UNICO AMERICAN CORP (Form: 10-K, Received: 03/31/2021 16:49:59)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2020

Commission File No. 000-03978

UNICO AMERICAN CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	95-2583928
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

26050 Mureau Road, Calabasas, California	91302
(Address of Principal Executive Offices)	(Zip Code)

Registrant's telephone number, including area code: (818) 591-9800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name Of Each Exchange On Which Registered
Common Stock, No Par Value	UNAM	The Nasdaq Global Market

Securities registered pursuant to section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No X

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerator filer,” “accelerator filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer___ Accelerated filer___

Non-accelerated filer X Smaller reporting company X Emerging growth company___

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

The aggregate market value of registrant’s voting and non-voting common equity held by non-affiliates as of June 30, 2020, the last business day of Registrant’s most recently completed second fiscal quarter, was $15,026,506.

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Outstanding at March 31, 2021

Common Stock, no par value per share

5,304,885

Portions of the definitive proxy statement that Registrant intends to file pursuant to Regulation 14(a) by a date no later than 120 days after December 31, 2020, to be used in connection with the annual meeting of shareholders, are incorporated herein by reference into Part III hereof. If such definitive proxy statement is not filed in the 120-day period, the information called for by Part III will be filed as an amendment to this Form 10-K not later than the end of the 120-day period.

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UNICO AMERICAN CORPORATION

INDEX TO FORM 10-K

		Page No.
PART I			5
Item 1	Business		5
	Insurance Company Operation		6
	Other Insurance Operations		13
	Investments		13
	Competition		14
	Employees		15
	Concentration of Risks		15
Item 1A	Risk Factors		15
Item 1B	Unresolved Staff Comments		28
Item 2	Properties		28
Item 3	Legal Proceedings		28
Item 4	Mine Safety Disclosures		29
PART II			29
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		29
Item 6	Selected Financial Data		29
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 7A	Quantitative and Qualitative Disclosures about Market Risk		55
Item 8	Financial Statements and Supplementary Data		56
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		86
Item 9A	Controls and Procedures		86
Item 9B	Other Information		86
PART III			87
Items 10-14			87
PART IV			88
Item 15	Exhibits and Financial Statement Schedules		88
Item 16	Form 10-K Summary		88
SIGNATURES			89
Financial Statement Schedules			90

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Forward Looking Statements

This Form 10-K, and the documents incorporated by reference in this document, our press releases and oral statements made from time to time by us or on our behalf, may contain “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (or “the Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (or “the Exchange Act”). In this context, forward-looking statements are not historical facts and include statements about our plans, objectives, beliefs and expectations. Forward-looking statements include statements preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “seeks,” “plans,” “estimates,” “intends,” “projects,” “targets,” “should,” “could,” “may,” “will,” “can,” “can have,” “likely,” the negatives thereof or similar words and expressions. These forward-looking statements are contained throughout this Form 10-K, including, but not limited to, statements found in Part I – Item 1 – “Business” and Part II – Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements are only predictions and are not guarantees of future performance. These statements are based on current expectations and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. These predictions are also affected by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond our ability to control or predict. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors. Such factors include, but are not limited to, the following:

· substantial historical net losses, which may continue in the future;

· failure to meet minimum capital and surplus requirements;

· vulnerability to climate change and significant catastrophic property loss;

· the impact of the recent coronavirus pandemic;

· ability to adjust claims accurately;

· insufficiency of loss and loss adjustment expense reserves to cover future losses;

· ability to realize deferred tax assets;

· the negative impact of emerging claim and coverage issues;

· ability to accurately underwrite risks and charge adequate premium;

· ability to obtain reinsurance or collect from reinsurers and or losses in excess of reinsurance limits;

· excess underwriting capacity and unfavorable premium rates;

· extensive regulation and legislative changes;

· risk management framework could prove inadequate;

· reliance on subsidiaries to satisfy obligations, including privacy and data protection laws;

· downgrade in financial strength rating or long-term issuer credit rating by A.M. Best;

· changes in interest rates;

· investments subject to credit, prepayment and other risks;

· geographic concentration;

· single operating location;

· reliance on independent insurance agents and brokers;

· insufficient reserve for doubtful accounts;

· litigation;

· enforceability of exclusions and limitations in policies;

