consummated but
                                    for the IP Waiver and the Haverland Waiver.

                                    The New Debentures shall be in the same form and shall have the same
                                    terms as those currently contained in the Debentures, except as set
                                    forth above and as follows (and for other changes necessary to
                                    conform to the following and the matters set forth above):

                                    (1)  Interest.  Interest on the June 30 Interest New Debentures
                                    shall not accrue prior to July 1, 2001, but, as of and after July 1,
                                    2001, interest on the June 30 Interest New Debentures shall accrue
                                    at 12.5% per annum and the interest payment thereon for all accrued
                                    and unpaid interest for the interest period commencing on July 1,
                                    2001 and ending on December 31, 2001 shall be paid on May 1, 2002
                                    and not December 31, 2001; and interest on the December 31 Interest
                                    New Debentures shall not accrue prior to
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                                    January 1, 2002, but, as of and after January 1, 2002, interest on the
                                    December 31 Interest New Debentures shall accrue at 12.5% per annum.

                                    (2)  Conversion.  The Vested Portion (as hereinafter defined) of the
                                    New Debentures shall be convertible into shares of the Company's
                                    Common Stock, at the option of the holder, at any time after the
                                    issuance of the New Debentures; "Vested Portion" shall mean (i) with
                                    respect to the June 30 Interest New Debentures, an amount equal to
                                    (x) (1) the number of calendar days that have elapsed through the
                                    date on which the June 30 Interest New Debenture that is being
                                    requested to be converted is deemed to have been converted (which
                                    shall be determined in a manner identical to the provisions therefor
                                    in Section 1(b) of the Debentures) during the period commencing on
                                    January 1, 2001 and ending on June 30, 2001 divided by (2) the
                                    number of calendar days in the period commencing on January 1, 2001
                                    and ending on June 30, 2001, multiplied by (y) the principal amount
                                    of the June 30 Interest New Debenture that is being requested to be
                                    converted; and (ii) with respect to the December 31 Interest New
                                    Debentures, an amount equal to (x)(1) the number of calendar days
                                    that have elapsed through the date on which the December 31 Interest
                                    New Debenture that is being requested to be converted is deemed to
                                    have been converted (which shall be determined in a manner identical
                                    to the provisions therefor in Section 1(b) of the Debentures) during
                                    the period commencing on July 1, 2001 and ending on December 31,
                                    2001 divided by (2) the number of calendar days in the period
                                    commencing on July 1, 2001 and ending on December 31, 2001,
                                    multiplied by (y) the principal amount of the December 31 Interest
                                    New Debenture that is being requested to be converted.

                                    (3)  Conversion Price.  The Conversion Price for the New Debentures
                                    shall be equal to $6.00 per share, subject to adjustment in
                                    circumstances identical to those set forth in the Debentures.

                                    (4)  Ranking.  The New Debentures shall rank on parity with the
                                    Debentures and be subordinate to the Senior Indebtedness (as defined
                                    in the Debentures) of the Company.

Further Documentation:              The Company and its counsel shall be responsible for preparing the
                                    New Debentures and other definitive documents (including, but not
                                    limited to, as contemplated under the paragraph below entitled
                                    "Registration Rights Agreement") further evidencing the matters
                                    agreed to herein, all of which shall be in form and substance
                                    reasonably acceptable to IP, Haverland, the Company and The Chase
                                    Manhattan Bank, as administrative agent under the Credit Agreement
                                    (as defined below).  The Company, IP and Haverland shall negotiate
                                    in good faith to arrive at mutually acceptable New Debentures and
                                    other definitive documents for approval, execution and delivery on
                                    the earliest reasonably practicable date.

Consents:                           The Company hereby represents to IP and Haverland, and IP and
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                                    Haverland, severally and not jointly, represent to the Company, that
                                    each such party has obtained all consents, authorizations and
                                    approvals necessary to enter into this agreement and to effect the
                                    transactions contemplated hereby, including, in the case of the
                                    Company, all consents required under that certain Credit Agreement,
                                    dated as of April 30, 1997 (as amended through the date hereof),
                                    among the Company, The Chase Manhattan Bank, as administrative
                                    agent, and the lenders party thereto (the "Credit Agreement"), and
                                    each such party has complied with all other legal or contractual
                                    requirements for or preconditions to the entering into of this
                                    agreement and the consummation of the transactions contemplated
                                    hereby, except, in any such case, where the failure to obtain any
                                    such consent, authorization or approval, or where any such
                                    noncompliance, would not materially and adversely affect the ability
                                    of the Company, IP U.S., IP Bermuda or Haverland, as the case may
                                    be, to consummate the transactions contemplated hereby.  The Company
                                    further represents and warrants to IP and Haverland that it has
                                    entered into a Seventh Amendment and Waiver to the Credit Agreement,
                                    a copy of which amendment is attached hereto as Exhibit A.

