<PAGE>
EXHIBIT 10.39
GENERAL AGENCY AGREEMENT
THIS GENERAL AGENCY AGREEMENT (this "Agreement") is made and
entered
into as of January 1, 2005, by and among
STATE NATIONAL INSURANCE COMPANY, INC.,
an insurance company organized under the
laws of the State of Texas ("Company"),
TOWER INSURANCE COMPANY OF NEW YORK, an
insurance company organized under the
laws of the State of New York
("Reinsurer"), and TOWER RISK MANAGEMENT CORP., a
company organized under the laws of the
State of New York ("General Agent");
W I T N E S S E T H:
THAT, in consideration of the mutual covenants hereinafter
contained
and upon the terms and conditions
hereinbelow set forth, the parties hereto
agree as follows:
PREAMBLE
The Company and HANNOVER REINSURANCE (IRELAND) LIMITED and E+S
REINSURANCE (IRELAND) LIMITED, and TOKIO
MILLENNIUM RE LTD. (collectively the
"2005 State National Quota Share
Reinsurers") have entered into Quota Share
Reinsurance Agreements dated as of January
1, 2005 (collectively the "2005 State
National Quota Share Reinsurance
Agreements"), and the Company, General Agent
and Reinsurer have entered into an Excess
of Liability Reinsurance Agreement
dated as of January 1, 2005 (the "2005
Excess of Liability Reinsurance
Agreement"), true and complete copies of
which are attached hereto as Exhibits A
and B respectively, and fully incorporated
herein by this reference (the 2005
State National Quota Share Reinsurance
Agreements and the 2005 Excess of
Liability Reinsurance Agreement shall be
referred to collectively as the
"Reinsurance Agreements"), which
Reinsurance Agreements require the appointment
of the General Agent to perform certain
specified acts on behalf of the Company
and the respective reinsurers as set forth
in the Reinsurance Agreements. The
General Agent desires to perform the
functions and duties necessary under the
Reinsurance Agreements. It is therefore
mutually agreed by the parties that the
General Agent will perform all functions
necessary for the production, service
and management of policies issued under the
Reinsurance Agreements in accordance
with the terms and conditions set forth
therein and herein. To the extent that
there is any conflict between the terms of
this Agreement and the Reinsurance
Agreements, the Reinsurance Agreements
shall govern. Notwithstanding any
provisions to the contrary contained
elsewhere herein or in any other document,
it is expressly understood that the
execution and delivery of this Agreement and
the Company's performance hereunder shall
not under any circumstances be
interpreted to affect, weaken or modify the
Reinsurer's obligation to indemnify
and hold the Company harmless from and
against the business, credit and
insurance risks as set forth in the 2005
Excess of Liability Reinsurance
Agreement. The contractual assumption by
the Reinsurer of these risks in the
2005 Excess of Liability Reinsurance
Agreement is a condition precedent to the
Company's entering into this Agreement with
the General Agent.
ARTICLE I
APPOINTMENT AND DUTIES
1.01 The Company, at the direction of the
Reinsurer, hereby appoints the General
Agent as its managing general agent for the
purpose of producing and handling
the business, which is the subject of the
Reinsurance Agreements, issued or
renewed on or after the effective date of
this Agreement. The Company, at the
request of the Reinsurer, hereby grants
authority to the General Agent to
solicit, accept and receive applications
for such classes of coverage as are
specified in the Reinsurance Agreements; to
secure, at its own expense,
reasonable underwriting information through
reporting agencies or other
appropriate sources relating to each risk
insured; to issue, renew and
countersign policies, certificates,
endorsements and binders which the Company
may, from time to time, authorize to be
issued, delivered, renewed and
countersigned; and to collect and receipt
for the premiums thereon and therefor.
