CONTRIBUTION NOTE PURCHASE AGREEMENT

Exhibit 10(DD)

CONTRIBUTION NOTE PURCHASE AGREEMENT

Between

DONEGAL MUTUAL INSURANCE COMPANY

and

SHEBOYGAN FALLS MUTUAL INSURANCE COMPANY

DATED AS OF DECEMBER 27, 2006

CONTENTS

APPENDICES :

CONTRIBUTION NOTE PURCHASE AGREEMENT

     THIS CONTRIBUTION NOTE PURCHASE AGREEMENT (this “Agreement”) made as of this 27 ^th day of December, 2006 between DONEGAL MUTUAL INSURANCE COMPANY, a Pennsylvania mutual fire insurance company (“Donegal Mutual”) and SHEBOYGAN FALLS MUTUAL INSURANCE COMPANY, a Wisconsin mutual fire and casualty insurance company (“Sheboygan Falls”).

WITNESSETH:

     WHEREAS, Sheboygan Falls proposes to issue a contribution note (the “Note”), the repayment of which would be subordinated to the claims of policyholders of Sheboygan Falls and otherwise be in compliance with applicable provisions of the Wisconsin Insurance Code and the regulations of the Commissioner of Insurance of the State of Wisconsin, in the principal amount of Three Million Five Hundred Thousand Dollars ($3,500,000) in substantially the form of Appendix A;

     WHEREAS, Donegal Mutual proposes to purchase the Note;

     WHEREAS, Donegal Mutual and Sheboygan Falls propose that Sheboygan Falls will (i) make certain changes in the composition of the Board of Directors of Sheboygan Falls in connection with the transactions contemplated by this Agreement, (ii) adopt Amended and Restated Bylaws in substantially the form of Appendix C and (iii) enter into employment agreements with four of its executive officers in substantially the form of Appendices D-1 and D-2;

     WHEREAS, Donegal Mutual and Sheboygan Falls propose that Donegal Mutual and Sheboygan Falls enter into: (i) a Services Agreement in substantially the form of Appendix B whereby Donegal Mutual will provide the services specified therein to Sheboygan Falls in accordance with the terms of such Agreement, (ii) a Technology License Agreement in substantially the form of Appendix E whereby Donegal Mutual will license certain of its computer applications and systems to Sheboygan Falls in accordance with the terms of such Agreement and (iii) a Retrocessional Reinsurance Agreement in substantially the form of Appendix F, whereby Sheboygan Falls will cede all of its business to Donegal Mutual and Donegal Mutual will retrocede all of such business to Sheboygan Falls in accordance with the terms of such Agreement;

     WHEREAS, the Board of Directors of Donegal Mutual has approved this Agreement, the Services Agreement, the Technology License Agreement and the Retrocessional Reinsurance Agreement by resolutions duly adopted; and

     WHEREAS, the Board of Directors of Sheboygan Falls has approved this Agreement, the Note, the Services Agreement, the Technology License Agreement, the Retrocessional Reinsurance Agreement, the Amended and Restated Bylaws and the Employment Agreements by resolutions duly adopted;

     NOW, THEREFORE, in consideration of the mutual covenants set forth herein and intending to be legally bound hereby, Donegal Mutual and Sheboygan Falls agree as follows:

ARTICLE I

DEFINITIONS

     1.1 Definitions . When used in this Agreement, the following words or phrases have the following meanings:

     “Affiliate” shall mean a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with another Person or beneficially owns or has the power to vote or direct the vote of 10% or more of any class of voting stock or of any form of voting equity interest of such other Person in the case of a Person that is not a corporation. For purposes of this definition, “control”, including the terms “controlling” and “controlled”, means the power to direct or cause the direction of the management and policies of a Person, directly or indirectly, whether through the ownership of securities or partnership or other ownership interests, by contract or otherwise.

     “Agreement” shall have the meaning ascribed to it in the preamble.

     “Ancillary Documents” shall mean the Note, the Services Agreement, the Employment Agreements, the Technology License Agreement and the Retrocessional Reinsurance Agreement.

     “Amended and Restated Bylaws” shall mean the Amended and Restated Bylaws of Sheboygan Falls in substantially the form of Appendix C.

     “Annual Statements” shall mean the annual statements of condition and affairs filed pursuant to the Wisconsin Insurance Code.

     “Assets” shall mean all rights, titles, franchises and interests in and to every species of property, real, personal and mixed, tangible and intangible, and things in action relating thereto, including, without limitation, cash and cash equivalents, securities, including, without limitation, exempted securities under the Securities Act of 1933, as amended (the “Securities Act”), receivables, recoverables from reinsurance and otherwise, deposits and advances, loans, agents balances, real property, together with buildings, structures and the improvements thereon, fixtures contained therein and appurtenances thereto and easements

and other rights relating thereto, machinery, equipment, furniture, fixtures, leasehold improvements, vehicles and other assets or property, leases, licenses, permits, approvals, authorizations, joint venture agreements, contracts or commitments, whether written or oral, policy forms, training materials, underwriting manuals, lists of policyholders and agents, processes, trade secrets, know-how, computer software, computer programs and source codes, protected formulae, all other Intellectual Property, research, goodwill, prepaid expenses, books of account, records, files, invoices, data, rights, claims and privileges and any other assets whatsoever.