Other Representations:              Each of IP and Haverland, severally and not jointly, represents to
                                    the Company as follows: (i) each of IP U.S., IP Bermuda and
                                    Haverland is acquiring the New Debentures for its or his, as
                                    applicable, own account, for investment purposes and not with a
                                    present view to the distribution thereof; (ii) each of IP U.S., IP
                                    Bermuda and Haverland is an "accredited investor" (as that term is
                                    defined in Rule 501 of Regulation D under the Securities Act of
                                    1933) and, by reason of its or his, as applicable, business and
                                    financial experience, each of IP U.S., IP Bermuda and Haverland has
                                    such knowledge, sophistication and experience in business and
                                    financial matters as to be capable of evaluating the merits and
                                    risks of the prospective investment, is able to bear the economic
                                    risk of such investment and is able to afford a complete loss of
                                    such investment; (iii) each of IP U.S., IP Bermuda and Haverland
                                    understands that the acquisition of the New Debentures involves
                                    substantial risk; and (iv) each of IP U.S., IP Bermuda and Haverland
                                    has experience as an investor in securities of companies and
                                    acknowledges that it or he, as applicable, is able to fend for
                                    itself, can bear the economic risk of its or his, as applicable,
                                    investment in the Company and has such knowledge and experience in
                                    financial or business matters that it or he, as applicable, is
                                    capable of evaluating the merits and risks of this investment in the
                                    Company and protecting its or his, as applicable, own interests in
                                    connection with this investment.

                                    In reliance in part of the representations made by IP U.S., IP
                                    Bermuda and Haverland above, the Company represents to IP and
                                    Haverland that the issuance of the New Debentures as provided herein
                                    is exempt from the registration requirements of the Securities Act
                                    of 1933 and all applicable state securities laws, and is otherwise
                                    in compliance with such laws.

                                    The Company represents to IP and Haverland that the issuance of the
                                    New Debentures and of the shares of the Company's Common Stock upon
                                    conversion of the New Debentures has been duly authorized by
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                                    the Company.  The Company represents to IP and Haverland that it has
                                    duly reserved a sufficient number of shares of its Common Stock for
                                    issuance upon any such conversion.

                                    Each of the Company, on the one hand, and IP U.S. and IP Bermuda, on
                                    the other hand, represent to each other that it is a corporation or
                                    partnership, as applicable, validly existing and in good standing
                                    under the laws of its jurisdiction of organization.

Management Debentures:              The Company will in good faith use its commercially reasonable best
                                    efforts to enter into an agreement with each present member of the
                                    Company's management who holds Debentures to similarly agree to the
                                    matters agreed to and contemplated herein with respect to their
                                    Debentures.  The Company will in good faith use reasonable efforts
                                    to enter into an agreement with as many other holders of Debentures
                                    as reasonably practicable, pursuant to which such holders would
                                    similarly agree to the matters agreed to and contemplated herein
                                    with respect to their Debentures.

Expenses:                           The Company shall reimburse IP for all of its expenses (including,
                                    but not limited to, reasonable fees and expenses of counsel,
                                    accountants and consultants) in connection with its considering and
                                    participating in the transactions contemplated hereby, which amount
                                    shall not exceed $25,000 and shall be payable upon the execution of
                                    the New Debentures and the definitive documentation referred to
                                    above.

Registration Rights Agreement:      To the extent IP in its reasonable discretion deems it necessary,
                                    the existing Registration Rights Agreement to which the Company and
                                    IP are parties shall be amended as promptly as practicable to
                                    appropriately account for transactions contemplated hereby and the
                                    issuance of the New Debentures, to the same extent that IP's
                                    ownership of the Debentures is contemplated thereunder, including to
                                    cover thereunder as "registrable securities" the shares of the
                                    Company's Common Stock issuable upon conversion of the New
                                    Debentures.