· difficulty to acquire necessary data;

· reliance on information technology systems;

· systems damage, failures, interruptions, cyber-attacks and intrusions, or unauthorized data disclosures;

· delays and cost overruns in connection with the upgrade of its legacy information technology system;

· ability to attract, develop and retain employees and maintain appropriate staffing levels;

· insolvency, financial difficulties, or default in performance of obligations by parties with significant contracts or

relationships

· ability to effectively compete;

· levy assessments by various underwriting pools and programs;

· maximization of long-term value which may sometimes conflict with short-term earnings expectations;

· control by a small number of stockholders;

· difficulty in effecting a change of control or sale of any subsidiaries;

· limited trading of stock;

· changes in accounting standards issued by the Financial Accounting Standards Board;

· changes in federal or state tax laws;

· ability to prevent or detect acts of fraud with disclosure controls and procedures;

· change in general economic conditions;

· dependence on key personnel;

· no assurance of dividend declaration in the future so returns may be limited to stock value;

· significant costs and substantial management time devoted to operating as a public company; and

· failure to maintain effective system of internal controls.

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Please see Part I - Item 1A – “Risk Factors” of this Form 10-K, as well as other documents we file with the U.S. Securities and Exchange Commission (“SEC”) from time-to-time, for other important factors that could cause our actual results to differ materially from our current expectations and from the forward-looking statements discussed herein. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of this Form 10-K and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

PART I

Item 1. Business.

Unico American Corporation is an insurance holding company. Currently, the Company’s subsidiary Crusader Insurance Company (“Crusader”) underwrites commercial property and casualty insurance, the Company’s subsidiaries Unifax Insurance Systems, Inc. (“Unifax”) and American Insurance Brokers, Inc. (“AIB”) provide marketing and various underwriting support services related to property, casualty, health and life insurance, the Company’s subsidiary American Acceptance Company (“AAC”) provides insurance premium financing, the Company’s subsidiary Insurance Club, Inc., dba AAQHC, an Administrator (“AAQHC”) provides membership association services, and the Company’s subsidiary U.S. Risk Managers, Inc. (“U.S. Risk”) provides claims adjustment services. Unico American Corporation is referred to herein as the "Company" or "Unico" and such references include both the corporation and its subsidiaries, all of which are wholly owned unless otherwise indicated. Unico was incorporated under the laws of Nevada in 1969. Add U.S. Risk.

Descriptions of the Company’s operations in the following paragraphs are categorized between the Company’s primary segment, the insurance company operation, and other insurance operations. The insurance company operation is conducted through Crusader, Unico’s property and casualty insurance company. Revenues from insurance company operation and other insurance operations for the years ended December 31, 2020, 2019, and 2018 are as follows:

	2020					2019					2018
	Total Revenues		Percent of Total Company Revenues			Total Revenues		Percent of Total Company Revenues			Total Revenues		Percent of Total Company Revenues

Insurance company operation	$	30,485,161		93.6	%	$	28,945,799		92.3	%	$	31,028,500		92.3	%

Other Insurance operations
Gross commissions and fees:
Health insurance program commission income		727,515		2.2	%		939,689		3.0	%		944,755		2.9	%
Brokerage fee income		1,006,505		3.1	%		1,146,420		3.6	%		1,408,592		4.2	%
Association operations membership and fee income		93,243		0.3	%		90,549		0.3	%		76,035		0.2	%
Total gross commission and fee income		1,827,263		5.6	%		2,176,658		6.9	%		2,429,382		7.3	%
Finance fees earned		240,589		0.8	%		239,524		0.8	%		144,925		0.4	%
Other income		7,098		—			10,833		—			9,989		—
Total other insurance operations		2,074,950		6.4	%		2,427,015		7.7	%		2,584,296		7.7	%
Total revenues	$	32,560,111		100.0	%	$	31,372,814		100.0	%	$	33,612,796		100.0	%

