EX-10 10 exhibit10-10.txt EXHIBIT 10.10 PENN-AMERICA INSURANCE COMPANY PENN-STAR INSURANCE COMPANY PENN-PATRIOT INSURANCE COMPANY Hatboro, Pennsylvania and any additional company established or acquired by the Company property catastrophe SECOND REINSTATEMENT EXCESS OF LOSS REINSURANCE contract PREPARED BY WILLIS RE INC. PENN-AMERICA INSURANCE COMPANY PENN-STAR INSURANCE COMPANY PENN-PATRIOT INSURANCE COMPANY Hatboro, Pennsylvania property catastrophe SECOND REINSTATEMENT excess of loss REINSURANCE contract Reinsurer Contract Participation --------- ---------------------- 36880-004 --------- Everest Reinsurance Company 100.00% Total 100.00% TABLE OF CONTENTS ARTICLE PAGE ------- ---- I BUSINESS COVERED 1 II TERM 1 III SPECIAL TERMINATION 2 IV DEFINITIONS 2 Declaratory Judgment Expense 2 Gross Net Written Premium Income 3 Loss Adjustment Expense 3 Loss Occurrence 3 Policy or Policies 5 Ultimate Net Loss 5 V TERRITORY 5 VI EXCLUSIONS 5 VII AMOUNT OF COVERAGE AND RETENTION 7 VIII PREMIUM 7 IX NOTICE OF LOSS AND LOSS SETTLEMENTS 7 X AGENCY AGREEMENT 8 XI SALVAGE AND SUBROGATION 8 XII ERRORS AND OMISSIONS 8 XIII OFFSET 8 XIV CURRENCY 9 XV TAXES 9 XVI FEDERAL EXCISE TAX 9 XVII UNAUTHORIZED REINSURANCE 9 XVIII NET RETAINED LIABILITY 11 XIX OTHER REINSURANCE 11 XX THIRD PARTY RIGHTS 12 XXI SEVERABILITY 12 XXII GOVERNING LAW 12 XXIII ACCESS TO RECORDS 12 XXIV CONFIDENTIALITY 12 XXV INSOLVENCY 13 XXVI BINDING ARBITRATION 13 XXVII SERVICE OF SUIT 14 XXVIII INTERMEDIARY 15 Pools, Associations & Syndicates Exclusion Clause Insolvency Funds Exclusions Clause War Exclusion Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A. Terrorism Exclusion Clause PROPERTY CATASTROPHE SECOND REINSTATEMENT excess of loss reinsurance contract (the "Contract") between PENN-AMERICA INSURANCE COMPANY PENN-STAR INSURANCE COMPANY PENN-PATRIOT INSURANCE COMPANY Hatboro, Pennsylvania and any additional company established or acquired by the Company (the "Company") and THE SUBSCRIBING REINSURER(S) EXECUTING THE INTERESTS AND LIABILITIES AGREEMENT(S) ATTACHED HERETO (the "Reinsurer") ARTICLE I --------- BUSINESS COVERED ---------------- By this Contract the Reinsurer agrees to reinsure the liability of the Company under its Policy or Policies in force at the effective time and date hereof or issued or renewed at or after the effective time and date, and classified by the Company as Property business, including but not limited to Fire and Allied Lines; Inland Marine; Commercial Multiple Peril (Property Coverages only); Businessowners (Property Coverages only); and Commercial and Private Passenger Automobile Physical Damage (excluding Collision but including Garagekeepers and Garage Physical Damage Coverages only), subject to the terms, conditions and limitations hereafter set forth. ARTICLE II ---------- TERM ---- A. This Contract shall become effective at 12:01 a.m., Eastern Daylight Time, September 28, 2004, as respects losses occurring at or after that time and date, and shall continue in effect until 12:01 a.m., Eastern Standard Time, January 1, 2005. B. If this Contract expires or is terminated while a Loss Occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire Loss Occurrence had occurred prior to the Page 1 expiration or termination of this Contract, provided that no part of that Loss Occurrence is claimed against any renewal or replacement of this Contract. ARTICLE III ----------- SPECIAL TERMINATION ------------------- A. The Company may terminate this Contract at any time by the giving of 10 days' notice in writing to the Reinsurer upon the happening of any one of the following circumstances: 1. A State Insurance Department or other legal authority orders the Reinsurer to cease writing business; or 2. The Reinsurer has become insolvent or has been placed into liquidation or receivership (whether voluntary or involuntary), or there has been instituted against it proceedings for the appointment of a receiver, liquidator, rehabilitator, conservator, trustee in bankruptcy or other agent known by whatever name, to take possession of its assets or control of its operations; or 3. The Reinsurer's policyholders' surplus has been reduced by whichever is greater, either 25% of the amount of surplus at the inception of this Contract or 25% of the amount at the latest anniversary, or has lost any part of, or has reduced its paid in capital; or 4. The Reinsurer has become merged with, acquired or controlled by any company, corporation or individual(s) not controlling the party's operations at the inception of this Contract; or 5. The Reinsurer has reinsured its entire liability under this Contract without the terminating party's prior written consent; or 6. The Reinsurer ceases writing new or renewal business. B. Notwithstanding any other termination provision of this Contract, if this Contract is terminated under the provisions of this Article, the Company shall have the right to terminate liability for losses occurring subsequent to termination of this Contract. In such event, the Reinsurer shall return the unearned portion, if any, less any commission allowed thereon, of premiums paid hereunder and the minimum premium provisions, if any, shall be waived. ARTICLE IV ---------- DEFINITIONS ----------- A. Declaratory Judgment Expense "Declaratory Judgment Expense" as used herein shall mean all expenses incurred by the Company in connection with a declaratory judgment action brought to determine the Page 2 Company's defense and/or indemnification obligations that are allocable to a specific claim subject to this Contract. Declaratory Judgment Expense shall be deemed to have been incurred on the date of the original loss (if any) giving rise to the declaratory judgment action. B. Gross Net Written Premium Income "Gross Net Written Premium Income" as used herein shall be defined as gross written premiums plus any additional premiums and less any cancellations and return premiums on the Policies reinsured hereunder, and less premiums paid for reinsurances, recoveries under which inure to the benefit of this Contract. C. Loss Adjustment Expense "Loss Adjustment Expense" as used herein shall mean all costs and expenses allocable to a specific claim that are incurred by the Company in the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of specific claims covered under the Policies reinsured hereunder, including court costs and costs of supersedeas and appeal bonds, and including a) pre-judgment interest, unless included as part of the award or judgment; b) post-judgment interest; c) legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including Declaratory Judgment Expense (as defined herein); and d) a pro rata share of salaries and expenses of Company field employees, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract. Loss Adjustment Expense does not include unallocated loss adjustment expense. Unallocated loss adjustment expense includes, but is not limited to, salaries and expenses of employees, other than (d) above, and office and other overhead expenses. D. Loss Occurrence "Loss Occurrence" as used herein shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss, or series of disasters, accidents or losses arising out of one event, which occurs anywhere in the world but limited in the United States of America and the Dominion of Canada to within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. The duration and extent of any one Loss Occurrence shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event. The term "Loss Occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period Page 3 of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an insured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's Loss Occurrence. 4. As regards "Freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company's Loss Occurrence. 5. As regards "Cyberrisk," losses arising, directly or indirectly, out of: a. the use or misuse of the Internet or similar facility; b. any electronic transmission of data or other information; c. any malicious code, that goes by the name computer virus, worm, logic bomb, or Trojan horse; d. the use or misuse of any Internet address, Website or similar facility; or e. any data or other information posted on a Website or similar facility; do not in and of themselves constitute an event unless arising out of one or more of the following perils: fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, collapse, flood, freeze, ice or weight of snow. For all Loss Occurrences, except as referred to under sub-paragraph 2 above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident, or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event, except for those Loss Occurrences referred to in sub-paragraph 1 above, where only one such period of 72 consecutive hours shall apply with respect to one event, regardless of the duration of the event. As respect those Loss Occurrences referred to in sub-paragraph 2 above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident, or loss into two or more Loss Occurrences, provided no two periods overlap and no individual loss is included in more Page 4 than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any Loss Occurrence claimed under the 168 hours provision. E. Policy or Policies "Policy" or "Policies" as used herein shall mean all binders, policies, and contracts of insurance or reinsurance which are issued by or on behalf of the Company, all as respects the business covered under this Contract, as set forth in the BUSINESS COVERED ARTICLE. F. Ultimate Net Loss "Ultimate Net Loss" as used herein shall mean the actual loss, including pre-judgment interest which is included as part of the award or judgment, Loss Adjustment Expense, which amounts are paid or to be paid by the Company on its net retained liability after making deductions for all recoveries, salvages, subrogations and all claims on inuring reinsurance, whether collectible or not; provided, however, that, in the event of the insolvency of the Company, payment by the Reinsurer shall be made in accordance with the provisions of the INSOLVENCY ARTICLE. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's Ultimate Net Loss has been ascertained. ARTICLE V --------- TERRITORY --------- The territorial limits of this Contract shall be identical with those of the Company's Policies. ARTICLE vI ---------- EXCLUSIONS ---------- The following shall be excluded from the scope of this Contract: A. Assumed treaty reinsurance other than: (1) Reinsurance from the Company's affiliated companies (i.e., companies which are under common management or common ownership of the Company), (2) Local agency reinsurance on a share basis accepted in the normal course of business, (3) Reinsurance assumed from State and County Mutuals; Page 5 B. Pools, Associations and Syndicates pursuant to the "Pools, Associations and Syndicates Exclusion Clause," attached hereto; C. Insolvency Funds pursuant to the "Insolvency Fund Exclusion Clause," attached hereto; D. War Risks pursuant to the "War Exclusion Clause," attached hereto; E. Loss, damage, cost, and/or expense attributable to any Act or Acts of Terrorism as certified by the Secretary of the Treasury and the Attorney General as defined in and excluded by the Terrorism Exclusion Clause attached hereto. F. Nuclear, Biological and Chemical Terrorism losses as excluded under the Terrorism Exclusion Clause attached hereto. G. Nuclear Incident pursuant to the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A.," attached hereto; H. Earthquake Insurance when written as such. I. Losses arising out of Extra Contractual Obligations and/or Excess of Original Policy Limits Judgments. The term "Extra Contractual Obligations" is defined as those liabilities not covered under any other provision of this Contract and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. The term "Excess of Original Policy Limits" is defined as those liabilities which arise in connection with any judgment in excess of the limit of the original Policy, such loss in excess of the limit having been incurred because of failure by the Company to settle within the Policy limit or by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or in the preparation or prosecution of an appeal consequent upon such action. J. Losses in respect of overhead transmission and distribution lines and their supporting structures, other than those on or within 300 meters (or 1,000 feet) of the insured premises. It is understood and agreed that public utilities extension and/or suppliers' extension and/or contingent business interruption coverages are not subject to this exclusion, provided that these are not part of a transmitters' or distributors' Policy; K. Pollution to the extent that it is excluded under the Company's original Policies; L. Rolling stock business; M. Satellite business; Page 6 N. Insurance on growing crops; O. Difference in Conditions coverage, however styled; P. Boiler and Machinery business. ARTICLE VII ----------- AMOUNT OF COVERAGE AND RETENTION -------------------------------- A. The Reinsurer shall be liable for 100% of the Ultimate Net Loss in excess of the Company's retention of $1,000,000 as a result of each Loss Occurrence subject to a limit of liability to the Reinsurer of $4,000,000 in respect to each Loss Occurrence. The Reinsurer's liability in respect of all losses occurring during the term of this Contract shall not exceed 100% of $4,000,000. B. It is warranted that losses from hurricanes Charley, Frances, Ivan, and Jeanne are excluded from coverage under this Contract. C. The coverage hereunder is subject to at least two risks being involved in the same Loss Occurrence. D. The Company shall be the sole judge of what constitutes each risk. E. "Company's Retention" shall be satisfied if this amount is retained by the Company or any affiliated company under common management or common ownership of the Company. ARTICLE VIII ------------ PREMIUM ------- The Company shall pay the Reinsurer a premium of $400,000 on September 28, 2004. ARTICLE IX ---------- NOTICE OF LOSS AND LOSS SETTLEMENTS ----------------------------------- A. The Company shall advise the Reinsurer promptly of all losses which may result in a claim hereunder and of all subsequent developments thereto which may materially affect the position of the Reinsurer. B. When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or proceeding. Page 7 C. All loss settlements made by the Company that are within the terms and conditions of the Policy shall be binding upon the Reinsurer. Upon the Reinsurer's receipt of satisfactory proof of loss, the Reinsurer agrees to pay within 45 days following its receipt thereof its share of each such loss settlement in accordance with this Contract. ARTICLE X --------- AGENCY AGREEMENT ---------------- If more than one reinsured company is named as a party to this Contract, the first named company will be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract and for purposes of remitting or receiving any monies due any party. ARTICLE XI ---------- SALVAGE AND SUBROGATION ----------------------- The Reinsurer shall be credited with salvage or subrogation recoveries (i.e., reimbursement obtained or recovery made by the Company, less Loss Adjustment Expense incurred in obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage and subrogation recoveries thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. ARTICLE XII ----------- ERRORS AND OMISSIONS -------------------- Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to either party if such delay, omission or error had not been made, provided such omission or error is rectified upon discovery. ARTICLE XIII ------------ OFFSET ------ The Company and the Reinsurer, each at its option, may offset any balance or balances, whether on account of premiums, claims