Binding Obligation:                 Upon execution of this agreement by the Company, IP U.S., IP Bermuda
                                    and Haverland or counterparts hereof, this agreement will constitute
                                    the legally binding and enforceable agreement of (i) the Company, on
                                    the one hand, and IP U.S. and IP Bermuda, on the other hand, and
                                    (ii) the Company and Haverland (in consideration of their respective
                                    mutual undertakings as to the matters described herein and for other
                                    good and valuable consideration, the receipt and adequacy of which
                                    is hereby acknowledged).

                                    The Company herby represents to IP, and IP and Haverland, severally
                                    and not jointly, represent to the Company, that this agreement has
                                    been duly executed by each such party, and, assuming the due
                                    authorization, execution and delivery by the other parties, this
                                    agreement constitutes the legal, valid and binding obligation of the
                                    Company, IP U.S., IP Bermuda and Haverland, as applicable,
                                    enforceable against each such party in accordance with the terms
                                    hereof, subject to applicable bankruptcy, insolvency, fraudulent
                                    conveyance, reorganization, moratorium and similar rights affecting
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                                    creditors' rights and remedies generally, and subject, as to
                                    enforceability, to general principles of equity.

Governing Law:                      This agreement shall be governed by and construed in accordance with
                                    the laws of the State of New York without regard to conflicts of law
                                    principles thereof.

Counterparts:                       This agreement may be executed in counterparts, each of which shall
                                    be deemed an original, but all of which together shall constitute
                                    one and the same instrument.

Miscellaneous:                      Nothing in this agreement shall create and be deemed to create any
                                    third-party beneficiary rights in any person not a party to this
                                    agreement, except for The Chase Manhattan Bank with respect to the
                                    matters set forth in the first sentence under "Further
                                    Documentation" above.

                                    This agreement shall be binding upon and shall inure to the benefit
                                    of the parties hereto and their respective successors and assigns.

                                    Without the prior written consent of The Chase Manhattan Bank, as
                                    administrative agent under the Credit Agreement, which consent shall
                                    not be unreasonably withheld, this agreement may not be amended,
                                    modified or terminated nor may any provision hereof be waived.

                                    [Signatures on following page.]
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Acknowledged and agreed as of April 13, 2001.

                           HIGHLANDS INSURANCE GROUP, INC.

                           By:
                              --------------------------------------
                              Name:
                              Title:

                           INSURANCE PARTNERS, L.P.

                           By:  Insurance GenPar MGP, L.P.,
                                its general partner

                              By:  Insurance GenPar MGP, Inc.
                                   its general partner

                                 By:
                                    --------------------------------------
                                    Name:
                                    Title:

                           INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P.

                           By: Insurance GenPar (Bermuda),
                               L.P., its general partner

                              By:  Insurance GenPar (Bermuda)
                                   Inc., its general partner

                                 By:
                                    --------------------------------------
                                    Name:
                                    Title:

                              ____________________________________
                              Richard M. Haverland

[Signature page to Waiver Agreement, dated as of April 13, 2001, among Highlands
Insurance Group, Inc., Insurance Partners, L.P., Insurance Partners Offshore
(Bermuda), L.P. and Richard M. Haverland.]

                              [Exhibit A Omitted]

                                       7<PAGE>

                                                                   EXHIBIT 10.19

                              Employment Agreement

     THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 1st
day of January 2000, between Highlands Insurance Group, Inc., a Delaware
corporation (the "Company") and John W. Cowley ("Employee").

     WHEREAS, it is the mutual desire of the Company and Employee that the
Company employ Employee on the terms and conditions described in this Agreement.

     Now, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth and for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties hereto agree as
follows:

     1.  Employment.  The Company hereby employs Employee for the Employment
         ----------
Period specified in Section 2 below as Executive Vice President - Operations of
the Company's insurance subsidiaries.  Employee hereby accepts such employment
and agrees to diligently and to the best of Employee's abilities perform the
duties and services appropriate to such position and to devote his full business
time and efforts to the performance of the duties of such position, which shall
include, but not be limited to, managing the Company's insurance operations.
Employee further agrees to at all times comply with and be subject to the
policies and procedures the Company may establish from time to time, so long as
such policies and procedures do not violate any applicable laws or regulations.