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INSURANCE COMPANY OPERATION

General

The Company’s insurance company operation is conducted through Crusader. Crusader is a multiple line property and casualty insurance company that began transacting business on January 1, 1985. From 2004 until June 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (99.9%, 99.9%, and 99.8% of gross written premium (before reinsurance ceded under reinsurance treaties) in 2020, 2019, and 2018, respectively). Crusader underwrites three statutory annual statement lines of business: (1) commercial multiple peril (“CMP”), (2) liability other than automobile and products, and (3) fire. During the years ended December 31, 2020, 2019, and 2018, CMP policies comprised 99.6%, 98.3%, and 98.4% of Crusader’s gross written premium, respectively. CMP policies include both property and liability coverages. Commercial property coverage insures against loss or damage to buildings, inventory and equipment from natural disasters, including hurricanes, windstorms, hail, water, explosions, severe winter weather, and other events such as theft and vandalism, fires, storms, and financial loss due to business interruption resulting from covered property damage. However, Crusader does not write earthquake coverage. Commercial liability coverage insures against third party liability from accidents occurring on the insured’s premises or arising out of its operation. In addition to CMP policies, Crusader also writes separate policies to insure commercial property and commercial liability risks on a mono-line basis which provides either commercial property or commercial liability coverage, but not both. Crusader is domiciled in California; and, as of December 31, 2020, Crusader is licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington.

Production and Servicing of Policies

Crusader sells its insurance policies through Unifax Insurance Systems, Inc. (“Unifax”), a subsidiary of the Company and Crusader’s sister corporation and exclusive general agent. All policies are produced by a network of independent brokers and agents.

The property casualty insurance marketplace continues to be intensely competitive. While Crusader attempts to meet such competition with competitive prices, its emphasis is on service, innovation, promotion, and distribution. Crusader believes that rate adequacy is more important than premium growth and that underwriting profit (net earned premium less losses and loss adjustment expenses and policy acquisition costs) is its primary goal. The Company believes that it can grow its sales and profitability through improved specialization and sales incentives, currently focused in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings.

Adjusting of Claims

Effective April 2020, the management and adjustment of claims of Crusader is managed by U.S. Risk, a subsidiary of the Company and sister corporation of Crusader. U.S. Risk currently manages all of the claims of Crusader with a staff of in-house claim adjusters. This staff adjusts claims and oversees all outside claim services such as attorneys, independent or outside claim adjusters, investigators, and experts as necessary. On April 23, 2020, the California Department of Insurance (“CA DOI”) advised Crusader of its non-disapproval of the move from Crusader’s claims adjusting function to U.S. Risk. U.S. Risk plans to offer claims adjusting services to non-affiliated entities in addition to the claims services provided to Crusader. To date, U.S. Risk is providing claims management services only to Crusader. All claims services being provided by U.S. Risk to Crusader are subject to the ultimate control of Crusader.

Reinsurance

A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on policies written to a reinsurer that assumes that risk for a premium (ceded premium). Reinsurance does not legally discharge Crusader from primary liability under its policies. If the reinsurer fails to meet its obligations, Crusader must nonetheless pay its policy obligations. Crusader’s primary excess of loss reinsurance agreements, or treaties, during the years ended December 31, 2020, 2019, and 2018 are as follows:

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Loss Year		Reinsurers	A.M. Best Rating	Retention

	2020	Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE	A+ A+	$	500,000

	2019	Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE	A+ A+	$	500,000

	2018	Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE	A+ A+	$	500,000

Reinsurance treaties are generally structured in layers, with different negotiated economic terms and retention of participation, or liability, in each layer. In calendar years 2020 and 2019, Crusader retained a participation in its excess of loss reinsurance treaties of 0% in its 1^stlayer (reinsured losses between $500,000 and $1,000,000), 0% in its 2^nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its property and casualty clash treaty. In calendar year 2018, Crusader retained a participation in its excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $500,000 and $1,000,000), 0% in its 2^nd layer (reinsured losses between $1,000,000 and $4,000,000), and 0% in its property and casualty clash treaty.

Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2020, 2019, and 2018, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).

Crusader has no reinsurance recoverable balances in dispute.

Crusader evaluates each of its ceded reinsurance treaties at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2020, all such ceded contracts are accounted for as risk transfer reinsurance.

The aggregate amount of ceded earned premium to Crusader’s reinsurers was $8,096,700, $7,220,734, and $6,478,500 for the years ended December 31, 2020, 2019, and 2018, respectively.

On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader that includes a reimbursement of the cost of acquiring the portion of the premium that is ceded. Crusader intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The unpaid losses ceded to the reinsurer are recorded as an asset on the balance sheet.