     “Closing” and “Closing Date” shall have the respective meanings set forth in Section 2.3.

     “Code” shall mean the Internal Revenue Code of 1986, as amended.

     “Commissioner of Insurance” shall mean the Commissioner of Insurance of the State of Wisconsin.

     “Condition” shall mean, as to a Person, the financial condition, business, results of operations, prospects, liabilities and/or properties or other Assets of such Person.

     “Contract” shall mean a contract, indenture, bond, note, mortgage, deed of trust, lease, agreement or commitment, whether written or oral, including, without limitation, an Insurance Contract.

     “Disclosure Schedule” or “Schedule” shall mean the Schedules attached to this Agreement.

     “Donegal Mutual” shall have the meaning ascribed to it in the preamble.

     “Donegal Mutual Adverse Effect” shall mean a material adverse effect on the Condition of Donegal Mutual, taken as a whole, other than resulting from general economic or financial conditions that do not affect Donegal Mutual uniquely.

     “Donegal Mutual Property” shall mean any property on which Donegal Mutual holds a Lien or any facility that is owned by Donegal Mutual or in the management of which Donegal Mutual actively participates.

     “Employment Agreements” shall mean the Employment Agreements to be entered into between Sheboygan Falls and Lee F. Wilcox in substantially the form of Appendix D-1 and between Sheboygan Falls and each of Bradford C. Bailey, Daniel A. Kussart and Janice L. Tupper in substantially the form of Appendix D-2.

     “Employee Welfare Plan” shall have the meaning set forth in Section 3(1) of ERISA.

     “Environmental Claim” shall mean any written notice by a Person alleging actual or potential Liability, including, without limitation, potential Liability for any investigatory cost, cleanup cost, governmental response cost, natural resources damage, property damage, personal injury or penalty, arising out of, based on or resulting from (a) the presence, transport, disposal, discharge or release, of any Hazardous Materials at any location, whether or not owned by Sheboygan Falls, as the case may be, or (b) circumstances forming the basis of any violation or alleged violation of any Environmental Law.

     “Environmental Law” shall mean all federal, state, local and foreign Laws relating to pollution or protection of human health or the environment, including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata, including, without limitation, Laws relating to emissions, discharges, releases or threatened releases, or the presence of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, existence, treatment, storage, disposal, transport, recycling, reporting or handling of Hazardous Materials.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.

     “ERISA Affiliate” shall mean, with respect to Sheboygan Falls, any trade or business that together with Sheboygan Falls would be deemed a “single employer” within the meaning of Section 4001(a)(14) of ERISA.

     “Existing Confidentiality Agreements” shall mean the Confidentiality Agreements between Sheboygan Falls and Donegal Mutual dated as of January 11, 2006 and October 31, 2006.

     “Governmental Entity” shall mean a court, legislature, governmental agency, commission or administrative or regulatory authority or instrumentality, domestic or foreign.

     “Hazardous Materials” shall mean any (i) “hazardous substance,” “pollutants,” or “containment” as defined in Sections 101(14) and (33) of the United States Comprehensive Environmental Response, Compensation and Liability Act, as amended (“CERCLA”) or the regulations issued pursuant to Section 102 of CERCLA, including any element, compound, mixture, solution or substance that is or may be designated pursuant to Section 102 of CERCLA; (ii) substance that is or may be designated pursuant to Section 311(b)(2)(A) of the Federal Water Pollution Control Act, as amended (“FWCPA”); (iii) hazardous waste having the characteristics identified under or listed pursuant to Section 3001 of the Resource Conservation and Recovery Act, as amended (“RCRA”) or having the characteristics that may subsequently be considered under RCRA to constitute a hazardous waste; (iv) substance containing petroleum, as that term is defined in Section 9001(8) of RCRA; (v) toxic pollutant that is or may be listed under Section 307(a) of FWCPA; (vi) hazardous air pollutant that is or may be listed under Section 112 of the Clean Air Act, as amended; (vii) imminently

hazardous chemical substance or mixture with respect to which action has been or may be taken pursuant to Section 7 of the Toxic Substance Control Act, as amended; (viii) source, special nuclear or by-product material as defined by the Atomic Energy Act of 1954, as amended; (ix) asbestos-containing material, or urea formaldehyde or material that contains it; (x) waste oil and other petroleum products and (xi) any other toxic materials, contaminants or hazardous substances or wastes pursuant to any Environmental Law.

     “Health and Safety Requirements” shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force and effect of Law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, including without limitation those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, labeling, testing, processing, discharge, release, threatened release, control or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls or noise, each as amended and as now or hereafter in effect.

     “Insurance Contract” shall mean any Contract of insurance including, without limitation, reinsurance contracts issued by Sheboygan Falls.

     “Insurance License” shall mean a License granted by a Governmental Entity to transact an insurance or reinsurance business.

