Quota Share Reinsurance Agreement - A-affordable Managing General Agency, Inc.

Exhibit 10.4

Quota Share Reinsurance Agreement
Number A-AFFORD-05- 001
Table of Contents Article 1 RecitalsArticle 2 DefinitionsArticle 3 Business ReinsuredArticle 4 Obligatory AgreementArticle 5 Term and CancellationArticle 6 ConsiderationArticle 7 Loss and Loss Adjustment ExpenseArticle 8 Reports and RemittancesArticle 9 Fronting Fees, Premium Taxes and Provisional Ceding Commission,Article 10 Errors and OmissionsArticle 11 Inspection of RecordsArticle 12 Offset ClauseArticle 13 ArbitrationArticle 14 Honorable UndertakingArticle 15 Assessments and AssignmentsArticle 16 Conservation, Liquidation or InsolvencyArticle 17 Hold HarmlessArticle 18 Regulatory MattersArticle 19 Loss in Excess of Policy Limits/Extra Contractual ObligationsArticle 20 Savings ClauseArticle 21 Unauthorized (Non-Admitted) ReinsuranceArticle 22 Program ReviewArticle 23 Service of SuitArticle 24 IntermediaryArticle 25 Miscellaneous

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QUOTA SHARE REINSURANCE AGREEMENT
NUMBER A-AFFORD-05- 001

This Agreement is made and entered into by and between OLD AMERICAN COUNTY MUTUAL FIRE INSURANCE COMPANY (hereinafter referred to as the " Company" ) and AFFIRMATIVE INSURANCE COMPANY (hereinafter referred to as the " Reinsurer" ).

THE COMPANY AND REINSURER HEREBY AGREE AS FOLLOWS:

ARTICLE 1 RECITALS

1.1 The Company and Reinsurer hereby wish to enter into a reinsurance arrangement through which the Company is to bear no business, credit or insurance risk whatsoever (save the risk of the Reinsurer' s insolvency). The Reinsurer shall hold the Company fully harmless and indemnify it for these and all risks arising pursuant to this Agreement.

1.2 The Company and Reinsurer hereby agree that the full consideration provided by the Company in exchange for the fees set forth herein, is to permit the Policies as defined herein to be issued in the name of the Company and reinsured one hundred percent (100%) under this Agreement.

1.3 It is understood and agreed that neither the Company nor the Reinsurer is obligated by any representations or warranties made by any of the parties involved in this transaction unless such representations and warranties are formally included in writing, in this Agreement.

1.4 All business reinsured hereunder shall be produced by A-AFFORDABLE MANAGING GENERAL AGENCY, INC. (Managing General Agent), in accordance with the terms and conditions of the Managing General Agency Agreement effective April 1, 2002, (Managing General Agency Agreement) between the Managing General Agent and the Company, a copy of said Agreement is attached hereto and fully incorporated herein.

1.5 This Agreement sets forth all of the duties and obligations between the Company and the Reinsurer and supersedes any and all prior or contemporaneous or written agreements with respect to matters referred to in this Agreement. This Agreement may not be modified, amended or changed except by an agreement in writing signed by both parties.

ARTICLE 2 DEFINITIONS

2.1 " Policies" is defined as all policies, endorsements, certificates, contracts, agreements and binders of insurance issued or renewed by Managing General Agent or its designated representatives on or after the effective date of this Agreement on behalf of the Company.

2.2 " Net Written Premium" is defined as the gross premium on all original and renewal Policies written by the Company, less return premium and cancellations.

2.3 " Net Collected Premium" is defined as the total of all collected premiums, including down payments received, on policies written by the Managing General Agent between the Company and the Managing General Agent less return premium and cancellations.

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2.4 " Loss in Excess of Policy Limits" (XPL) is defined as any amount which the Company pays or would have been contractually held liable to pay had it not been for the limit of the original Policy.

2.5 " Extra Contractual Obligation" (ECO) is defined as those liabilities not covered under any other provision of this Agreement which arise from the handling of any claim on business covered hereunder, because of, but not limited to, failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any ECO is incurred by the Company shall be deemed, in all circumstances, to be the date of the original disaster and/or casualty.