1
<PAGE>
1.02 All activities of the General Agent
pursuant to this Agreement shall be in
strict compliance with the terms of the
Reinsurance Agreements and all rules,
regulations and instructions of the
Company, including, but not limited to, all
rules, instructions and specifications
included in the Company's rate manuals,
rate brochures and rate schedules.
1.03 The Company, at the Reinsurer's
request, further authorizes the General
Agent to perform all acts and duties under
policies of insurance issued by the
Company as would otherwise be performed by
the Company, including, but not
limited to, properly sending and/or
receiving reports and notices and remitting
and/or receiving monies due from or to the
Company, and adjusting and paying
losses or other claims. The Company grants
to the General Agent the authority to
settle claims on behalf of the Company.
However, the maximum dollar amount of
such authority per claim shall not exceed
$100,000. For claims settlement in
excess of $100,000, the General Agent may
only settle such claims with prior
approval of the Company and the 2005 State
National Quota Share Reinsurers. The
Company retains final authority to
determine any disputes relating to claims
settlement and setting of loss reserves. In
performing each of the acts
mentioned above, the General Agent shall be
under the direct supervision and
control of the Reinsurer, and the Reinsurer
shall be solely responsible for the
acts of the General Agent. While there are
acts of the General Agent which may
be required by applicable law to be
performed on behalf of the Company, the
Reinsurer shall remain ultimately
responsible for such acts and will indemnify
and hold the Company completely harmless
for any damage, cost, liability,
expense and/or loss (including attorneys'
fees and expenses) incurred by the
Company as respects such acts of the
General Agent. The General Agent must send
to the Company a report, as soon as it
becomes known, that a claim (i) involves
a coverage dispute; (ii) involves a demand
in excess of policy limits; (iii)
alleges bad faith; (iv) exceeds General
Agent's claims settlement authority; (v)
is open for more than six months; or (vi)
alleges a violation of any applicable
unfair practices and unfair competition
statutes. The Company may suspend or
terminate the settlement authority of the
General Agent during the pendency of
any dispute regarding any event of default
by the General Agent.
1.04 Claims handling shall be accomplished
by the General Agent through its
designated representative ("Claims
Administrator"), which designation is subject
to the Company's and Reinsurer's continuing
approval. The agreement between the
General Agent and the Claims Administrator
shall be subject to the approval of
the Reinsurer and the Company and shall not
be inconsistent with the terms and
conditions of this Agreement. Payment to
the Claims Administrator shall be made
by the General Agent, on behalf of the
Company, directly to the Claims
Administrator. The Claims Administrator
shall accept notice of and investigate
any claim arising under any of the
Policies, and pay, adjust, settle, resist, or
compromise any such claim, unless the
Company specifically directs to the
contrary with respect to any individual
claim. All such loss settlements,
whether under strict policy conditions or
by way of compromise, shall be
unconditionally binding upon the Company
and the Reinsurer. However, should the
Company be ordered or instructed by the
Texas Department of Insurance or any
other regulatory agency of competent
jurisdiction to take any action or refrain
from taking any action with regard to any
claim, the Reinsurer and the General
Agent shall be bound by and shall follow
the order or instructions of such
regulatory agency as though the General
Agent were the object of such order or
instruction. The General Agent will
exercise the authority granted hereunder in
good faith and toward the end of paying any
and all valid claims. The General
Agent is authorized to have claims adjusted
through independent claims
adjusters, subject to the supervision of
the Reinsurer. The selection of
independent claims adjusters shall be
subject to prior written approval of the
Reinsurer and Company. Such independent
claims adjusters are not the agents of
the Company and the Company shall be held
harmless and indemnified by the
Reinsurer for any liability, claim, demand,
expense and/or cost of whatever kind
or character as a result of, related to or
connected with any action or inaction
of such claims adjusters.