     “Intellectual Property” shall mean (i) all inventions whether patentable or unpatentable and whether or not reduced to practice, all improvements thereof and all patents, applications and patent disclosures, together with all reissuance, continuations, continuations-in-part, revisions, extensions and reexaminations thereof; (ii) all trademarks, service marks, trade dress, logos, trade names and corporate names, together with all translations, adaptations, derivations and applications, registrations and renewals in connection therewith; (iii) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith; (iv) all mask works and all applications, registrations and renewals thereof; (v) all trade secrets and confidential business information including ideas, research and development, know-how, formulas, data, designs, drawings, specifications, policy forms, training materials, underwriting manuals, pricing and cost information and business and marketing plans and proposals; (vi) all computer software including data and related documentation; (vii) all other proprietary rights and (vii) all copies and tangible embodiments thereof in whatever form or medium.

     “Investment Assets” shall mean bonds, notes, debentures, mortgage loans, collateral loans and all other instruments of indebtedness, stocks, partnership interests and other equity interests, real estate and leasehold and other interests therein, certificates issued by or

interests in trusts, cash on hand and on deposit, personal property and interests therein and all other Assets acquired for investment purposes.

     “IRS” shall mean the Internal Revenue Service.

     “Knowledge” shall mean the knowledge of the relevant Person, after due inquiry by its appropriate officer or officers.

     “Law” shall mean a law, ordinance, rule or regulation enacted or promulgated, or an Order issued or rendered, by any Governmental Entity.

     “Liability” shall mean a liability, obligation, claim or cause of action of any kind or nature whatsoever, whether absolute, accrued, contingent or other and whether known or unknown, including, without limitation, any liability, obligation, claim or cause of action arising as a result of an Insurance Contract.

     “License” shall mean a license, certificate of authority, permit or other authorization to transact an activity or business issued or granted by a Governmental Entity.

     “Lien” shall mean a lien, mortgage, deed to secure debt, pledge, security interest, lease, sublease, charge, levy or other encumbrance of any kind.

     “Losses” shall mean losses, claims, damages, costs, expenses, Liabilities and judgments, including, without limitation, court costs and attorneys’ and expert witness fees.

     “Note” shall mean the Contribution Note to be issued by Sheboygan Falls to Donegal Mutual in substantially the form of Appendix A.

     “OCI” shall mean the Office of the Commissioner of Insurance of the State of Wisconsin.

     “Officers’ Certificate” shall mean, with respect to any Person, a certificate executed by the Chief Executive Officer, the President or an appropriate Vice President of such Person, as attested by the Secretary or an Assistant Secretary of such Person.

     “Ordinary Course of Business” shall mean an action taken by a Person if: (i) such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person; (ii) such action is not required to be authorized by the board of directors of such Person or by any Person or group of Persons exercising similar authority or by a parent company and (iii) such action is similar in nature and magnitude to actions customarily taken, without any authorization by the board of directors or by any Person or group of Persons exercising similar authority or by a parent company, in the ordinary course of the normal day-to-day operations of other Persons that are in the same line of business as such Person.

     “Order” shall mean an order, writ, ruling, judgment, injunction or decree of, or any stipulation to or agreement with, any arbitrator, mediator or Governmental Entity.

     “PBGC” shall mean the Pension Benefit Guaranty Corporation or any successor entity.

     “Permits” shall have the meaning set forth in Section 3.10(d).

     “Permitted Liens” shall mean as to Sheboygan Falls, (i) all Liens approved in writing by Donegal Mutual, (ii) statutory Liens arising out of operation of Law with respect to a Liability incurred in the Ordinary Course of Business of Sheboygan Falls and that is not delinquent and can be paid without interest or penalty and (iii) such Liens and other imperfections of title that do not materially detract from the value or impair the use of the property subject thereto.

     “Person” shall mean an individual, corporation, partnership, association, joint stock company, Governmental Entity, business trust, unincorporated organization or other legal entity.

     “Proceedings” shall mean actions, suits, hearings, claims and other similar proceedings.

     “Quarterly Statements” shall mean the quarterly statements of condition and affairs filed pursuant to state insurance Laws.

     “Reorganization Proposal” shall have the meaning set forth in Section 5.8.

     “Required Filings and Approvals” shall mean the filing of this Agreement with and the approval of such by the Commissioner of Insurance, and such other applications, registrations, declarations, filings, authorizations, Orders, consents and approvals as may be required to be made or obtained prior to consummation of the transactions contemplated hereby under the Laws of any jurisdiction.

     “Retrocessional Reinsurance Agreement” shall mean the Retrocessional Reinsurance Agreement between Donegal Mutual and Sheboygan Falls in substantially the form of Appendix F.

     “SAP” shall mean statutory accounting practices as prescribed or permitted by the Commissioner of Insurance and the National Association of Insurance Commissioners subject, in the case of unaudited interim financial statements, to normal year-end adjustments and the absence of footnotes.

     “Sanders” shall mean Sanders Morris Harris, Inc.

     “Services Agreement” shall mean the Services Agreement between Donegal Mutual and Sheboygan Falls in substantially the form of Appendix B.

     “Sheboygan Falls” shall have the meaning ascribed to it in the preamble.