     2.  Employment Period.  The period of Employee's employment under this
         -----------------
Agreement (the "Employment Period") shall commence on January 1, 2000 and shall
end upon the earlier of (i) the date three months following receipt by Employee
of written notice of termination of the Employment Period from the Company (but
in no event earlier than the third anniversary of this Agreement) or (ii) the
termination of the Employment Period pursuant to Section 6 below.  On each
anniversary date of this Agreement, the parties may agree to extend the
Employment Period for an additional one year period.

     3.   Compensation.
          ------------

          (a)  As compensation for all services rendered and to be rendered by
Employee pursuant to this Agreement, the Company agrees to pay Employee:

               (i)  during the Employment Period, an annual salary (the "Base
     Annual Salary") of $250,000 and

               (ii) an annual incentive of up to 75% of Employee's Base Annual
     Salary based on the performance of the Company as measured by the
     achievement of specified performance objectives.  The objectives will be
     determined by the Chief Executive Officer of the Company in his sole
     discretion.  Any bonuses shall be payable in accordance with the Company's
     current practice for all key executives under its Management Incentive Plan
     ("MIP").  Exhibit A is a summary of  the MIP.

          (b)  The Base Annual Salary shall be reviewed no less frequently than
annually by the Chief Executive Officer and may be increased by the Chief
Executive Officer in his sole discretion. The Base Annual Salary shall accrue
and be payable in accordance with the payroll practices of the Company as in
effect from time to time.

     4.  Other Employment Benefits.
         -------------------------

          (a) During the Employment Period, Employee shall be entitled to such
other benefits as are customarily accorded the executives of the Company,
including, without limitation, the right to participate in employee benefit
programs maintained by the Company, including a health and life insurance
program and
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disability and retirement plans, provided, that nothing contained herein shall
be construed to require the Company to establish or maintain any policy or
program.  The Employee will be entitled to four weeks vacation annually.

          (b) The Company shall grant Employee an option under the Company's
1995 Stock Option Plan exercisable for 50,000 shares of common stock, par value
of $0.01 per share, of the Company's Common Stock ("Common Stock").  Such option
shall (i) have an exercise price per share equal to the closing price of the
Common Stock on the New York Stock Exchange on the business date designated by
the Board of Directors, (ii) vest in three equal annual installments commencing
on the first anniversary of this Agreement, (iii) fully vest on a change of
control of the Company, or the death or termination by reason of disability of
Employee, the termination of Employee without Cause, or the voluntary
termination by Employee for Good Reason, and  (iv) expire on the tenth
anniversary of this Agreement.  The Company agrees to use reasonable efforts to
register the sale by Employee of the shares of Common Stock issuable upon
exercise of such options under the Securities Act of 1933, as amended.

          (c) Employee will be eligible to participate in the Company's
Restricted Stock Plan, with a base price equal to the price of the Common Stock
purchased from the Company.  If Employee retires, is terminated by reason of
death or disability, is terminated without Cause or voluntarily terminates for
Good Reason after the three-year period specified in paragraph 6(d) of the Plan,
his Restricted Shares will not be forfeited on account of such retirement or
termination.

     5.   Relocation Expenses.  Upon submission of expense vouchers and
          -------------------
corresponding receipts and related documentation in accordance with Company
policies, the Company shall promptly reimburse Employee for reasonable expenses
incurred by Employee in connection with the relocation of Employee from his
Florida home to one proximate to the executive offices of the Company in
Lawrenceville, New Jersey.  Reimbursable relocation expenses shall include
expenses for movement and temporary storage of household goods, real estate
commissions and closing costs.  The Company agrees to reimburse Employee for up
to 60 days temporary living expenses, such amount to be adjusted for its income
tax consequences.  In addition, the Company shall pay the Employee an amount
equal to one-twelfth of the Base Annual Salary to cover incremental relocation
expenses.  Expenses to be reimbursed under this Section must be incurred by the
Employee and submitted to the Company for reimbursement by December 31, 2000.