2
<PAGE>
1.05 The Company shall not be responsible
for the General Agent's expenses and
costs, including, but not limited to,
salaries, bonuses, rentals, transportation
facilities, clerk hire, solicitors' fees,
postage, advertising, exchange,
personal license fees, adjustment by the
General Agent of losses under policies
issued by the General Agent, or any other
agency expenses whatsoever. The
General Agent's sole compensation shall be
the amounts payable to the General
Agent in Article III of this Agreement.
1.06 The General Agent understands and
agrees that it has no power or authority
granted to it by the Company independent of
this Agreement and the 2005 Excess
of Liability Reinsurance Agreement, and
that this Agreement and the General
Agent's authority hereunder shall cease
immediately upon the termination, for
any reason, of this Agreement or any of the
Reinsurance Agreements (excepting
only the General Agent's responsibilities
with regard to run-off and other
matters as set forth herein or in the
Reinsurance Agreements).
1.07 The General Agent shall not have the
power to accept or bind risk other
than as set forth herein, as set forth in
the 2005 Excess of Liability
Reinsurance Agreement or as may be
subsequently authorized by the Company and
Reinsurer in writing. The General Agent may
not bind or cede reinsurance or
retrocession on behalf of the Company, may
not commit the Company to
participation in insurance or reinsurance
syndicates, and may not commit the
Company to a claim settlement with a
reinsurer without the prior written
approval of the Company. If such prior
written approval is given, the General
Agent shall forward promptly a report to
the Company concerning such transaction
and/or payment. The Company hereby
authorizes the General Agent to collect
payments for losses and loss adjustment
expenses from a reinsurer. The General
Agent shall send a report to the Company
concerning such transactions promptly.
1.08 The General Agent acknowledges that,
with respect to any state in which
business is permitted to be written under
the Reinsurance Agreements, this
Agreement shall not become effective until
the General Agent is first duly
appointed by the Company with the
applicable regulatory authority. The General
Agent agrees that any producing agent
receiving commission pursuant to this
Agreement shall first be duly registered by
the Company and said appointment on
file with any applicable state insurance
department. The General Agent further
agrees to be responsible for the payment of
any penalty assessed to the Company
for any violation by the General Agent or
any producing agent or broker
registered by the General Agent pursuant to
the provisions of Article IV hereof
of any license or appointment provision of
the Texas Insurance Code, or other
applicable state statutes, and the rules
and regulations promulgated thereunder.
If the General Agent fails to pay such
penalty, the Reinsurer shall in
accordance with the 2005 Excess of
Liability Reinsurance Agreement pay it
immediately upon written notification by
the Company of the General Agent's
failure to pay such penalty.
1.09 It is understood that the Reinsurer
has acknowledged that the Company shall
not be required to monitor the General
Agent's compliance with the terms of
either the Reinsurance Agreements or this
Agreement and the Reinsurer shall be
responsible for monitoring the General
Agent's compliance with the Reinsurance
Agreements and this Agreement.
3
<PAGE>
1.10 The authority and limitations of the
General Agent to issue policies are as
follows:
(a) the maximum annual premium volume the General Agent may
produce
under this Agreement is $50,000,000 (fifty million dollars);
(b) the basis of the rates charged are as provided in the
Company's
rate manuals, rate brochures and rate schedules which the General
Agent
shall follow, and the General Agent shall not decrease rates or
increase discounts without the prior approval of the Company
and
Reinsurer;
(c) the only classes of business the General Agent is authorized
to
produce and
handle under this Agreement are the classes of business
specified in the Reinsurance Agreements;
(d) the General Agent may issue policies under this Agreement only
to
insured residents in the states in which business is permitted to
be
produced under the Reinsurance Agreements; but this limitation
shall
not apply to losses if said policies provide coverage outside
the
aforesaid territorial limit;
(e) the General Agent shall only cancel policies as set forth in
the
policy form for the policies produced hereunder or as otherwise
permitted by applicable law;
(f) the maximum term for any policy issued hereunder shall be
twelve
(12) months;
(g) the General
Agent shall employ all reasonable and appropriate
measures to control and keep a record of the issuance of the
Company's
insurance policies hereunder, including, but not limited to,
keeping
records of policy numbers issued and maintaining policy
inventories;
(h) the excluded risks are those set forth in the 2005 State
National
Quota Share Reinsurance Agreements.