     “Sheboygan Falls Adverse Effect” shall mean a material adverse effect on the Condition of Sheboygan Falls, taken as a whole, other than resulting from general economic or financial conditions that do not affect Sheboygan Falls uniquely.

     “Sheboygan Falls Financial Statements” shall have the meaning set forth in Section 3.4.

     “Sheboygan Falls Property” shall mean any property on which Sheboygan Falls holds a Lien or any facility that is owned by Sheboygan Falls or in the management of which Sheboygan Falls actively participates.

     “Subsidiary” of a Person means any Person with respect to whom such specified Person, directly or indirectly, beneficially owns 50% or more of the equity interests in, or holds the voting control of 50% or more of the equity interests in, such Person.

     “Taxes” shall mean all income, gross income, gross receipts, premium, sales, use, transfer, franchise, profits, withholding, payroll, employment, excise, severance, property and windfall profits taxes, and all other taxes, assessments or similar charges of any kind whatsoever thereon or applicable thereto, together with any interest and any penalties, additions to tax or additional amounts, in each case imposed by any taxing authority, domestic or foreign, upon Sheboygan Falls, including, without limitation, all such amounts imposed as a result of being a member of an affiliated or combined group.

     “Tax Returns” or “Returns” shall mean all tax returns, declarations, reports, estimates, information returns and statements required to be filed under federal, state, local or foreign Laws.

     “Technology License Agreement” shall mean the Technology License Agreement between Donegal Mutual and Sheboygan Falls in substantially the form of Appendix E.

     “Wisconsin Insurance Code” shall mean Chapters 611 and 617 of the Wisconsin Insurance Code, as amended, and the regulations promulgated thereunder.

ARTICLE II

SALE AND PURCHASE OF NOTE

     2.1 Sale and Purchase of Note . Upon the terms, conditions, representations and warranties herein set forth, Sheboygan Falls hereby agrees to sell the Note to Donegal Mutual and Donegal Mutual hereby agrees to purchase the Note from Sheboygan Falls.

     2.2 Payment of Purchase Price and Delivery of Note . The purchase price of the Note shall be Three Million Five Hundred Thousand Dollars ($3,500,000). The entire purchase price of the Note is to be paid in cash by Donegal Mutual to Sheboygan Falls on the Closing Date against delivery of the Note.

     2.3 Closing Date .

          (a) Subject to the fulfillment of the conditions precedent specified in Article VI, the transactions contemplated by this Agreement shall be consummated (the “Closing”) at 10:00 a.m. on the second business day following the date on which all of the conditions set forth in Article VI shall have been fulfilled (the “Closing Date”). Unless otherwise mutually agreed by Donegal Mutual and Sheboygan Falls, the Closing shall be held at the offices of Foley & Lardner LLP, 150 East Gilman, Madison, Wisconsin 53703.

          (b) At the Closing, Sheboygan Falls shall deliver to Donegal Mutual (i) copies of each resolution adopted by the Board of Directors of Sheboygan Falls approving and adopting this Agreement, the Note, the Services Agreement, the Employment Agreements, the Technology License Agreement, the Retrocessional Reinsurance Agreement and the Amended and Restated Bylaws and authorizing the consummation of the transactions contemplated hereby and thereby, certified by the Secretary of Sheboygan Falls that each such resolution is then in full force and effect and without amendment; (ii) any Officers’ Certificates specified in Section 6.2 duly executed by Sheboygan Falls; (iii) the Services Agreement duly executed by Sheboygan Falls; (iv) the Technology License Agreement duly executed by Sheboygan Falls; (v) the Retrocessional Reinsurance Agreement duly executed by Sheboygan Falls; (vi) the Note duly executed by Sheboygan Falls; (vii) duly executed copies of the resignations of four current members of the Board of Directors of Sheboygan Falls designated by Sheboygan Falls and evidence of the election of six designees of Donegal Mutual to Sheboygan Falls’ Board of Directors as specified in Section 6.2(d); (viii) evidence of the termination of any severance or similar agreement required by Section 6.2(e) and (ix) duly executed copies of the Employment Agreements as specified in Section 6.2(e).

          (c) At the Closing, Donegal Mutual shall deliver to Sheboygan Falls (i) copies of each resolution adopted by the Board of Directors of Donegal Mutual approving and adopting this Agreement, the Services Agreement, the Technology License Agreement and the Retrocessional Reinsurance Agreement and authorizing the consummation of the transactions contemplated hereby and thereby, certified by the Secretary of Donegal Mutual that each such resolution is then in full force and effect and without amendment; (ii) the Services Agreement duly executed by Donegal Mutual; (iii) the Technology License Agreement duly executed by Donegal Mutual; (iv) the Retrocessional Reinsurance Agreement duly executed by Donegal Mutual and (v) any Officers’ Certificate specified in Section 6.3 duly executed by Donegal Mutual.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SHEBOYGAN FALLS

     As an inducement to Donegal Mutual to enter into this Agreement and to consummate the transactions contemplated herein, Sheboygan Falls represents and warrants to Donegal Mutual and agrees as follows:

     3.1 Organization and Standing .

          (a) Sheboygan Falls is a mutual fire and casualty insurance company duly organized, validly existing and in good standing under the laws of the State of Wisconsin. Sheboygan Falls is not admitted to transact an insurance business as a foreign insurance company in any state.