     6.   Termination.  The Employment Period may be terminated pursuant to any
          -----------
one or more of the following provisions:

          (a) The Employment Period may be terminated at any time by the Company
by written notice to Employee or by Employee by written notice to the Company.
Upon such termination, all of Employee's rights under Sections 3, 4, and 5 above
shall immediately terminate, except that the Company will pay to Employee all
amounts accrued in respect of periods prior to such termination.  If such
termination (i) is by the Company without Cause (as hereinafter defined) or by
the Employee with Good Reason (as hereinafter defined) and (ii) is other than
the result of Employee's death or Disability (as hereinafter defined), the
Company shall pay to Employee severance pay during the Severance Period (as
hereinafter defined) in an amount equal to the amount of salary and pro rated
portion of any bonus that would otherwise be payable to Employee under this
Agreement (assuming that the Base Term (as hereinafter defined) were extended,
if necessary, so as to end concurrently with the end of the Severance Period),
based upon the Base Annual Salary and the bonus terms in effect on the date of
such termination ("Severance Payments").  Such Severance Payments shall be
payable in installments during the Severance Period on the same basis as salary
and bonus would be otherwise be payable to Employee during the Base Term.  In
addition, Employee shall be entitled to all benefits accorded by Section 4(a) so
along as Employee is eligible to receive Severance Payments.  The term
"Severance Period" shall mean a period of time equal to the greater of (i) one
year or (ii) the period commencing on the date of Employee's termination of
employment with the Company and ending on the last day of the Base Term.  The
term "Base Term" shall mean the period from the date hereof to and including the
third anniversary of this Agreement or any extension thereof.

          (b) The term "Cause" shall mean (i) fraud, dishonesty, or similar
willful misconduct on the part of Employee, (ii) a material breach by Employee
of any of his representations or obligations under this Agreement (provided that
Employee shall first be notified of an be given a reasonable opportunity to cure
such breach), (iii) gross negligence by Employee in the performance of the
services contemplated by this Agreement, or (iv) conviction of Employee (or the
entering of a plea of guilty, nolo contendere, or request for deferred
<PAGE>

adjudication) for fraud, misappropriation, embezzlement, financial misconduct,
any felony, or any lesser criminal offense which carries a potential penalty of
imprisonment for a term of one year or more and/or a fine of $25,000 or more,
whether or not a lesser penalty or fine is assessed.  The term "Good Reason"
shall mean, without Employee's written consent, (i) any reduction in the amount
of Employee's Base Annual Salary, (ii) any material reduction in Employee's
title, duties, or responsibilities with the Company's insurance subsidiaries,
(iii) the failure of the Board of Directors to discharge an employee of the
Company, at the request of Employee, for an act that would constitute "Cause"
under clause (i), (iii) or (iv) of the immediately prior sentence, or (iv) a
material breach by the Company of its obligations under this Agreement.
Notwithstanding the foregoing sentence, the occurrence of any of the events
described in the foregoing sentence will not constitute Good Reason unless
Employee gives the Company written notice that such event constitutes Good
Reasons, and the Company thereafter fails to cure the event within 30 days after
receipt of such notice.

          (c) If employee shall terminate his employment with the Company
without Good Reason or shall die during the Employment Period, the Employment
Period shall terminate as of the date of such termination, all of Employee's
rights under Sections 3, 4 (other than subsections 4(b) and 4(c)), and 5 above
shall immediately terminate, and the Company shall pay to Employee or Employee's
estate or legal representative only the amount of salary and pro rated portion
of any bonus accrued to Employee under this Agreement through the date of such
termination without Good Reason or death.

          (d) If Employee is unable to discharge his duties hereunder for a
period of four consecutive months, or for a total of six months in any 12-month
period, by reason of physical or mental illness, injury, or incapacity
("Disability"), the Company may, by written notice to Employee, terminate the
Employment Period.  In such case, all of Employee's rights under Sections 3, 4
(other than subsections 4(b) and 4(c)), and 5 above shall immediately terminate,
and the Company shall pay to Employee only the amount of salary and pro rated
portion of any bonus accrued to Employee under this Agreement through the date
of such termination.  During any such period in which Employee is unable to
discharge his duties hereunder, Employee's Base Annual Salary shall be reduced
by the amount of any Company sponsored disability benefits paid to Employee
during such period.