(i) the maximum limits of liability for policies to be produced are
as
follows:
1. General
Liability - $1,000,000 (one million dollars) per
occurrence; $2,000,000 (two million dollars) aggregate;
2.
Automobile Liability - $1,000,000 (one million dollars)
combined
single limit or $1,000,000 (one million
dollars)/$1,000,000 (one million dollars) split limit;
3.
Property - $10,000,000 (ten million dollars) per risk
The above limits apply to all segments for General Liability.
These
limits also apply to the Small Market and Middle Market for
Property
and Automobile policies only.
In underwriting policies, the General Agent
shall follow the underwriting
guidelines developed by the General Agent,
the Reinsurer and the Company, and
these guidelines are herein incorporated by
reference.
4
<PAGE>
ARTICLE II
PREMIUMS
2.01 It is expressly agreed and understood
that all premiums collected by the
General Agent are collected on behalf of
the Company; that such premiums are the
property of the Company, the 2005 State
National Quota Share Reinsurers and the
Reinsurer as their respective interests may
appear pursuant to the Reinsurance
Agreements, less such commissions and fees
as are due the General Agent as
specified herein. All premiums on policies
issued hereunder shall be collected
within seventy-five (75) days of the
effective date of the policy or the General
Agent shall cancel such policy. All
premiums collected by the General Agent on
the business produced under the Reinsurance
Agreements shall be held in trust by
the General Agent in a fiduciary capacity
on behalf of the Company and shall be
deposited immediately in a segregated trust
account that is maintained separate
and apart from all other bank accounts of
the General Agent and which reflects
the ownership of the account by the Company
(the "Operating Fund"). The General
Agent shall not commingle any funds
deposited in the Operating Fund with its
general assets. The General Agent shall
have no legal or beneficial right, title
or interest in the Operating Fund. The
General Agent is responsible for full
compliance with all applicable laws,
regulations, rules and requirements
regarding fiduciary trust accounts.
(a) All premiums collected by the General Agent shall be
deposited
immediately in the Operating Fund. The only disbursements from
the
Operating Fund shall be the payment of claims, claims expenses,
return
premiums, commission due the General Agent as authorized herein,
Ceding
Fee (as defined in Article 3.02 of this Agreement) due the Company
and
remittances in accordance with Article 12, Accounts, Remittances
and
Loss Settlements of the 2005 State National Quota Share
Reinsurance
Agreements. Within ten (10) days after the end of each month,
the
General Agent will furnish an accounting of the cash
transactions
reported in the Operating Fund. Such accounting will include: (i)
a
summary of premiums, net of cancellations and returns, deposited in
the
account; (ii) losses and loss adjustment expenses paid, net of
any
salvage and subrogation; (iii) commissions paid or received;
(iv)
interest or other investment income received; (v) any bank
charges
deducted; (vi) Ceding Fees and premium taxes paid; (vii) detail of
all
such other amounts that increased or decreased the reported
cash
balance in a level of detail sufficient to enable the Company to
meet
its Statutory financial reporting requirements; and (viii) copies
of
bank statements and of the reconciliation of same to the
reported
financial amounts.
(b) The General Agent, via an investment manager, shall have the
power
to direct the investment of the funds held in the Operating Fund.
The
General Agent shall satisfy any financial obligation of the Company
to
the 2005 State National Quota Share Reinsurers by remitting
funds
deposited in the Operating Fund to such 2005 State National Quota
Share
Reinsurers. In addition, any interest earned on funds deposited in
the
Operating Fund shall inure to the benefit of the General Agent.
