MANAGEMENT AND OPERATIONS AGREEMENT among STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY STATE AUTOMOBILE MUTUAL INSURANCE COMPANY and THE ROCKHILL COMPANIES

Exhibit 10.3

MANAGEMENT AND OPERATIONS AGREEMENT

among

STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY

STATE AUTOMOBILE MUTUAL INSURANCE COMPANY

and

THE ▇▇▇▇▇▇▇▇ COMPANIES

This Management and Operations Agreement effective as of 12:01 a.m., Eastern Standard Time, January 1, 2010 (the “Agreement”) is entered into as of February 10, 2010 by and among State Auto Property & Casualty Insurance Company (“State Auto P&C”), State Automobile Mutual Insurance Company (“Mutual”), ▇▇▇▇▇▇▇▇ Insurance Company (“RIC”), Plaza Insurance Company (“Plaza”), American Compensation Insurance Company (“ACIC”), Bloomington Compensation Insurance Company (“BCIC”), ▇▇▇▇▇▇▇▇ Holding Company (“▇▇▇▇▇▇▇▇ Holding”), National Environmental Coverage Corporation of the South, LLC (“NECCS”), National Environmental Coverage Corporation (“NECC”), RTW, Inc. (“RTW”), ▇▇▇▇▇▇▇▇ Insurance Services, LLC (“RIS”), ▇▇▇▇▇▇▇▇ Underwriting Management, LLC (“RUM”) and Risk Evaluation and Design, LLC (“RED”). RIC, Plaza, ACIC, and BCIC are collectively referred to as the “▇▇▇▇▇▇▇▇ Insurers”; ▇▇▇▇▇▇▇▇ Holding, NECCS, NECC, RTW, RIS, RUM and RED are collectively referred to as the “Service Companies”; and the ▇▇▇▇▇▇▇▇ Insurers and the Service Companies are collectively referred to as the “▇▇▇▇▇▇▇▇ Companies” and individually as a “▇▇▇▇▇▇▇▇ Company.”

WHEREAS, State Auto P&C desires to make available to the ▇▇▇▇▇▇▇▇ Companies and the ▇▇▇▇▇▇▇▇ Companies desire to obtain from State Auto P&C the services of State Auto P&C through certain of its executive, managerial, administrative and other employees and human resources (collectively referred to hereafter as “Management and Operations Services”), provided that the arrangements between State Auto P&C and the ▇▇▇▇▇▇▇▇ Companies under this Agreement recognize that the ▇▇▇▇▇▇▇▇ Companies have their own employee force performing services for the ▇▇▇▇▇▇▇▇ Companies; and

WHEREAS, Mutual desires to make available to the ▇▇▇▇▇▇▇▇ Companies its data processing and other equipment and facilities, all of which may be used jointly by the ▇▇▇▇▇▇▇▇ Companies and Mutual and its other affiliates, and recognizing that the ▇▇▇▇▇▇▇▇ Companies also have certain facilities and equipment of their own; and

WHEREAS, the ▇▇▇▇▇▇▇▇ Companies desire to make available to Mutual and State Auto P&C (together, the “State Auto Companies”) certain unique services that the ▇▇▇▇▇▇▇▇ Companies have to offer, which services may be used jointly by the ▇▇▇▇▇▇▇▇ Companies, the State Auto Companies, and third parties with whom the ▇▇▇▇▇▇▇▇ Company may contract; and

WHEREAS, in response to a recommendation from the Independent Committee of the Board of Directors of each of Mutual and State Auto Financial Corporation, the Boards of Directors of the parties hereto have approved this Agreement;

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NOW, THEREFORE, in consideration of the premises and the mutual promises contained herein, AND INTENDING TO BE LEGALLY BOUND HEREBY, the parties hereto agree as follows:

Statement of Agreement

1. Engagement and Term - On the terms and subject to the conditions described in this Agreement, the ▇▇▇▇▇▇▇▇ Companies hereby engage State Auto P&C, and State Auto P&C hereby accepts such engagement, to provide Management and Operations Services to the ▇▇▇▇▇▇▇▇ Companies as any of such ▇▇▇▇▇▇▇▇ Companies requires to operate its business.