          (e) The Severance Payments paid to Employee shall be in consideration
of Employee's continuing obligations hereunder after such termination
(including, without limitation, or Employee's obligations under Section 10
hereof).  Employee's rights under this Section 6(e) are Employee's sole and
exclusive rights against the Company or its affiliates under this Agreement and
the Company's sole and exclusive liability to Employee under this Agreement, for
the termination of his Employment relationship with the Company.  Employee
covenants not to sue or lodge any claim, demand or cause of action against the
Company based upon Employee's termination of employment under this Agreement for
any moneys other than those specified in Section 6(a).   If Employee breaches
this covenant, the Company shall be entitled to recover from Employee all sums
expended by the Company (including costs and attorneys' fees) in connection with
such suit claim demand or cause of action.  Nothing contained in Section 6 shall
be construed to be a waiver by Employee of any benefits accrued for or due
Employee through the date of termination of Employee's employment under any
employee benefit plan (as such term is defined in the Employees' Retirement
Income Security Act of 1974, as amended) maintained by the Company.

     7.   Representations by Employee.  Employee hereby represents and warrants
          ---------------------------
to the Company that (a) Employee's execution and delivery of this Agreement and
his performance of his duties and obligations hereunder will not conflict with,
or cause a default under, or give any party a right to damages under, or to
terminate, any other agreement to which Employee is a party or by which he is
bound, and (b) there are no restrictions, agreements, or understandings that
would make unlawful Employee's execution or delivery of this Agreement or his
employment hereunder.

     8.   Arbitration.
          -----------

          (a) Any controversy or claim arising out or relating to this
Agreement, or the breach thereof, shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association
("AAA"), and judgment on the award rendered by the arbitrator(s) may be entered
in any court having jurisdiction thereof.  Any arbitration brought under the
terms of this Agreement shall be conducted in the manner set forth in this
Section 8.
<PAGE>

          (b) In accordance with the rules of the AAA, each of the parties
hereto shall appoint one person as an arbitrator.  The two arbitrators so chosen
shall select a third impartial arbitrator within ten (10) days of the date on
which the second arbitrator is selected.  The three arbitrators shall determine
all questions presented to them by majority vote.  The decision of a majority of
the arbitrators shall be final and conclusive on the parties hereto.

          (c) The arbitration hearing shall be held at a location to be
determined by the parties hereto in good faith in Mercer County, New Jersey.

          (d) The parties agree that, subject to the rulings and scheduling of
the arbitrators, the following time limitations shall govern the arbitration
proceedings conducted under the terms of this Agreement.

               (i) Any demand for arbitration must be filed within a reasonable
     time following the date on which the dispute arises or the alleged breach
     occurs.

               (ii) Each party must select an arbitrator within thirty (30) days
     of receipt of notice that an arbitration proceeding has commenced.  In the
     event that no such selection is made, the arbitrator selected by the other
     party may conduct the arbitration proceeding without selecting any other
     arbitrator.

               (iii)  The hearing must be held within thirty (30) days of the
     date on which the third arbitrator is selected or the single arbitrator is
     selected pursuant to (ii) above.

          (e) Costs of arbitration hereunder shall be borne by the Company.
Unless the arbitrators determine that Employee did not have a reasonable basis
for asserting his position with respect to the dispute in questions, the Company
shall also reimburse Employee for his reasonable attorneys' fees incurred with
respect to any arbitration.  Pending the resolution of any arbitration or court
proceeding, the Company shall continue payment of all amounts due Employee under
this Agreement and all benefits to which Employee is entitled at the time such
dispute arises (other than the amounts which are the subject of such dispute).

     9.  Taxes and Other Deductions.  The Company shall have the right to deduct
         --------------------------
from any compensation paid to Employee or his estate or legal representative
under this Agreement all taxes and other amounts which may be required to be
deducted or withheld by law (including, without limitation, income tax
withholding and social security payments), whether such laws are now in effect
or become effective after the date of this Agreement.

     10.  Noncompetition; Confidentiality
          -------------------------------

          (a) During Employee's employment with the Company and for an
additional period of two years immediately following Employee's employment with
the Company (the "Restriction Period"), Employee shall not, directly or
indirectly, (i) solicit any employee of the Company or its affiliates to
terminate his or her employment with the Company or its affiliates or (ii) call
upon or solicit, with the intent to divert or take away, or attempt to call upon
or solicit, with the intent to divert or take away, or divert or take away, any
clients, policyholders, agents, customers, or accounts of the Company or its
affiliates.