          (b) Sheboygan Falls has the corporate power and authority and other authorizations necessary or required in order for it to own or lease and operate the Sheboygan Falls Property and to carry on its business as now conducted.

     3.2 Subsidiaries . Sheboygan Falls has no subsidiaries.

     3.3 Authorization . Sheboygan Falls has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Documents, and to adopt the Amended and Restated Bylaws and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement, the Note, the Services Agreement, the Employment Agreements, the Technology License Agreement and the Retrocessional Reinsurance Agreement, the consummation of the transactions contemplated hereby and thereby and the adoption of the Amended and Restated Bylaws (which Amended and Restated Bylaws are subject to the approval of the OCI) have been duly approved and authorized by the Board of Directors of Sheboygan Falls. No other corporate proceedings on the part of Sheboygan Falls are necessary to authorize this Agreement, the Note, the Services Agreement, the Employment Agreements, the Technology License Agreement and the Retrocessional Reinsurance Agreement and the transactions contemplated hereby and thereby and the adoption of the Amended and Restated Bylaws. This Agreement, and the Ancillary Documents, when executed and delivered by Sheboygan Falls and assuming the due execution thereof by the other parties thereto, will constitute the valid, legal and binding agreements of Sheboygan Falls enforceable in accordance with their respective terms, except that (i) such enforcement may be subject to bankruptcy, rehabilitation, liquidation, conservation, dissolution, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors’ rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any Proceeding therefor may be brought. Neither the execution nor the delivery of this Agreement or the Ancillary

Documents or the adoption of the Amended and Restated Bylaws nor the consummation of the transactions contemplated hereby or thereby, nor compliance with nor fulfillment of the terms and provisions hereof or thereof, will (i) conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under the Restated Articles of Incorporation or the Amended and Restated Bylaws of Sheboygan Falls, or any instrument, agreement, mortgage, judgment, Order, award, decree or other restriction to which Sheboygan Falls is a party; (ii) give any party to or with rights under any such instrument, agreement, mortgage, judgment, Order, award, decree or other restriction the right to terminate, modify or otherwise change the rights or obligations of Sheboygan Falls under such instrument, agreement, mortgage, judgment, Order, award, decree or other restriction or (iii) require the approval, consent or authorization of or any filing with or notification to any federal, state or local court or Governmental Entity, except (y) the Required Filings and Approvals and (z) any approval, consent or authorization the failure of which to obtain would not, individually or in the aggregate, have a Sheboygan Falls Adverse Effect.

     3.4 Financial Statements; Examinations .

          (a) Sheboygan Falls has furnished to Donegal Mutual the balance sheets of Sheboygan Falls as of December 31, 2003, 2004 and 2005 and the related statements of operations and of changes in financial position for the periods then ended, together with appropriate notes to such financial statements (collectively, the “Sheboygan Falls Financial Statements”). Sheboygan Falls will furnish to Donegal Mutual, if available prior to Closing, the balance sheet of Sheboygan Falls as of December 31, 2006 and the related statements of operations and of changes in financial position for the period then ended, together with appropriate notes to such financial statements, which shall also constitute “Sheboygan Falls Financial Statements.” The Sheboygan Falls Financial Statements are accompanied by the reports thereon by Dippold & Associates, LLC, independent certified public accountants. The Sheboygan Falls Financial Statements are correct and complete in all material respects and fairly present the financial position of Sheboygan Falls as at the respective dates thereof, the results of its operations and the changes in its financial position for the respective periods covered thereby and have been prepared in conformity with SAP consistently applied throughout all periods.

          (b) Each of the Annual Statements for 2003, 2004 and 2005 and, if available, for 2006 was or will be in compliance in all material respects with applicable Law when filed.

          (c) The most recently completed report of examination of Sheboygan Falls conducted by the OCI was for the period set forth in Schedule 3.4(C), and a complete and correct copy of such report is attached to Schedule 3.4(C).

          (d) Since the dates of all examinations referred to in Schedule 3.4(C), Sheboygan Falls has not been the subject of further examination by any insurance

Governmental Entity, and Sheboygan Falls is not currently undergoing examination by any insurance Governmental Entity.

          (e) Schedule 3.4(E) sets forth a correct and complete list of all (i) accounts, borrowing resolutions and deposit boxes maintained by Sheboygan Falls at any bank or other financial institution, (ii) the names of the persons authorized to sign or otherwise act with respect thereto and (iii) powers of attorney for Sheboygan Falls with respect thereto.