Any of State Auto P&C’s employees may also serve as directors or officers of any of the ▇▇▇▇▇▇▇▇ Companies notwithstanding that such persons may also be officers or directors of State Auto P&C, Mutual or other affiliates. State Auto P&C shall also be entitled to continue using its employees to conduct all of its business operations, notwithstanding that such persons will be performing services for the ▇▇▇▇▇▇▇▇ Companies and other affiliates as well.

To the extent reasonably possible, the parties shall jointly utilize State Auto P&C’s employees in a cooperative manner and consistent with the business interests and needs of State Auto P&C and its affiliates. State Auto P&C shall direct its employees performing such services for each of the ▇▇▇▇▇▇▇▇ Companies to use their best efforts to promote the general interests and economic welfare of each of the ▇▇▇▇▇▇▇▇ Companies to the same extent as such employees provide to State Auto P&C.

The term of State Auto P&C’s engagement under this Agreement shall begin on the date of this Agreement and shall end, unless sooner terminated in accordance with the provisions of Section 9 below, on the tenth anniversary of this Agreement. This Agreement shall be automatically renewed for successive ten-year periods upon the same terms and conditions contained in this Agreement, unless and until terminated as described in Section 9 below.

2. Authority and Duties of State Auto P&C - In providing Management and Operations Services, State Auto P&C, acting through its employees, shall be responsible for performing certain organizational, operational, and management functions of each of the ▇▇▇▇▇▇▇▇ Companies. State Auto P&C shall use its reasonable efforts to operate each ▇▇▇▇▇▇▇▇ Company’s business efficiently and in accordance with the reasonable guidelines and policies which may be established from time to time by the board of directors of each of the ▇▇▇▇▇▇▇▇ Companies. State Auto P&C shall have all authority necessary to carry out its duties under this Agreement and shall act as an agent of each of the ▇▇▇▇▇▇▇▇ Companies. Without limiting the generality of the foregoing as well as recognizing that the ▇▇▇▇▇▇▇▇ Companies have their own employee force performing services for the ▇▇▇▇▇▇▇▇ Companies, State Auto P&C’s duties under this Agreement may include the following:

(a) Management and Administration of Insurance Operations - State Auto P&C shall provide services for the operation, administration, and management of the insurance business operations of each of the ▇▇▇▇▇▇▇▇ Companies engaged in the insurance business, in accordance with the underwriting, claims and any other reasonable guidelines of such companies which may be in effect

 

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or established from time to time by the board of directors of such companies. The management and administration of each such insurer’s business operations by State Auto P&C may include, without limitation, appointment and termination of agencies, underwriting of insurance risks, investigation and settlement of claims and arrangement of reinsurance. State Auto P&C shall use the same degree of care in acting on behalf of such insurers as the degree of care it uses in connection with the conduct of its insurance business operations.

(b) Management and Administration of Non-Insurance Operations of the Service Companies - State Auto P&C through its employees, shall perform Management and Operations Services for each of the other ▇▇▇▇▇▇▇▇ Companies which are Service Companies in accordance with the policies and guidelines which each of such companies’ board of directors may establish from time to time. State Auto P&C will use the same degree of care in acting on behalf of these companies as it uses in connection with the conduct of its own business operations.

(c) Employees – State Auto P&C shall provide each ▇▇▇▇▇▇▇▇ Company with such executive, managerial, supervisory, administrative, technical, clerical, professional, and other personnel as may be necessary or desirable for the operation and administration of each ▇▇▇▇▇▇▇▇ Company’s business as a supplement to the services performed by the ▇▇▇▇▇▇▇▇ Companies’ own employees. State Auto P&C shall direct its employees, in performing such services for each ▇▇▇▇▇▇▇▇ Company, to use their best efforts to promote the general interests and economic welfare of each ▇▇▇▇▇▇▇▇ Company, in the same manner as such employees utilize when providing service to State Auto P&C.

(d) Employees and Payroll - The employees that may be provided by State Auto P&C to each ▇▇▇▇▇▇▇▇ Company under this Agreement shall be employed as employees of State Auto P&C and not of any of the ▇▇▇▇▇▇▇▇ Companies. Notwithstanding the foregoing, Mutual shall continue to act as the common paymaster of all such State Auto P&C employees providing services to any ▇▇▇▇▇▇▇▇ Companies. As common paymaster, Mutual shall be responsible for filing information and tax returns and issuing tax and other payroll forms and reports with respect to wages paid to the employees employed by State Auto P&C and provided to each ▇▇▇▇▇▇▇▇ Company.

