SERVICES AND AFFILIATION AGREEMENT
Exhibit 10(HH)
THIS SERVICES AND AFFILIATION AGREEMENT (this “Agreement”) is entered into this 30th day of
October, 2009 between SOUTHERN MUTUAL INSURANCE COMPANY, a Georgia mutual fire insurance company
(“Southern Mutual”) and DONEGAL MUTUAL INSURANCE COMPANY, a Pennsylvania mutual fire insurance
company (“Donegal Mutual”) in accordance with the terms of a Surplus Note Purchase Agreement dated
as of September 8, 2009 (the “Note Purchase Agreement”) with Donegal Mutual. All capitalized terms
used herein but not defined herein shall have the respective meanings assigned to them in the Note
Purchase Agreement.
WITNESSETH:
WHEREAS, Donegal Mutual purchased on the date hereof a surplus note (the “Surplus Note”) of
Southern Mutual in the principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000)
pursuant to the Note Purchase Agreement;
WHEREAS, a condition precedent in the Note Purchase Agreement to Donegal Mutual’s purchase of
the Surplus Note is that Southern Mutual and Donegal Mutual enter into this Agreement to assist
Southern Mutual in reducing its expense ratio and to provide advice and assistance to the officers
and employees of Southern Mutual in connection with their conduct of the operations of Southern
Mutual;
WHEREAS, Donegal Mutual and Southern Mutual are entering into a Quota Share Reinsurance
Agreement purchase to which Southern Mutual shall cede to, and Donegal Mutual shall assume from,
Southern Mutual up to 100% of the net written premiums of Southern Mutual; and
WHEREAS, Southern Mutual and Donegal Mutual are also entering into a Technology License
Agreement whereby Donegal Mutual will license certain of its computer applications and systems to
Southern Mutual on the terms and conditions set forth in the Technology License Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and
intending to be legally bound hereby, Donegal Mutual and Southern Mutual agree as follows:
1. Effective Date. The effective date of this Agreement shall be the date of the
Closing under the Note Purchase Agreement. This Agreement shall continue in effect unless and
until terminated pursuant to Section 5.
2. Services To Be Rendered.
(a) In order to achieve the objectives of Southern Mutual in entering into this Agreement,
Donegal Mutual shall have the authority, subject to the ultimate authority of the Board of
Directors of Southern Mutual, to oversee all of Southern Mutual’s principal business activities
including the following operations:
(i) Underwriting — the development, implementation and administration of policies relating
to
underwriting and the acceptance of risks, the maintenance of underwriting manuals and guidelines
and services relating to the development of rates, the provision of all actuarial services
necessary or appropriate for the operation of Southern Mutual’s business, the analysis of loss
trends and reserve developments and risk concentrations and the arranging for insurance and other
reasonable risk management services in the underwriting process to protect Southern Mutual and its
properties and other assets against loss, damage and liabilities;
(ii) Claims — the admitting, adjusting, compromising, rejection and settlement of claims
under insurance policies issued by Southern Mutual and the collection of reinsurance and
recoverables;
(iii) Reinsurance — the review, negotiation, monitoring and coordination of all
reinsurance
contracts and placements, including the determination of the amounts, terms, types and structure of
reinsurance to be obtained and the selection of the reinsurers;
(iv) Investments — the oversight of the investment of all available funds in the name of
and
on behalf of Southern Mutual pursuant to its investment policy;
(v) Data Processing Analysis — analysis and consultation regarding the advisability and
potential benefits of migrating Southern Mutual’s computer systems to Donegal Mutual’s computer
systems and the adaptation of Southern Mutual’s computer system so it can operate Donegal Mutual’s
WritePro® and WriteBiz® applications;
(vi) Personnel and Professional Services — the appointment, direction, removal and
suspension, in the name of and on behalf of Southern Mutual, of employees and agents, including the
determination of the appropriate levels thereof, and the ongoing review and analysis of
professional services, including the retention of counsel, accountants and other consultants and
the payment to them, from the funds of Southern Mutual, of their reasonable fees for services and
reasonable expenses incurred in connection with such services;
(vii) Financial Reporting — the analysis and reporting of actual performance to budgeted
performance, including analysis of financial results through the
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budgeted period and the preparation of all statements and reports necessary or appropriate for
Southern Mutual’s business, including reports to insurance regulatory authorities.