          (b) During and after Employee's employment with the Company, Employee
shall not use for his personal benefit, or disclose, communicate, or divulge to,
or use for the direct or indirect benefit of any person, firm, association, or
company other than the Company, any Confidential Information. "Confidential
Information" means information relating to the processes, products, services,
customers, agents, or operations of the Company or any subsidiary thereof that
is not generally known, is proprietary to the Company or such subsidiary and is
made known to Employee or learned or acquired by Employee while in the employ of
the Company. However, Confidential Information shall not include under any
circumstances any information with respect to the foregoing matters that becomes
publicly available through no fault of Employee. All materials or articles of
information of any kind furnished to Employee by the Company or developed by
Employee in the course of his employment hereunder are and shall remain the sole
property of the Company; and if the Company requests the return of such
information at any time during, upon, or after the termination of Employee's
employment, Employee shall immediately deliver the same to the Company.
<PAGE>

          (c) Employee acknowledges that, in view of the nature of the business
in which the Company is engaged, the restrictions contained in Section 10(a) and
10(b) above (the "Restrictions") are reasonable and necessary in order to
protect the legitimate interests of the Company, and that any violation thereof
would result in irreparable injuries to the Company, and Employee therefore
further acknowledges that, in the event Employee violates, or threatens to
violate, any of such Restrictions, the Company shall be entitled to obtain from
any court of competent jurisdiction, without the posting of any bond or other
security, preliminary and permanent injunctive relief as well as damages and an
equitable accounting of all earnings, profits, and other benefits arising from
such violation, which rights shall be cumulative and in addition to any other
rights or remedies in law or equity to which the Company may be entitled.

          (d) If any Restriction, or any part thereof, shall be determined in
any judicial or administrative proceeding to be invalid or unenforceable, the
remainder of the Restrictions shall not thereby be affected and shall be given
full effect, without regard to the invalid provisions.  If the period of time or
the area specified in the Restrictions shall be determined in any judicial or
administrative proceeding to be unreasonable, then the court or administrative
body shall have the power to reduce the period of time or the area covered and,
in its reduced form, such provisions shall then be enforceable and shall be
enforced.

          (e) If Employee violates any of the Restrictions, the applicable
restrictive period shall be tolled from the time of the Commencement of any such
violation until such time as such violation shall be cured by Employee to the
reasonable satisfaction of the Company.

          (f) Employee may not engage, directly or indirectly, in any other
business, investment, or activity which (i) substantially interferes with
Employee's performance of his duties hereunder (ii) is contrary to the best
interests of the Company, or (iii) requires such portion of Employee's business
time as to render compliance with Section 1 impracticable. In that regard,
subject to Section 10(g), Employee may serve on the board of directors (or
comparable controlling body) of corporations or other legal entities of
Employee's choice so long as service on any such board or controlling body does
not constitute a violation of federal or state statutory provisions, or related
rules and regulations pertaining to interlocking directorships, and the meeting
times of such boards or controlling bodies do not materially conflict with the
meeting times of the Board of Directors. Employee acknowledges and agrees that
Employee owes certain duties to the Company under applicable law and agrees to
do not act which would intentionally injure the Company's business, interests,
or reputation. In keeping with Employee's fiduciary duties to the Company,
Employee agrees that Employee shall not knowingly become involved in a conflict
of interest with the Company, or upon discovery thereof, allow such a conflict
to continue. Moreover, Employee agrees that Employee shall disclose to the Audit
Committee of the Board of Directors any facts which might reasonably be expected
to involve a conflict of interest with the Company.

          (g) Employee may not serve on the Board of Directors of any entity
other than the Company or its affiliates during the term of this Agreement
without the approval of the Chief Executive Officer in accordance with the
Company's policies and procedures regarding such service.