     3.5 Material Changes Since December 31, 2005 . Since December 31, 2005, the business of Sheboygan Falls has been operated only in the ordinary course and, whether or not in the Ordinary Course of Business of Sheboygan Falls, other than as disclosed in this Agreement or the Schedules referred to herein, there has not been, occurred or arisen (i) any material adverse change in the Condition of Sheboygan Falls from that shown on the balance sheet of Sheboygan Falls as of December 31, 2005 referred to in Section 3.4; (ii) any damage or destruction in the nature of a casualty loss, whether covered by insurance or not, to any Asset that is material to the financial condition, operations or business of Sheboygan Falls; (iii) any material increase in any employee benefit plan listed in Section 3.18; (iv) any amendment or termination of any agreement, or cancellation or reduction of any debt owing to Sheboygan Falls or waiver or relinquishment of any right of material value to Sheboygan Falls or (v) any other event, condition or state of facts of any character that would constitute a Sheboygan Falls Adverse Effect.

     3.6 Availability of Assets and Legality of Use . The Assets owned or leased by Sheboygan Falls constitute all of the Assets that are being used in its business, and such Assets, to the Knowledge of Sheboygan Falls, are in good and serviceable condition, normal wear and tear excepted, and suitable and adequate for the uses for which intended and such Assets and their uses conform in all material respects to all applicable Laws. Such Assets will be sufficient for the continued conduct of Sheboygan Falls’ business immediately after the Closing in substantially the same manner as Sheboygan Falls’ business was conducted immediately prior to the Closing.

     3.7 Title to Property . Sheboygan Falls has good and marketable title to all of its Assets, including the Assets reflected on the December 31, 2005 balance sheet referred to in Section 3.4 and all of the Assets thereafter acquired by it, except to the extent that such Assets have thereafter been disposed of for fair value in the Ordinary Course of Business of Sheboygan Falls.

     3.8 Books and Records . The books of account, minute books and other records of Sheboygan Falls, all of which have been made available to Donegal Mutual, are complete and correct and have been maintained in accordance with sound business practices and the requirements of the Wisconsin Insurance Code and any other applicable Laws, including the maintenance of an adequate system of internal controls. Since January 1, 2001, the minute books of Sheboygan Falls contain accurate and complete records of all meetings held of, and

corporate action taken by, the policyholders, the Board of Directors and committees of the Board of Directors of Sheboygan Falls, and no meeting of any such policyholders, Board of Directors or committees thereof has been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, all of the aforementioned books and records will be in the possession of Sheboygan Falls.

     3.9 Accounts Receivable . All accounts receivable reflected on the December 31, 2005 balance sheet referred to in Section 3.4 and all accounts receivable arising subsequent to such date and prior to the date hereof, not collected at the date hereof, have arisen from bona fide transactions in the Ordinary Course of Business of Sheboygan Falls. To the Knowledge of Sheboygan Falls, none of such receivables is subject to counterclaims or set-offs or is in dispute and all of such accounts are good and collectible in the Ordinary Course of Business at the aggregate recorded amounts thereof, subject in each case to the allowance for possible losses shown on such balance sheet. All accounts receivable existing on the Closing Date will be good and collectible in the Ordinary Course of Business at the aggregate recorded amounts thereof, net of any applicable allowance for doubtful accounts, which allowance will be determined on a basis consistent with the basis used in determining the allowance for doubtful accounts reflected in the December 31, 2005 balance sheet referred to in Section 3.4.

     3.10 Compliance with Legal Requirements; Governmental Authorizations . Schedule 3.10 contains a complete and accurate list and copy of its license to transact insurance in Wisconsin and each other material license, permit and other authorization held by Sheboygan Falls in the operation of its business. Except as set forth in Schedule 3.10:

          (a) To the Knowledge of Sheboygan Falls, Sheboygan Falls is, and at all times since January 1, 2001 has been, in compliance in all material respects with the Wisconsin Insurance Law, and all other Laws that are applicable to it or to the conduct or operation of its business or the ownership or use of any of its Assets.

          (b) To the Knowledge of Sheboygan Falls, no event has occurred or circumstance exists that with or without notice or lapse of time (i) may constitute or result in a violation by Sheboygan Falls of, or a failure on the part of Sheboygan Falls to comply with, any Law in any material respect or (ii) may give rise to any material obligation on the part of Sheboygan Falls to undertake, or to bear all or any portion of the cost of, any remedial action of any nature.

          (c) Sheboygan Falls has not received, at any time since January 1, 2001, any oral or written notice or other communication from any Governmental Entity or any other Person regarding (i) any actual, alleged, possible or potential violation of, or failure to comply with, any Law in any material respect or (ii) any actual, alleged, possible or potential material obligation that may give rise on the part of Sheboygan Falls to undertake, or to bear all or any portion of the cost of, any material remedial action of any nature.

          (d) Sheboygan Falls possesses all material licenses, permits and other authorizations necessary to own or lease and operate its properties and to conduct its business as now conducted and each of Sheboygan Falls’ agents is duly licensed as such. All of such licenses, permits and authorizations of Sheboygan Falls and such agents’ appointments are hereinafter collectively called the “Permits.” All Permits are in full force and effect and will continue in effect after the date hereof and the Closing Date without the consent, approval or act of, or the making of any filing with, any Governmental Entity other than the Required Filings and Approvals. To the Knowledge of Sheboygan Falls, Sheboygan Falls is, and at all times since January 1, 2001 has been, in material compliance with all terms and requirements of each Permit. Neither Sheboygan Falls nor, to the Knowledge of Sheboygan Falls, any of Sheboygan Falls’ agents is in material violation of the terms of any Permit, and Sheboygan Falls has not received notice of any violation or claimed violation thereunder. All applications required to have been filed for the renewal of any and all Permits have been duly filed on a timely basis with the appropriate Governmental Entity, and all other filings required to have been made with such Governmental Entities with respect to the Permits have been duly made on a timely basis.