(viii) Tax Administration — the ordinary and necessary tax administration services for
income
taxes, premium taxes, sales and use taxes, franchise and similar taxes and any other taxes
incurred;
(ix) Accounting Services — the providing of routine accounting and bookkeeping services
relating to cash, cash equivalents, receivables, supplies and other inventory items, fixed assets
and other asset accounting, accounts payable, notes payable, other trade payables, payroll and
payroll taxes, other general ledger items, accounting services relating to investments and the
reconciliation of all bank accounts; and
(x) Policyholder Services — the maintenance of policyholders’ customer relation
services and
the maintenance of policyholder information, including names, addresses, policy anniversary dates
and premiums due.
(b) Donegal Mutual shall use its commercially reasonable efforts to provide the services
described above and such other or additional services as Southern Mutual’s Board of Directors may
from time to time request pursuant to this Agreement in such manner as Southern Mutual’s Board of
Directors, in its business judgment, exercised in accordance with applicable law, deems necessary
or appropriate. Notwithstanding the foregoing, Southern Mutual agrees that Donegal Mutual shall
have no obligation to provide services to Southern Mutual of a quality greater than the quality of
such services that Donegal Mutual maintains for its own operations. All byproducts from the
services provided by Donegal Mutual pursuant to this Agreement shall be the property of Southern
Mutual except whereby expressly provided to the contrary in this Agreement or in the Technology
License Agreement. Donegal Mutual shall cause the services to be rendered by it to Southern Mutual
pursuant to this Agreement to be covered by Donegal Mutual’s disaster recovery plans.
(c) Nothing in this Agreement shall constitute or be construed to be or create a partnership
or joint venture relationship between Southern Mutual and Donegal Mutual. In connection with the
performance of services under this Agreement, neither Southern Mutual nor Donegal Mutual shall make
any statement or take any action that is inconsistent with the provisions of this Section 2(c).
3. Payment for Services.
(a) Donegal Mutual agrees to bear the costs of the services Donegal Mutual provides pursuant
to this Services Agreement in consideration of the Quota Share Reinsurance Agreement between
Donegal Mutual and Southern Mutual. Southern Mutual shall pay from its own funds all of its own
operating costs and expenses in accordance with the Ordinary Course of Southern Mutual’s business.
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(b) Southern Mutual shall be solely responsible for, and shall hold harmless and indemnify
Donegal Mutual, including its successors, officers, directors, employees, agents and affiliates,
from and against all losses, claims, damages, liabilities and expenses, including any and all
reasonable expenses and attorneys’ fees and disbursements incurred in investigating, preparing or
defending against any litigation or proceeding, whether commenced or threatened, or any other claim
whatsoever, whether or not resulting in any liability, suffered, incurred, made, brought or
asserted by any person not a party to this Agreement in connection with Donegal Mutual’s provision
of services to Southern Mutual, unless such loss, claim, damage, liability or expense results from
the negligence, willful misconduct or fraud of Donegal Mutual or its officers, directors,
employees, agents or affiliates or any other person engaged by Donegal Mutual to provide services
to Southern Mutual.
(c) Donegal Mutual shall be solely responsible for, and shall hold harmless and indemnify
Southern Mutual, including its successors, officers, directors, employees, agents and affiliates,
from and against all losses, claims, damages, liabilities and expenses, including any and all
reasonable expenses and attorneys’ fees and disbursements incurred in investigating, preparing or
defending against any litigation or proceeding, whether commenced or threatened, or any other claim
whatsoever, whether or not resulting in any liability, suffered, incurred, made, brought or
asserted by any person not a party to this Agreement resulting from the negligence, willful
misconduct or fraud of Donegal Mutual or its officers, directors, employees, agents or affiliates
or any other person engaged by Donegal Mutual to provide services to Southern Mutual.
4. Approval by Commissioner. Donegal Mutual and Southern Mutual agree to submit this
Agreement and any other required information and filings to the Commissioner of Insurance of the
State of Georgia (the “Commissioner”) for his review and approval in accordance with the Georgia
Insurance Code.
5. Termination; Extension.
(a) This Agreement shall terminate on December 31, 2014, except if extended by Southern Mutual
as provided in Section 5(b); and further provided, however, that this Agreement may be terminated
at any time prior to such date in any of the following events:
(i) By Donegal Mutual, upon written notice to Southern Mutual, if Southern Mutual shall become
insolvent or shall become subject to any voluntary or involuntary conservatorship, rehabilitation,
receivership, reorganization, liquidation or bankruptcy case or proceeding or the surplus of
Southern Mutual is less than the minimum amount of surplus required by the laws of the State of
Georgia for the classes of insurance Southern Mutual is then transacting;
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(ii) By Donegal Mutual, upon written notice to Southern Mutual, if the designees of Donegal
Mutual shall cease to constitute a majority of the members of the Board of Directors of Southern
Mutual;
(iii) By Southern Mutual, upon written notice to Donegal Mutual, if Donegal Mutual shall
become insolvent or shall become subject to any voluntary or involuntary conservatorship,
receivership, reorganization, liquidation or bankruptcy case or proceeding; or
(iv) By Southern Mutual, upon written notice to Donegal Mutual, subsequent to payment in full
of the Surplus Note.