The
Operating Fund shall be established so that the Company will
receive on
a monthly basis a detailed report on all investment
transactions,
copied on all executed trade tickets, and receive monthly
account
reporting directly from the Custodian so that all disbursements
and
transactions can be reconciled.
(c) The bank costs incurred for the Operating Fund shall be
deducted
from interest income earned on the Operating Fund balance. The
General
Agent shall be responsible for any bank costs that exceed the
interest
income earned on the Operating Fund.
The General Agent shall not make personal
use of any funds in this account. The
commissions payable to the General Agent
are debts due to the General Agent by
the Reinsurer and the privilege herein
granted of deducting commissions from
said premiums should not be taken as a
waiver by the Company of its exclusive
ownership rights of premiums as provided
herein. Should any dispute arise
between the Company, the Reinsurer and/or
the General Agent regarding payment of
premium, the General Agent shall remit
immediately all money and property,
without deductions for commissions, to the
Operating Fund with full reservation
of any and all rights reserved by the
parties.
2.02 The General Agent shall furnish to the
Company and the Reinsurer all
necessary premium and loss data (in a form
acceptable to the Reinsurer and the
Company) no later than thirty (30) days
following the end of the month during
which the business is written or losses are
incurred to enable the Company to
record statistics required by statutes,
regulation or upon call by authorities
having competent jurisdiction. Such data
shall include, but is not limited to,
premiums written and unearned premium. Said
data shall be segregated by lines of
insurance and location of risk.
5
<PAGE>
2.03 The keeping of an account with the
General Agent on the Company's books as
a creditor and debtor account is declared a
record memorandum of business
transacted and neither such keeping of an
account, nor alteration in commission
rate, nor failure to enforce prompt
remittance or compromise or settlement or
declaration of balance of account, shall be
held to waive assertion of the trust
relation as to premiums collected by the
General Agent.
2.04 The General Agent shall be liable for
the payment of all premiums upon all
policies of insurance written through the
General Agent or any sub-agents of the
General Agent.
2.05 The General Agent shall remit to the
Reinsurer, or Company as applicable,
any funds of or due to the Company under
this Agreement at the earlier of the
following: (1) forty-five (45) days from
the end of the month in which premium
is recorded; or (2) forty-five (45) days
from the end of the month in which the
coverage under this Agreement became
effective.
2.06 The General Agent shall hold all funds
of or due the Company in a fiduciary
capacity.
ARTICLE III
COMPENSATION TO THE GENERAL AGENT
3.01 In partial consideration for the
services rendered hereunder and under the
Reinsurance Agreements, the General Agent
is entitled to the commission payable
by the Reinsurer as specified herein. In
addition, the Company shall allow the
General Agent a provisional commission as
specified in Article 10, Section A and
B of the 2005 State National Quota Share
Reinsurance Agreements less 2.0% (two
point zero percent) on all subject
collected net written premiums, as defined in
the 2005 State National Quota Share
Reinsurance Agreements with such amounts to
be paid to the General Agent on all subject
collected net written premiums
produced under this Agreement. The Company
shall not pay the General Agent any
commission amounts in respect of net
written premiums which are not received by
the Company. The General Agent shall assume
the credit risk associated with the
underlying insureds and shall pay to the
Company a Ceding Fee in respect of the
net written premiums whether collected or
not by the General Agent.
3.02 The General Agent shall pay direct to
the Company 6.0% (six point zero
percent) of all net written premiums
produced under this agreement ("Ceding
Fee"), and to the 2005 State National Quota
Share Reinsurers and 2005 Excess of
Liability Reinsurer their premiums, as
specified in the respective Reinsurance
Agreements, and the amounts for
assignments, assessments, premium taxes, fines
and penalties as specified in such
Reinsurance Agreements. This above Ceding Fee
due the Company shall not be reduced by any
payments due by the General Agent to
third parties except for return net written
premiums. The General Agent shall
allow the Company to return commission on
return net written prem