     3.11 Real Property and Leases . Except as described on Schedule 3.11(A), Sheboygan Falls does not own any real property, nor is Sheboygan Falls a party to any lease or agreement under which Sheboygan Falls is lessee or sublessee of, or holds or operates, any real property owned by any third party. All of such leases and agreements are in full force and effect and constitute legal, valid and binding obligations of Sheboygan Falls, and, to the Knowledge of Sheboygan Falls, the other parties thereto. Sheboygan Falls is not in default in any material respect under any such lease or agreement nor has any event occurred that, with the passage of time or giving of notice or both would constitute such a default and Sheboygan Falls will not take any action or fail to take required action between the date hereof and the Closing Date that would permit any such default or event to occur. None of such leases and agreements requires the consent of any party thereto in order to undertake or consummate the transactions contemplated by this Agreement.

     3.12 Insurance . Sheboygan Falls maintains policies of fire and casualty, product and other liability and other forms of insurance in such amounts and against such risks and losses as are adequate and reasonable for its business as currently conducted and properties and are sufficient for compliance with all Laws applicable to Sheboygan Falls. All such policies are valid, duly issued and enforceable in accordance with their respective terms and conditions. Attached as Schedule 3.12 is a list and an accurate description of all policies of insurance that are or were owned, held or maintained by or for the benefit of Sheboygan Falls or under which Sheboygan Falls is or was a named insured from January 1, 2001 to the date hereof, including policy numbers, nature of coverage, limits, deductibles, carriers, premiums and effective and termination dates, under which Sheboygan Falls has any remaining coverage. To the Knowledge of Sheboygan Falls, Sheboygan Falls has complied with each of such policies and has not failed to give any notice or present any known claim thereunder.

     Sheboygan Falls will keep such insurance in full force and effect through the Closing Date. Sheboygan Falls has not received, and, to the Knowledge of Sheboygan Falls, no event or omission has occurred that may cause it to receive, notice that any such policies will be cancelled or will be reduced in amount or scope. True and complete copies of all such policies have been delivered to Donegal Mutual.

     3.13 Conduct of Business .

          (a) Schedule 3.13 lists all claims arising in other than the Ordinary Course of Business of Sheboygan Falls that are pending or, to the Knowledge of Sheboygan Falls, threatened against Sheboygan Falls and correctly sets forth the data reflected therein, including the insurance carrier to which the claim has been reported. No insurance carrier listed therein has denied coverage of any claim listed opposite its name or accepted investigation of any such loss or defense of any such claim under a reservation of rights.

          (b) The aggregate actuarial reserves and other actuarial amounts held in respect of Liabilities with respect to Insurance Contracts of Sheboygan Falls as established or reflected in the December 31, 2005 Annual Statement of Sheboygan Falls and in the Sheboygan Falls Financial Statements as of December 31, 2005: (i) were or will be determined in accordance with sound actuarial standards consistently applied, (ii) were or will be fairly stated in accordance with sound actuarial principles, (iii) were or will be based on actuarial assumptions that are in accordance with those specified in the related Insurance Contracts, (iv) met or will meet the requirements of the insurance Laws of the applicable jurisdiction in all material respects and (v) to the Knowledge of Sheboygan Falls, were or will be adequate to cover the total amount of all reasonably anticipated matured and unmatured Liabilities of Sheboygan Falls under all outstanding Insurance Contracts pursuant to which Sheboygan Falls has any Liability. For purposes of clause (v) above, (x) the adequacy of reserves shall be determined only on the basis of facts and circumstances known based on procedures consistently applied by Sheboygan Falls in connection with assessing the adequacy of reserves from time to time by Sheboygan Falls as at the date hereof and (y) the fact that reserves covered by any such representation may be subsequently adjusted at times and under circumstances consistent with Sheboygan Falls’ ordinary practice of periodically reassessing the adequacy of its reserves shall not be used to support any claim regarding the accuracy of such representation.

          (c) All of Sheboygan Falls’ outstanding insurance coverage is, to the extent required by applicable Law, on forms and at rates approved by the insurance regulatory authority of the jurisdiction where issued or has been filed with and not objected to by such authority within the period provided for objection. To the Knowledge of Sheboygan Falls, Sheboygan Falls has not exceeded any authority granted to it by any party to bind it in connection with Sheboygan Falls’ business.

     3.14 No Undisclosed Material Liabilities . Sheboygan Falls is not subject to any material Liability, including, to Sheboygan Falls’ Knowledge, unasserted claims, absolute or contingent, that is not shown or that is in excess of amounts shown or reserved for in the December 31, 2005 balance sheet referred to in Section 3.4, other than Liabilities of the same nature as those set forth in such balance sheet and reasonably incurred in the Ordinary Course of Business of Sheboygan Falls after December 31, 2005 or as otherwise disclosed in the Disclosure Schedules.