and losses, loss expenses or salvages due from one party to the other under this Contract; provided, however, that in the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with applicable statutes and regulations. Page 8 ARTICLE XIV ----------- CURRENCY -------- A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. ARTICLE XV ---------- TAXES ----- In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia or Canada. ARTICLE XVI ----------- FEDERAL EXCISE TAX ------------------ (Applicable to those subscribing reinsurers, excepting underwriters at Lloyd's London and other subscribing reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The subscribing reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the subscribing reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. ARTICLE XVII ------------ UNAUTHORIZED REINSURANCE ------------------------ (Applies only to a subscribing reinsurer who does not qualify for full credit with any insurance regulatory authority having jurisdiction over the Company's reserves.) A. As regards Policies issued by the Company coming within the scope of this Contract, the Company agrees that when it shall file with the insurance regulatory authority or set up on Page 9 its books reserves for losses covered hereunder which it shall be required by law to set up, it will forward to the subscribing reinsurer a statement showing the proportion of such reserves which is applicable to the subscribing reinsurer. The subscribing reinsurer hereby agrees to fund such reserves in respect of known outstanding losses that have been reported to the subscribing reinsurer and allocated loss adjustment expense relating thereto, losses and allocated loss adjustment expense paid by the Company but not recovered from the subscribing reinsurer, plus reserves for losses incurred but not reported, as shown in the statement prepared by the Company (hereinafter referred to as "subscribing reinsurer's obligations") by funds withheld, cash advances or a Letter of Credit. The subscribing reinsurer shall have the option of determining the method of funding provided it is acceptable to the insurance regulatory authorities having jurisdiction over the Company's reserves. B. When funding by a Letter of Credit, the subscribing reinsurer agrees to apply for and secure for timely delivery to the Company (in accordance with the Company's reporting requirements) a clean, irrevocable and unconditional Letter of Credit issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Company's reserves in an amount equal to the subscribing reinsurer's proportion of said reserves. Such Letter of Credit shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless 30 days (60 days where required by insurance regulatory authorities) prior to any expiration date the issuing bank shall notify the Company by certified or registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period. C. The subscribing reinsurer and Company agree that the Letters of Credit provided by the subscribing reinsurer pursuant to the provisions of this Contract may be drawn upon at any time, notwithstanding any other provision of this Contract, and be utilized by the Company or any successor, by operation of law, of the Company including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company for the following purposes, unless otherwise provided for in a separate Trust Agreement: 1. to reimburse the Company for the subscribing reinsurer's obligations, the payment of which is due under the terms of this Contract and which has not been otherwise paid; 2. to make refund of any sum which is in excess of the actual amount required to pay the subscribing reinsurer's obligations under this Contract; 3. to fund an account with the Company for the subscribing reinsurer's obligations. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the subscribing reinsurer; 4. to pay the subscribing reinsurer's share of any other amounts the Company claims are due under this Contract. D. In the event the amount drawn by the Company on any Letter of Credit is in excess of the actual amount required for 1 or 3 or, in the case of 4, the actual amount determined to be due, the Company shall promptly return to the subscribing reinsurer the excess amount so Page 10 drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Company or the subscribing reinsurer. E. The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. F. At annual intervals, or more frequently as agreed but never more frequently than quarterly, the Company shall prepare a specific statement of the subscribing reinsurer's obligations, for the sole purpose of amending the Letter of Credit, in the following manner: 1. If the statement shows that the subscribing reinsurer's obligations exceed the balance of credit as of the statement date, the subscribing reinsurer shall, within 30 days after receipt of notice of such excess, secure delivery to the Company of an amendment to the Letter of Credit increasing the amount of credit by the amount of such difference. 