     11.  Notices.  Any notice or communication given pursuant to this Agreement
          -------
must be in writing and (a) delivered personally, (b) sent by telefacsimile or
other similar facsimile transmission, (c) delivered by overnight express, or (d)
sent by registered or certified mail, postage prepaid, as follows:

                          (i)  If to Employee:

                                  John W. Cowley
                                  1000 Lenox Drive
                                  Lawrenceville, NJ  08648-0426
                                  Facsimile Number:  (609) 219-1774
<PAGE>

                          (ii)  If to the Company:

                                  Highlands Insurance Group, Inc.
                                  1000 Lenox Drive
                                  Lawrenceville, NJ  08648-0426
                                  Attention:  General Counsel
                                  Facsimile Number:  (609) 219-1774

All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Section will (A) if delivered personally
or by overnight express, be deemed given upon delivery; (B) if delivered by
telefacsimile or similar facsimile transmission, be deemed given when
electronically confirmed; and (C) if sent by registered or certified mail, be
deemed given when received.  Any party from time to time may change its address
for the purpose of notices to that party by giving a similar notice specifying a
new address, but no such notice will be deemed to have been given until it is
actually received by the party sought to be charged with the contents thereof.

     12.  Entire Agreement.  This Agreement, and the plans referenced in this
          ----------------
Agreement, constitute the entire agreement between the parties hereto with
respect to the subject matter hereof and (other than as to the employee benefit
plans and practices of the Company) supersedes all prior communications,
agreements, understandings, representations, and warranties, whether oral or
written, between the parties hereto with respect to the subject matter hereof.
Other than the employee benefit plans and practices of the Company, there are no
oral or written agreements, understandings, representations, or warranties
between the parties hereto with respect to the subject matter hereof other than
those set forth in this Agreement.

     13.  Assignment and Amendment of Agreement.  This Agreement will be binding
          -------------------------------------
upon the parties hereto and their respective successors and permitted assignees.
Because Employee's duties and services hereunder are special, personal and
unique in nature, Employee may not transfer, sell or otherwise assign his
rights, obligations or benefits under this Agreement.  This Agreement may be
modified or amended only by a writing duly executed on behalf of each party
hereto.

     14.  Governing Law.  This Agreement will be governed by and construed and
          -------------
enforced in accordance with the Laws of the State of New Jersey (without regard
to the principles of conflicts of law) applicable to a contract executed and to
be performed in such state.

     15.  No Third Party Rights.  Except as specifically provided in this
          ---------------------
Agreement, this Agreement is not intended and may not be construed to create any
rights (including third party beneficiary rights) in any parties other than
Employee and the Company, and their respective successors and permitted
assignees.

     16.  Headings, Gender, etc.  The headings used in this Agreement have been
          ----------------------
inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement.  Unless the context of this
Agreement otherwise requires, (a) words of any gender will be deemed to include
each other gender, (b) words using the singular or plural number also will
include the plural or singular number, respectively, (c) the terms "hereof,"
"herein", "hereby," hereunder," "hereto," and derivative or similar words will
refer to this entire Agreement, (d) the terms "Article" or "Section" will refer
to the specified Article or Section of this Agreement, and (e) the conjunction
"or" will denote any one or more, or any combination or all, of the specified
items or matters involved in the applicable list.

     17.  Waiver and Remedies.  Any term or condition of this Agreement may be
          -------------------
waived at any time by the party that is entitled to the benefit thereof.  Any
such waiver will be in writing and will be executed by such party.  A waiver on
one occasion will not be deemed to be a waiver of the same or any other breach
on a future occasion.  All remedies, either under this Agreement, or by law or
otherwise afforded, will be cumulative and not alternative.

     18.  Invalid Provisions.  Subject to the provisions of Section 10(d)
          ------------------
above, if any provision of this Agreement is held to be illegal, invalid, or
unenforceable under any present or future law, and if the rights or obligations
of any party hereto under this Agreement will not be materially and adversely
affective thereby, (a) such
<PAGE>

provision will be fully severable, (b) this Agreement will be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part hereof, (c) the remaining provisions of the Agreement will
remain in full force and effect and will not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom, and (d) in
lieu of such illegal, invalid, or unenforceable provision, there will be added
automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible.

     19.  Counterparts.  This Agreement may be executed simultaneously in one or
          ------------
more counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.

          IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement as of the day and year first above written.

COMPANY:                              HIGHLANDS INSURANCE GROUP, INC.

                              By:     __________________________________________
                                      Willis T. King, Jr.
                                      Chief Executive Officer

EMPLOYEE:                     __________________________________________
                                           John W. Cowley

                              [Exhibit A Omitted]

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