     3.15 No Defaults or Litigation . Sheboygan Falls is not in default in any material respect under any Contract to which it is a party. There are no lawsuits, proceedings, claims or governmental investigations pending or, to the Knowledge of Sheboygan Falls, threatened against Sheboygan Falls or against the properties or business thereof that might, individually or in the aggregate, have a Sheboygan Falls Adverse Effect and Sheboygan Falls has no Knowledge of any factual basis for any such lawsuit, proceeding, claim or investigation and there is no action, suit, proceeding or investigation pending, threatened or contemplated that questions the legality, validity or propriety of the transactions contemplated by this Agreement.

     3.16 Tax Liabilities . The amounts reflected as liabilities for Taxes on the December 31, 2005 balance sheet referred to in Section 3.4 are sufficient for the payment of all Taxes of Sheboygan Falls accrued for or applicable to the period ended on such balance sheet date and all years and periods prior thereto. All Tax Returns that are required to be filed by or in respect of Sheboygan Falls up to and including the date hereof have been filed and all Taxes, including any interest and penalties thereon, which have become due pursuant to such Returns or pursuant to any assessment have been paid and no extension of the time for filing of any such return is presently in effect. All such Returns that have been filed or will be filed by or in respect of Sheboygan Falls for any period ending on or before the Closing Date are or will be true and correct. There exists no proposed assessment against Sheboygan Falls. No consent to the application of Section 341(f)(2) of the Code has been filed with respect to any Sheboygan Falls Property. Sheboygan Falls has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor or other third party. No claim has ever been made by a Governmental Entity in a jurisdiction where Sheboygan Falls does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. Sheboygan Falls has delivered to Donegal Mutual correct and complete copies of all federal, state and local Tax Returns, examination reports and statements of deficiencies assessed against or agreed to by Sheboygan Falls since January 1, 2001. The federal Tax Returns for Sheboygan Falls have never been examined by the IRS, and the applicable statute of limitations relating thereto has expired for the tax year ended December 31, 2002 and all prior periods.

     3.17 Contracts . Sheboygan Falls is not a party to (i) any contract for the purchase or sale of real property to or from any third party; (ii) any contract for the lease or sublease of

personal property from or to any third party that provides for annual rentals in excess of $25,000, or any group of contracts for the lease or sublease of similar kinds of personal property from or to third parties that provides in the aggregate for annual rentals in excess of $25,000; (iii) any contract for the purchase or sale of equipment, computer software, lists of clients, insurance carriers or agents or similar information, commodities, merchandise, supplies, other materials or personal property or for the furnishing or receipt of services that calls for performance over a period of more than 60 days and involves more than the sum of $25,000; (iv) any license agreement involving the use of copyrights, franchises, licenses, trademarks, or information owned by Sheboygan Falls or others; (v) any broker’s representative, sales, agency or advertising contract that is not terminable on notice of 30 days or less; (vi) any contract involving the borrowing or lending of money or the guarantee of the obligations of officers, directors, employees or others or (vii) any other contract, whether or not made in the Ordinary Course of Business of Sheboygan Falls that is material to the business or Assets of Sheboygan Falls. No outstanding purchase commitment by Sheboygan Falls is in excess of its ordinary business requirements or at a price in excess of market price at the date thereof. None of such contracts and agreements will expire or be terminated or be subject to any modification of terms or conditions by reason of the consummation of the transactions contemplated by this Agreement. With respect to its contracts with insurance agents, none of the agents who is party to any such agreement has terminated, threatened to terminate or given any notice, written or oral, of an intention to terminate its agreement with Sheboygan Falls or to substantially reduce the volume of business placed with or through Sheboygan Falls, and Sheboygan Falls has no Knowledge of any condition or state of facts or circumstances that would cause any such termination or reduction in the foreseeable future. Sheboygan Falls is not in default in any material respect under the terms of any such contract nor is it in default in the payment of any insurance premiums due to insurance carriers nor any principal of or interest on any indebtedness for borrowed money nor has any event occurred that, with the passage of time or giving of notice, or both, would constitute such a default by Sheboygan Falls and, to the Knowledge of Sheboygan Falls, no other party to any such contract is in default in any material respect thereunder nor has any such event occurred with respect to such party. Without the prior written consent of Donegal Mutual, Sheboygan Falls will not make any changes or modifications in any of the foregoing, nor incur any further obligations or commitments, nor make any further additions to its properties, except in each case in the Ordinary Course of Business of Sheboygan Falls and as contemplated by this Agreement.

     3.18 Employee Agreements . Listed on Schedule 3.18 are all plans, contracts and arrangements, oral or written, including but not limited to, union contracts, employee benefit plans, deferred compensation agreements, split dollar agreements, employment agreements, consulting agreements, confidentiality agreements, non-competition agreements or other agreements with any of Sheboygan Falls’ employees, whereunder Sheboygan Falls has any obligation, other than obligations to make current wage or salary payments terminable on

notice of 30 days or less, to or on behalf of its officers, employees or their beneficiaries or whereunder any of such persons owes money t