2.6 " Loss Adjustment Expense" shall mean expenditures by the Company that are not part of the indemnity under the original policy (i.e. which do not contribute to exhaustion of the original policy limit), made in connection with the disposition of a claim, loss or legal proceeding (including investigation, negotiation, cost of bonds, court costs, statutory penalties, prejudgment interest or delayed damages, and interest on any judgment or award and legal expenses of litigation) and the Company' s defense costs and legal expenses incurred in direct connection with legal actions (including, but not limited to, Declaratory Judgment actions) brought to determine the Company' s defense and/or indemnification obligations that are allocable only to Policies and claims under Policies subject to this Contract. Any Declaratory Judgment action expenses shall be deemed to have been fully incurred on the same date as the original loss (if any) giving rise to the action.

2.7 " Prejudgment Interest" or " Delayed Damages" shall mean interest or damages added to a settlement, verdict, award or judgment based on the amount of time prior to the settlement, verdict, award or judgment whether or not made part of the settlement, verdict, award or judgment.

ARTICLE 3 BUSINESS REINSURED

3.1 The Reinsurer hereby reinsures the Company for a one hundred percent (100%) quota share in respect of all liability, including, but not limited to, losses and Loss Adjustment Expenses, under Policies as classified by the Company in the attached Schedule of Business.

3.2 It is understood that the classes of business reinsured under this Agreement are deemed to include coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company' s policies when they include or are deemed to include so-called " Out of State Insurance" provisions.

3.3 All insurance under this Agreement shall be subject to the same rates, terms, conditions and waivers, and to the same modifications and alterations as the respective Policies of the Company.

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ARTICLE 4 OBLIGATORY AGREEMENT

4.1 The Company agrees to cede to the Reinsurer, and the Reinsurer agrees to accept from the Company, a one hundred percent (100%) quota share reinsurance participation under all Policies effective on or after the effective date hereof by the Company covering risks situated in Texas. The liability of the Reinsurer shall commence obligatorily and simultaneously with that of the Company subject to the terms, conditions and limitations set forth in this Agreement.

4.2 Business ceded hereunder shall include every original policy, rewrite, renewal or extension (whether before or after the termination of this Agreement) required by statute or by rule or regulation of the Texas Department of Insurance, or other authority having competent jurisdiction, of any policy of insurance originally ceded hereunder by the Company to the Reinsurer.

4.3 The parties understand and intend that the Managing General Agent and the Reinsurer will agree on the rates to be charged under this program. Rate changes proposed by the Reinsurer shall be incorporated into the rate filing by the Managing General Agent.

ARTICLE 5 TERM AND CANCELLATION

5.1 This Agreement shall become effective 12:00:01 a.m. (Central Standard Time) on the first day of January 2005, as respects losses arising under Policies effective on or after such date, and shall remain continuously in force unless terminated by either party.

5.2 This Agreement may be terminated by either party at any annual anniversary, giving the other party written notice at least ninety (90) days prior to such date.

5.3 In addition to the provisions set forth in Article 5.2 herein, this Agreement may be terminated at any time in accordance with the following terms and conditions:

a. After thirty (30) days written notice by the Reinsurer or the Company in the event the Reinsurer or Company:

(i) Is acquired and/or merged by or in any manner becomes under the control of any other company or corporation;

(ii) Change a majority of its officers or board of directors; or

(iii) Are the subject of a filing or petition or initiation of any proceeding for supervision, rehabilitation, conservation or liquidation, or any other proceedings for the protection of the Company' s or the Reinsurer' s creditor.

b. By the Company, immediately and automatically, without prior written notice should the Texas Department of Insurance require cancellation or disallow credit for this reinsurance.

c. After fifteen (15) days written notice by the Reinsurer or the Company, in the event of breach of conditions, fraud or default by either party under the terms and conditions of the Agreement.

d. On the effective date of any termination of the Managing General Agency Agreement.

5.4 When the Agreement terminates for any reason, reinsurance hereunder shall continue to apply to the business in force at the time and date of termination until expiration or cancellation of such business. The parties understand and agree that any Policies with effective dates prior to the termination date, but issued after the termination date, are covered under this Agreement.

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Additionally, the reinsurance hereunder shall continue to apply as to Policies that must be issued or renewed, as a matter of state law or regulation or because an agent (appointed by the Company at the request of the Reinsurer) has not been timely canceled, or non-renewed, until the expiration dates on said Policies.