In 2020, Crusader entered into a 100% Quota Share Agreement with United Specialty Insurance Company (“USIC”) in which Crusader accepted and assumed reinsurance ceded to it by USIC for commercial property and liability insurance written by USIC on a surplus lines basis. The assumed premium ceded to Crusader was $304,030 for year ended December 31, 2020, the assumed losses for the business ceded to Crusader by USIC was $89,204 for the year ended December 31, 2020.

Unpaid Losses and Loss Adjustment Expenses

Crusader maintains reserves for losses and loss adjustment expenses with respect to both reported and unreported losses. When a claim for loss is reported to Crusader, a reserve is established for the expected cost to settle the claim, including estimates of any related legal expense and other costs associated with resolving the claim. These reserves are called “case” reserves. In addition, Crusader also establishes reserves at the end of each reporting period for losses that have occurred but have not yet been reported to Crusader. These incurred but not reported losses are referred to as “IBNR” reserves.

Crusader establishes reserves for reported losses based on historical experience, upon case-by-case evaluation of facts surrounding each known loss, and upon the related policy provisions. The amount of reserves for unreported losses is estimated by analysis of historical and statistical information. The ultimate liability of Crusader may be greater or less than estimated reserves. Reserves are monitored and adjusted when appropriate and are reflected in the statement of operations in the period of adjustment. Reserves for losses and loss adjustment expenses are estimated to cover the future amounts needed to pay claims and related expenses with respect to insured events that have occurred.

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Crusader does not discount to a present value the portion of loss and loss adjustment expense reserves expected to be paid in future periods. Federal tax law, however, requires Crusader to discount loss and loss adjustment expense reserves for federal income tax purposes.

In 2020, Crusader experienced a significant increase in loss and loss adjustment expense reserves due to a $9,399,547 strengthening of IBNR reserves.

Net Written Premium to Statutory Surplus Ratio

The following table shows, for the periods indicated, Crusader's statutory ratio of net written premium (after reinsurance ceded) to statutory surplus. Since each property and casualty insurance company has different capital needs, an "acceptable" ratio of net written premium to statutory surplus for one company may be inapplicable to another. While there is no statutory requirement applicable to Crusader that establishes a permissible net premium to surplus ratio, guidelines established by the National Association of Insurance Commissioners (“NAIC”) provide that such ratio should generally be no greater than 3 to 1.

	Year ended December 31
Statutory Accounting Basis:	2020		2019		2018

Net written premium	$	28,564,082	$	28,650,820	$	25,874,020
Statutory surplus	$	26,893,515	$	46,498,960	$	50,148,258
Ratio		1.1 to 1		0.6 to 1		0.5 to 1

Crusader’s results herein are reported in accordance with U.S. generally accepted accounting principles (“GAAP”). These results differ from Crusader’s financial results reported in accordance with Statutory Accounting Principles (“SAP”) as prescribed or permitted by insurance regulatory authorities. Crusader is required to file financial statements with insurance regulatory authorities prepared on a SAP basis.

SAP differs in certain respects from GAAP. The more significant of these differences that apply to Crusader are:

Under GAAP, policy acquisition costs such as commissions, premium taxes and other costs incurred in connection with the successful acquisition of new and renewal business are capitalized and amortized on a pro rata basis over the period in which the related premium is earned, rather than expensed as incurred as required by SAP.

Certain assets included in balance sheets under GAAP are designated as “non-admitted assets” and are charged directly against statutory surplus under SAP. Non-admitted assets primarily include premium receivables that are outstanding over 90 days, federal deferred tax assets in excess of statutory limitations, furniture, equipment, leasehold improvements, and prepaid expenses.

Under GAAP, amounts related to ceded reinsurance are shown on a gross basis as prepaid reinsurance premium and reinsurance recoverable, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP.

Under GAAP, fixed maturity securities that are classified as available-for-sale are reported at estimated fair values, rather than at amortized cost or the lower of amortized cost or market, depending on the specific type of security, as required by SAP.

The differing treatment of income and expense items results in a corresponding difference in federal income tax expense. Under GAAP reporting, changes in deferred income taxes are reflected as an item of income tax benefit or expense. As required by SAP, federal income taxes are recorded as income tax benefit or expense when payable and deferred taxes, subject to limitations, are recognized but only to the extent that they do not exceed a specified percentage of statutory surplus. Changes in deferred taxes are recorded directly to statutory surplus.