3. Provision of Facilities and Expense Payments - During the term of this Agreement, Mutual shall provide each of the ▇▇▇▇▇▇▇▇ Companies with such data processing equipment, office supplies and equipment, furniture and fixtures, automobiles and such other items of tangible personal property as each of such ▇▇▇▇▇▇▇▇ Companies may require or desire for the operation of its business, recognizing that the ▇▇▇▇▇▇▇▇ Companies have certain facilities and equipment of their own. Utilizing the employees of State Auto P&C, Mutual may act as agent for each of the ▇▇▇▇▇▇▇▇ Companies and, to the extent agreed upon by the parties, in collecting and disbursing funds due to any ▇▇▇▇▇▇▇▇ Company, and in paying expenses and other operating costs of the facilities used by such parties except for those expenses paid directly by any such ▇▇▇▇▇▇▇▇ Company from its own accounts.

4. Services Provided by ▇▇▇▇▇▇▇▇ Companies – From time to time as agreed upon by the parties either orally or under separate written agreement(s), the ▇▇▇▇▇▇▇▇ Companies shall provide the State Auto Companies with certain unique services offered by the ▇▇▇▇▇▇▇▇ Companies.

 

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5. Board of Directors’ Control - The officers of State Auto P&C, Mutual and each of the ▇▇▇▇▇▇▇▇ Companies shall be subject to the authority of their respective boards of directors, provided, however, it is understood that such officers have contractual obligations under this Agreement. State Auto P&C, Mutual and each ▇▇▇▇▇▇▇▇ Company may appoint or elect as its officers those persons who hold offices in any other State Auto Company or any other affiliate, subject at all times to the power of each company’s respective board of directors to appoint, elect, or remove its officers in accordance with its respective articles or certificate of incorporation, code of regulations or by-laws, and other governing documents, statutes, or rules of law applicable to each respective company.

6. Allocation of Costs and Expenses - All out-of-pocket expenses incurred for goods or services from third-party vendors or other unrelated parties which are identifiable to a particular ▇▇▇▇▇▇▇▇ Company, including without limitation, director’s fees, legal fees, audit fees, stock transfer expenses, travel expenses, stationery, supplies and items of a similar nature, shall be charged to the ▇▇▇▇▇▇▇▇ Company for whose benefit such costs or expenses were incurred. Likewise, all out-of-pocket expenses incurred by the ▇▇▇▇▇▇▇▇ Companies for goods or services from third-party vendors or other unrelated parties which are identifiable to a particular State Auto Company shall be charged to the State Auto Company for whose benefit such costs or expenses were incurred. Expenses of the insurers shall be apportioned in accordance with SSAP No. 70 “Allocation of Expenses.” The books, accounts, and records shall be so maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the expenses apportioned to the respective parties.

All costs and expenses incurred by State Auto P&C for the employees, and by Mutual for the equipment, facilities and other items shared by the parties pursuant to this Agreement shall be allocated among the parties to this Agreement as follows:

(a) Insurance Losses, Loss Adjustment Expenses and Underwriting Expenses of the ▇▇▇▇▇▇▇▇ Insurers - All insurance losses, loss adjustment expenses and underwriting expenses of the ▇▇▇▇▇▇▇▇ Insurers, as computed under the statutory accounting principles used by the ▇▇▇▇▇▇▇▇ Insurers from time to time shall be paid by the ▇▇▇▇▇▇▇▇ Insurers. Underwriting and loss adjustment expenses include, without limitation, expenses for State Auto P&C employees providing services on behalf of the ▇▇▇▇▇▇▇▇ Insurers for only part of their time, which expenses shall be allocated to the ▇▇▇▇▇▇▇▇ Insurers in proportion to the amount of time those employees spend on the ▇▇▇▇▇▇▇▇ Insurers’ behalf in accordance with statutory accounting principles used by the ▇▇▇▇▇▇▇▇ Insurers from time to time.

(b) Expenses of the Service Companies - The salary expenses attributable to State Auto P&C employees performing services for the Service Companies, in the course of such Service Company providing services to any ▇▇▇▇▇▇▇▇ Company under this Agreement, shall be reimbursed to State Auto P&C by each of these companies based on an allocation of the time these individuals spend on behalf of each of the Service Companies. In addition, each of the Service Companies shall reimburse State Auto P&C for the expense

 

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of services provided to it by State Auto P&C including, without limitation, payroll taxes, benefits, overhead, and rent based on a percentage of the aforesaid salary expenses to be determined annually by State Auto P&C in an amount that reasonably reflects the actual costs of the aforesaid items.