2. If, however, the statement shows that the subscribing reinsurer's obligations are less than the balance of credit as of the statement date, the Company shall, within 30 days after receipt of written request from the subscribing reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. ARTICLE XVIII ------------- NET RETAINED LIABILITY ---------------------- A. This Contract applies to only that portion of any Policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract) and, in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any Policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurer(s), whether specific or general, any amounts which may have become due from such Reinsurer(s), whether such inability arises from the insolvency of such other Reinsurer(s) or otherwise. ARTICLE XIX ----------- OTHER REINSURANCE ----------------- The Company shall maintain in force other reinsurance, recoveries under which shall inure to the benefit of this Contract. Page 11 ARTICLE XX ---------- THIRD PARTY RIGHTS ------------------ This Contract is solely between the Company and the Reinsurer, and in no instance shall any other party have any rights under this Contract except as expressly provided otherwise in the INSOLVENCY ARTICLE. ARTICLE XXI ----------- SEVERABILITY ------------ If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract. ARTICLE XXII ------------ GOVERNING LAW ------------- This Contract shall be governed as to performance, administration and interpretation by the laws of the State of Pennsylvania, exclusive of the rules with respect to conflicts of law, except as to rules with respect to credit for reinsurance in which case the applicable rules of all states shall apply. ARTICLE XXIII ------------- ACCESS TO RECORDS ----------------- The Company shall place at the disposal of the Reinsurer and the Reinsurer shall have the right to inspect through its authorized representative, at all reasonable times during the term of this Contract and thereafter, the books, records and papers of the Company pertaining to the reinsurance provided hereunder and all claims made in connection therewith. ARTICLE XXIV ------------ CONFIDENTIALITY --------------- The Reinsurer, except with the express prior written consent of the Company, shall not directly or indirectly, communicate, disclose or divulge to any third party, any knowledge or information that may be acquired either directly or indirectly as a result of the inspection of the Company's books, records and papers. The restrictions as outlined in this Article shall not apply to information which is already in the public domain or communication or disclosures that the Reinsurer is required to make to its statutory auditors, retrocessionaires, legal counsel, parent company, arbitrators involved in any arbitration procedures under this Contract or disclosures required upon subpoena or other duly-issued order of a court or other governmental agency or regulatory authority. Page 12 ARTICLE XXV ----------- INSOLVENCY ---------- A. In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor upon demand, with reasonable provision for verification, on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the Policy reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more Reinsurers are involved in the same claim and a majority in interest elects to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company. C. It is further agreed that, in the event of the insolvency of the Company, the reinsurance under this Contract shall be payable directly by the Reinsurer to the Company or its liquidator, receiver, conservator, or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the Company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such Policy obligations of the Company as direct obligations of the Reinsurer to the payee under such policies and in substitution for the obligations of the Company to such payees. D. In the event of the insolvency of the Company or companies listed in the designation of "Company" under this Contract, this Article shall apply only to the insolvent company or companies. ARTICLE XXVI ------------ BINDING ARBITRATION ------------------- A. If any dispute shall arise between the parties to this Contract, either before or after its termination, with reference to the interpretation of this Contract, including the formation or validity thereof, or the rights of either party with respect to any transactions under this Contract, the dispute shall be referred to three arbitrators. One arbitrator is to be chosen by each party and the third by the two so chosen. If either party refuses or neglects to appoint Page 13 an arbitrator within 30 days after the receipt of written notice from the other party requesting it to do so, the requesting party may nominate two arbitrators who shall choose the third. B. In the event the arbitrators do not agree on the selection of the third arbitrator within 30 days, each arbitrator shall name three, of whom the other arbitrator shall decline two and the decision shall be made by drawing lots. All arbitrators shall be executive or retired officers of insurance or reinsurance companies or underwriters at Lloyd's of London, not under the control of either party to this Contract. C. If more than one Reinsurer is involved in the same dispute, all such Reinsurers shall constitute and act as one party for the purposes of this Article, provided, however, that nothing herein shall impair the rights of such Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurer under the terms of this Contract from several to joint. D. Each party shall submit its case to the arbitrators within 30 days of the appointment of the arbitrators. The arbitrators shall consider this Contract an honorable engagement rather than merely a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of a majority of the arbitrators shall be final and binding on both the Company and the Reinsurer. Judgment may be entered upon the award of the arbitrators in any court having jurisdiction. E. Each party shall bear the fee and expenses of its own arbitrator, one half of the fees and the expenses of the third arbitrator and one half of the other expenses of the arbitration. In the event both arbitrators are chosen by one party, the fees of the arbitrators shall be equally divided between parties. F. Any such arbitration shall take place in Hatboro, Pennsylvania, unless some other location is mutually agreed upon by the parties. ARTICLE XXVII ------------- SERVICE OF SUIT --------------- (Applicable if the subscribing reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities). A. It is agreed that in the event the subscribing reinsurer fails to pay any amount claimed to be due hereunder, the subscribing reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the subscribing reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Page 14 B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the subscribing reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. ARTICLE XXVIII -------------- INTERMEDIARY ------------ Willis Re Inc., 1835 Market Street, Suite 2700, Philadelphia, Pennsylvania 19103 is hereby recognized as the intermediary negotiating this Contract and through whom all communications relating thereto shall be transmitted to the Company or the Reinsurer. However, all communications concerning accounts, claim information, funds and inquiries related thereto shall be transmitted to the Company or the Reinsurer through Willis Re Inc., 5420 Millstream Road, Suite 200, P.O. Box 3000, McLeansville, North Carolina 27301-3000. Payments by the Company to Willis Re Inc. shall be deemed to constitute payment to the Reinsurer and payments by the Reinsurer to Willis Re Inc. shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date specified below: Signed this day of , 2004. -------------------- --------------------------- PENN-AMERICA INSURANCE COMPANY PENN-STAR INSURANCE COMPANY PENN-PATRIOT INSURANCE COMPANY By -------------------------------------------------- Page 15 POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE ------------------------------------------------- SECTION A: ---------- EXCLUDING: (a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B: ---------- It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations, or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk Mutuals, Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs, United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. SECTION B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B (a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builder's Risks on the classes of risks specified in this subsection (d) only. Where this Clause attaches to catastrophe excesses, the following Section C is added: SECTION C: ---------- NEVERTHELESS the Reinsurer specifically agrees that liability accruing to the Company from its participation in residual market mechanisms including but not limited to: Page 1 of 2 (l) The following so-called "Coastal Pools": ALABAMA INSURANCE UNDERWRITING ASSOCIATION LOUISIANA INSURANCE UNDERWRITING ASSOCIATION MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION TEXAS WINDSTORM INSURANCE ASSOCIATION AND (2) All "FAIR Plan" and "Rural Risk Plan" business AND (3) The Citizens Property Insurance Corporation ("CPIC") and the California Earthquake Authority (CEA) for all perils otherwise protected hereunder shall not be excluded, except, however, that this reinsurance does not include any increase in such liability resulting from: (i) The inability of any other participant in such "Coastal Pool" and/or "FAIR Plan" and/or "Rural Risk Plan" and/or Residual Market Mechanisms to meet its liability. (ii) Any claim against such "Coastal Pool" and/or "FAIR Plan" and/or "Rural Risk Plan" and/or Residual Market Mechanisms, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any Insolvency Fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract). SECTION D: ---------- (1) Notwithstanding Section C above, in respect of the CEA, where an assessment is made against the Company by the CEA, the Company may include in the Ultimate Net Loss only that assessment directly attributable to each separate loss occurrence covered hereunder. The Company's initial capital contribution to the CEA shall not be included in the Ultimate Net Loss. (2) Notwithstanding Section C above, in respect of the CPIC, where an assessment is made against the Company by the CPIC, the maximum loss that the Company may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall not exceed the lesser of: (a) The Company's assessment from the CPIC for the accounting year in which the loss occurrence commenced, or (b) The product of the following: (i) The Company's percentage participation in the CPIC for the accounting