(b) Subject to subsection (a) of this Section 5, Southern Mutual shall have the option to
extend the term of this Agreement for one additional year upon delivery of a written notice of
extension to Donegal Mutual not later than 90 days prior to the expiration of the then current
term. Southern Mutual shall have the right to exercise the extension option for five successive
years commencing with an option to extend the scheduled termination date of December 31, 2014 to
December 31, 2015 and ending with an option to extend the termination date to December 31, 2019.
(c) Any termination of this Agreement by Donegal Mutual pursuant to Sections 5(a)(i) or
5(a)(ii) of this Agreement shall only become effective (i) 18 months after the date on which
written notice of termination is given to Southern Mutual by Donegal Mutual and (ii) subject to the
receipt of any necessary insurance regulatory approvals.
6. Confidentiality. Donegal Mutual agrees during the term of this Agreement and
subsequent to the termination of this Agreement to hold in confidence all documents, materials and
other information that Donegal Mutual shall have obtained about Southern Mutual during the term of
this Agreement (the “Confidential Information”).
7. Miscellaneous.
(a) All notices or other communications required or permitted under this Agreement shall be in
writing and shall be given by confirmed facsimile or registered mail, postage prepaid, addressed as
follows:
if to Southern Mutual, to:
Southern Mutual Insurance Company
000 Xxxx Xxxx
Xxxxxx, Xxxxxxx 00000
Attention: Xxxxx X. Xxxxx, President
Facsimile: 000-000-0000
000 Xxxx Xxxx
Xxxxxx, Xxxxxxx 00000
Attention: Xxxxx X. Xxxxx, President
Facsimile: 000-000-0000
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if to Donegal Mutual, to:
Donegal Mutual Insurance Company
0000 Xxxxx Xxxx
Xxxxxxxx, Xxxxxxxxxxxx 00000
Attention: Xxxxxx X. Xxxxxxxx, President
Facsimile: 000-000-0000
0000 Xxxxx Xxxx
Xxxxxxxx, Xxxxxxxxxxxx 00000
Attention: Xxxxxx X. Xxxxxxxx, President
Facsimile: 000-000-0000
Such notice shall be given at such other address or to such other representative as a party to this
Agreement may furnish pursuant to this Section 7(a) to the other party to this Agreement.
(b) No assignment, transfer or delegation, whether by merger or other operation of law or
otherwise, of any rights or obligations under this Agreement shall be made by a party to this
Agreement without the prior written consent of the other party to this Agreement and, if required
by applicable law, the Commissioner and any other insurance regulatory authority having
jurisdiction over this Agreement. This Agreement shall be binding upon the parties hereto and
their respective permitted successors and assigns.
(c) This Agreement constitutes the entire agreement of the parties to this Agreement with
respect to its subject matter, supersedes all prior agreements, if any, of the parties to this
Agreement with respect to its subject matter and may not be amended except in writing signed by the
party to this Agreement against whom the change is asserted. The failure of any party to this
Agreement at any time or times to require the performance of any provision of this Agreement shall
in no manner affect the right to enforce the same and no waiver by any party to this Agreement of
any provision or breach of any provision of this Agreement in any one or more instances shall be
deemed or construed either as a further or continuing waiver of any such provision or breach or as
a waiver of any other provision or breach of any other provision of this Agreement.
(d) In case any one or more of the provisions contained herein shall, for any reason, be held
to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision or provisions had never been
contained herein unless the deletion of such provision or provisions would result in such a
material change as to cause continued performance of this Agreement as contemplated herein to be
unreasonable or materially and adversely frustrate the objectives of the parties as expressed in
this Agreement.
(e) This Agreement shall be governed by and construed in accordance with the laws of the State
of Georgia.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first
above written.
| SOUTHERN MUTUAL INSURANCE COMPANY |
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| By: | /s/ Xxxxx X. Xxxxx | |||
| Xxxxx X. Xxxxx, President | ||||
| DONEGAL MUTUAL INSURANCE COMPANY |
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| By: | /s/ Xxxxxx X. Xxxxxxxx | |||
| Xxxxxx X. Xxxxxxxx, President | ||||
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