(c) Pension and Benefit Expenses - The ▇▇▇▇▇▇▇▇ Companies’ share of pension and benefit expenses under the State Auto Insurance Companies Employees’ Retirement Plan and any other applicable benefit plans provided by any State Auto Company for the employees of State Auto P&C (the “Plans”) shall be allocated to each of the ▇▇▇▇▇▇▇▇ Companies based on the percentage of State Auto P&C payroll expenses attributable to each such ▇▇▇▇▇▇▇▇ Company.

(d) Real Estate Expenses - The ▇▇▇▇▇▇▇▇ Companies own or rent office space at their principal offices or other locations, and all such rental or ownership expense shall be the responsibility and direct expense of the ▇▇▇▇▇▇▇▇ Companies. If Mutual provides the ▇▇▇▇▇▇▇▇ Companies with any office space, the amount of rent Mutual charges the ▇▇▇▇▇▇▇▇ Companies shall be based upon the percentage that the total salaries (including a benefits factor) paid to individuals performing services for any of the ▇▇▇▇▇▇▇▇ Companies bears to the aggregate of all salaries for State Auto P&C times the total rent expenses for the State Auto Companies for the locations where the ▇▇▇▇▇▇▇▇ Companies are provided facilities, in accordance with statutory accounting principles.

All costs and expenses incurred by the ▇▇▇▇▇▇▇▇ Companies for the services provided to the State Auto Companies pursuant to this Agreement shall be allocated among the parties to this Agreement as follows. The salary expenses attributable to ▇▇▇▇▇▇▇▇ Companies’ employees performing services for the State Auto Companies shall be reimbursed to the ▇▇▇▇▇▇▇▇ Companies by each of the State Auto Companies based on an allocation of the time these individuals spend on behalf of each of the State Auto Companies. In addition, each of the State Auto Companies shall reimburse the ▇▇▇▇▇▇▇▇ Companies for the expense of services provided to it by the ▇▇▇▇▇▇▇▇ Companies including, without limitation, payroll taxes, pension and employee benefits, overhead, and rent based on a percentage of the aforesaid salary expenses to be determined annually by the ▇▇▇▇▇▇▇▇ Companies in an amount that reasonably reflects the actual costs of the aforesaid items.

7. Payments for Services - All amounts due under this Agreement shall be due and payable by the respective company within sixty (60) days after the end of each calendar quarter.

8. Conflicts of Interest - The parties hereby acknowledge that, due to the common management of Mutual and its wholly owned subsidiaries (the “Mutual Group”) and State Auto Financial Corporation and its subsidiaries (the “State Auto Financial Group”), conflicts of interest may arise with respect to business opportunities available to such companies. In order to deal with such conflicts of interest on an equitable basis, the guidelines incorporated in the Charter of the Mutual Independent Committee (as defined below) and the Financial Independent Committee (as defined below), which respective Charters are hereby incorporated by this reference, shall be used to determine which company may avail itself of a business opportunity.

 

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(a) As used herein, Mutual Independent Committee shall mean a committee established by the Board of Directors of Mutual and comprised solely of persons who are not, and during the past three years have not been, directors, officers or employees of companies in the State Auto Financial Group or employees of Mutual or any wholly owned subsidiary of Mutual. The Mutual Independent Committee members shall also represent the interests of all wholly owned subsidiaries of Mutual (together with Mutual, each “a Mutual Company” and, collectively, the “Mutual Companies”).

(b) As used herein, Financial Independent Committee shall mean a committee established by the Board of Directors of State Auto Financial Corporation and comprised solely of persons who are not, and during the past three years have not been, directors, officers or employees of Mutual or any wholly owned subsidiary of Mutual or employees of any company in the State Auto Financial Group. The Financial Independent Committee members shall also represent the interests of all subsidiaries of State Auto Financial Corporation (together with State Auto Financial Corporation, each “a Financial Company” and, collectively, the “Financial Companies”).

9. Termination – This Agreement may be terminated prior to the end of the initial term, or any renewal thereof, as follows:

(a) By any party upon giving the other parties at least sixty (60) days’ advance written notice of such termination (provided that such termination shall only relate to the Company giving notice and shall not terminate the Agreement with respect to any of the other parties unless they also give at least sixty (60) days’ advance written notice of termination).