year in which the loss occurrence commenced; and (ii) The CPIC's total losses in such loss occurrence. Any assessments for accounting years subsequent to that in which the loss occurrence commenced may not be included in the Ultimate Net Loss hereunder. Moreover, notwithstanding Section C above, in respect of the CPIC, the Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the CPIC. For the purposes of this Contract, the Company may not include in the Ultimate Net Loss any assessment or any percentage assessment levied by the CPIC to meet the obligations of an insolvent insurer member or other party, or to meet any obligations arising from the deferment by the CPIC of the collection of monies. Page 2 of 2 INSOLVENCY FUNDS EXCLUSIONS CLAUSE ---------------------------------- This Contract excludes: All liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency Fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee, or other obligation in whole or in part. WAR EXCLUSION ------------- As regards interests which at time of loss or damage are on shore, no liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty States of the Union and the District of Columbia, its territories and possessions, including the Commonwealth of Puerto Rico and including Bridges between the United States of America and Mexico provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under original policies, endorsements or binders containing a standard war or hostilities or warlike operations exclusion clause. Nevertheless, this clause shall not be construed to apply to loss or damage occasioned by riots, strikes, civil commotion, vandalism, malicious damage, including acts committed by agents of any government, party or faction engaged in war, hostilities or other warlike operation, provided such agents are acting secretly and not in connection with any operations of military or naval armed forces in the country where the interests insured are situated. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A. -------------------------------------------------------------------------- 1) This Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2) Without in any way restricting the operation of paragraph (1) of this Clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly and whether as Insurer or Reinsurer, from any Insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph 2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3) Without in any way restricting the operations of paragraphs 1) and 2) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph 3) shall not operate a) where the Reinsured does not have knowledge of such nuclear reactor power plant or nuclear installation, or b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st, January 1960, this sub-paragraph b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Government Authority having jurisdiction thereof. 4) Without in any way restricting the operations of paragraphs 1), 2) and 3) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reinsured to be the primary hazard. 6) The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954, or by any law amendatory thereof. 7) Reinsured to be sole judge of what constitutes: a) substantial quantities, and b) the extent of installation, plant or site. NOTE: Without in any way restricting the operations of paragraph 1) hereof, it is understood and agreed that: a) all policies issued by the Reinsured on or before 31st, December 1957, shall be free from the application of the other provisions of this Clause until expiry date or 31st, December 1960, whichever first occurs whereupon all the provisions of this Clause shall apply, b) with respect to any risk located in Canada policies issued by the Reinsured on or before 31st, December 1958, shall be free from the application of the other provisions of this Clause until expiry date or 31st, December 1960, whichever first occurs whereupon all the provisions of this Clause shall apply. TERRORISM EXCLUSION CLAUSE -------------------------- A. This Contract excludes any "insured loss" under a "property and casualty insurance" policy which results from an "act of terrorism" that is certified under the Terrorism Risk Insurance Act of 2002 ("TRIA"), as those three terms are defined by TRIA. B. However, any non-certified terrorism loss shall be reinsured hereunder, except for any loss that is directly or indirectly caused by or related to the release of germs, disease or other chemical or biological contagions or contaminants, or the use of any nuclear device or radioactive substance. C. "Non-certified terrorism loss" as used herein shall mean any loss that is not eligible for reimbursement under TRIA but which results from a violent act or an act that is dangerous to human life, property, or infrastructure, that is committed by an individual or individuals, and that appears to be part of an effort to coerce a civilian population or to influence the policy or affect the conduct of any government by coercion. D. Should any judicial or regulatory entity having jurisdiction invalidate any exclusion in the Company's Policy that is also the subject of one or more of the exclusions herein, then a loss for which the Company is liable because of such invalidation shall not be excluded hereunder.