5.5 Upon termination of this Agreement for any reason, the Reinsurer and the Company shall not be relieved or released from any obligation that relate to outstanding insurance business created by or under this Agreement. The parties hereto expressly covenant and agree that they will cooperate with each other in the handling of all such run-off insurance business until all Policies have expired and all outstanding losses and Loss Adjustment Expenses have been settled.

While by law and regulations, the Company recognizes its primary obligations to its Policyholders, the Reinsurer recognizes that there shall be no cost or involvement by the Company, unless specifically agreed, in servicing this run-off. The Reinsurer shall bear all costs and expenses associated with handling of such run-off business following the cancellation or termination of this Agreement. If for any reason any managing general agent or agent fails to service any such run-off business (or any business while the Agreement is still in effect), including the payment of claims, then consistent with this Agreement, the Reinsurer' s obligation with respect to such run-off business shall continue and the Reinsurer shall either service such run-off business directly or appoint, at the Reinsurer' s expense, a successor to such managing general agent and/or agent, subject to the approval of the Company, which approval shall not be unreasonably withheld. Such successor shall perform all of the duties and obligations of the managing general agent and/or agent with respect to servicing such run-off business.

5.6 Notices hereunder shall be provided in accordance with Article 23.2, hereof.

ARTICLE 6 CONSIDERATION

6.1 In consideration of the acceptance by the Reinsurer of one hundred percent (100%) of the Company' s liability on insurance business reinsured hereunder, the Reinsurer is entitled to one hundred percent (100%) of the Net Premium produced by the Managing General Agent and/or agent or the Reinsurer on Policies reinsured less the Provisional Ceding Commission allowed to the Company, which includes premium taxes and fronting fees on Policies subject to reinsurance hereunder.

ARTICLE 7 LOSS AND LOSS ADJUSTMENT EXPENSE

7.1 All loss settlements, judgments and all interest on said judgments, including losses in excess of policy limits (XPL) and extra contractual obligations (ECO) made by the Company or the Company' s designee under the terms of this Agreement, whether under strict policy conditions or by way of compromise, shall be unconditionally binding upon the Reinsurer. The Reinsurer shall also be liable for one hundred percent (100%) of and pay, or cause to be paid, on behalf of the Company all Loss Adjustment Expenses as defined in Article 2.6. The Reinsurer shall be credited with all salvage or recoveries by the Company on business reinsured hereunder.

7.2 The Reinsurer shall provide a loss adjustment expense allowance equal to 9.0% of net earned premium, inclusive of direct loss adjustment expense charged to specific claim files. Such allowance shall be passed to the Managing General Agency .

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7.3 Claims handling shall be accomplished by the Managing General Agent or its designated representative (" Claims Agent" ) pursuant to the Managing General Agency Agreement and whose designation is subject to the Company' s continuing approval and shall not be inconsistent with the terms and conditions of this Agreement.

7.4 The Reinsurer' s share of losses, Loss Adjustment Expenses and loss recoveries shall be carried into the monthly account for which provision is hereinafter made; however, when the amount of loss paid by the Company under insurance subject to this Agreement exceeds the balance due the Reinsurer pursuant to Article 8, the Reinsurer will, at the option and the demand of the Company, immediately reimburse the Company by special remittance. The Reinsurer shall retain the right to deduct from any such special remittance any overdue balance due the Reinsurer by the Company.

ARTICLE 8 REPORTS AND REMITTANCES

8.1 Within thirty-five (35) days after the end of each calendar month, the Company shall provide the Reinsurer a net monthly account of the following:

a. Ceded net written premium;
b. Ceded collected premium for the month;
c. Provisional Ceding Commission on such premium as provided in Article 9.1;
d. Ceded losses and Loss Adjustment Expenses paid during the month;
e. Ceded earned and unearned premium at the end of the month;
f. Ceded outstanding losses and Loss Adjustment Expenses at the end of the month; and
g. Inception to date ceded uncollected premium.

8.2 The Company will immediately settle with the Reinsurer upon receipt of funds from the Managing General Agency, any and all sums due to the Reinsurer, on a Net Collected Premium basis, pursuant to this Agreement (b-c-d).

8.3 The Reinsurer shall remit balances due directly to the Company via wire transfer within forty-eight (48) hours, or as soon as commercially feasible if the net monthly account results in an amoun ...