(b) Automatically, with respect to a party, if that party files a voluntary petition in bankruptcy, applies for or consents to the appointment of a receiver, makes a general assignment for the benefit of creditors, admits in writing its inability to pay debts as they mature, files a petition or answer seeking a reorganization or arrangement with creditors under any insolvency law, files an answer admitting the material allegations of a petition filed in any bankruptcy or reorganization proceeding, or if a decree of any court is entered adjudging the party to be bankrupt or approving a reorganization or arrangement under any insolvency law (which decree is not set aside within ninety days after it is entered), (provided that such termination shall only relate to the company subject to the foregoing event or action and shall not terminate the Agreement with respect to any of the other parties unless they also give notice of termination within thirty days of the event that causes the automatic termination for another party).

10. Arbitration - Any and all disagreements or controversies arising with respect to this Agreement, whether during or after the term of State Auto P&C’s engagement under this Agreement, shall be settled by binding arbitration by a panel of three arbitrators, one selected by Mutual on behalf of any member of the Mutual Group, one selected by State Auto Financial Corporation on behalf of any member of the State Auto Financial Group, and the third to be selected by the mutual agreement of the first two arbitrators. The arbitration shall be held, and the award made, in Franklin County, Ohio, pursuant to the Ohio Arbitration Law (Ohio Revised Code Chapter 2711 or any law of similar tenor or effect that hereafter is enacted). All fees of the arbitrators shall be borne equally by the parties to the arbitration.

 

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11. Complete Agreement – This document contains the entire agreement between the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, or agreements relating to the subject matter. No changes to this Agreement shall be made or be binding on any party unless made in writing and signed by each party to this Agreement.

12. No Third Party Benefit - This Agreement is intended for the exclusive benefit of the parties to this Agreement and their respective successors and assigns, and nothing contained in this Agreement shall be construed as creating any rights or benefits in or to any third party.

13. Captions - The captions of the various sections of this Agreement are not part of the content or context of this Agreement, but are only labels to assist in locating those sections, and shall be ignored in construing this Agreement.

14. Force Majeure - Notwithstanding any provision of this Agreement to the contrary, any party’s obligations under this Agreement shall be excused if and to the extent that any delay or failure to perform such obligations is due to fire or other casualty, material shortages, strikes or labor disputes, acts of God, or other causes beyond the reasonable control of such party.

15. Amendments - This Agreement may be amended by the parties, upon authority of their officers without specific director approval, if such amendment is solely for the purpose of clarification and does not change the substance of this Agreement and the parties have obtained an opinion of legal counsel to that effect. Additionally, any present or future subsidiary or affiliate of the ▇▇▇▇▇▇▇▇ Companies may be added as a party to this Agreement by an amendment entered into by Mutual, State Auto P&C and the new party, after approval of the Independent Committee of the Board of Directors of each of Mutual and State Auto Financial Corporation and the directors of each and of the new party. Except as otherwise specifically provided in this section of the Agreement, all other amendments to this Agreement must be presented to the Independent Committee of Mutual and of State Auto Financial Corporation and be approved by the directors of each company. Any amendment to this Agreement is subject to the prior approval of the insurance commissioners for the domiciliary states of the insurers which are parties to this Agreement.

16. Successors - No party may assign any of its rights or obligations under this Agreement without the written consent of all other parties to this Agreement, which consent may be arbitrarily withheld by any such party. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the respective successors and assigns of each party to this Agreement.

17. Access to Records - The parties hereto understand and agree that each shall have such access to the records of the other as is necessary to confirm that this Agreement is being properly administered and applied, provided that such access is achieved in compliance with laws protecting the privacy of insureds and claimants. It is further understood and agreed that the parties will permit regulators with jurisdiction to have such access to such records, as and to the extent required by law.

 

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18. Indemnification - Subject to the limitations contained herein, the parties mutually agree to defend, indemnify and hold the other party and its directors, officers, and employees harmless against all liability including but not limited to damages, losses, fines, penalties and reasonable costs and expenses of whatsoever kind including but not limited to fees and disbursements of counsel, which the indemnified party is or may be held liable to pay arising out of any breach of the indemnifying party’s obligations under this Agreement. This provision shall survive the termination of this Agreement.

The parties hereto have caused this Agreement to be executed as of February 10, 2010.

 

 

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