Regulation

Crusader is regulated by the CA DOI and by the insurance departments of other states in which Crusader is authorized to transact insurance. The insurance departments have broad regulatory, supervisory, and administrative powers over insurers that transact business in their states. These powers relate primarily to the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature and limitation of insurers' investments; the prior approval of rates, rules, and forms; the issuance of securities by insurers; periodic financial and market conduct examinations of the affairs of insurers; the annual and other reports required to be filed on the financial condition and results of operations of such insurers or for other purposes; and the establishment of reserves required to be maintained for unearned premium, losses, and other purposes. The regulations and supervision by the insurance departments are designed principally for the benefit and protection of policyholders of insurance companies and not for the stockholders of the insurance companies or stockholders of the Company. The insurance departments may perform market conduct examinations of Crusader to ensure compliance with applicable laws and regulations with respect to rating, underwriting and claims handling practices. The most recent market conduct examination of Crusader was conducted by the CA DOI and covered Crusader’s rating and underwriting practices in California during the period June 1, 2015, through August 31, 2015. The examination report was adopted by the CA DOI on January 9, 2017. All issues identified during the examination were resolved to the satisfaction of the CA DOI and Crusader. None of the issues identified during the examination had any material effect on Crusader. The CA DOI also conducts periodic financial examinations of Crusader. During 2017, the CA DOI completed a financial examination of Crusader’s December 31, 2015, statutory financial statements. On June 23, 2017, a report of examination was officially filed and became part of the records of the CA DOI. Crusader has complied with all comments and recommendations identified in the report of examination, and none of the issues in that report of examination had any material effect on Crusader.

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Crusader is subject to risk-based capital (“RBC”) requirements. RBC is a method developed by the National Association of Insurance Commissioners and adopted in the California Insurance Code to determine the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile.

The RBC provides standards for calculating a variable regulatory capital requirement related to a company's current operations and its risk exposures (asset risk, underwriting risk, credit risk and off-balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for insurance regulators that establish uniform capital levels and specific authority levels for actions when an insurer falls below minimum capital levels. The RBC specifies four distinct action levels at which either the insurance company or its domiciliary regulator must take certain actions. Generally, if a company’s RBC is at the Company Action Level, a heightened level of regulatory supervision will occur. A regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company's RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. Crusader’s adjusted capital at December 31, 2020, was 278% of the authorized control level RBC.

The following table sets forth the different levels of risk-based capital that may trigger regulatory involvement and the corresponding actions that may result.

LEVEL	TRIGGER	CORRECTIVE ACTION

Company Action Level	Adjusted capital less than 200% of authorized control level or adjusted capital less than 300% accompanied by a combined ratio of 120% or greater	The insurer must submit a comprehensive plan to the insurance commissioner.
Regulatory Action Level	Adjusted capital less than 150% of authorized control level	In addition to above, insurer is subject to examination, analysis and specific corrective action.
Authorized Control Level	Adjusted capital less than 100% of authorized control level	In addition to both of the above, insurance commissioner may place insurer under regulatory control.
Mandatory Control Level	Adjusted capital less than 70% of authorized control level	Insurer must be placed under regulatory control.

Crusader’s adjusted capital was above 200% of the Company Action Level but less than 300% of the Authorized Control Level as of December 31, 2020. That RBC percentage triggered a trend test under the RBC. If the RBC level is greater than 200% but less than 300% and if the combined ratio is greater than 120% for the year most recently ended, a Company Action Level Event is deemed to have occurred. The occurrence of the Company Action Level Event required Crusader to submit an RBC Plan to the CA DOI to address what actions will be taken to correct the conditions that resulted in the Company Action Level Event.

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Crusader has submitted to the insurance commissioner of the CA DOI a comprehensive plan to increase the adjusted capital above 300% to resolve the company action level event and is awaiting response from the CA DOI (“RBC Plan”). The CA DOI has sixty days following the submission of an RBC Plan to determine whether the RBC Plan should be implemented or if such plan is unsatisfactory. In the event that the CA DOI finds the RBC Plan to be unsatisfactory, the CA DOI must notify Crusader of proposed revisions that will make the plan satisfactory in the judgment of the CA DOI. In such event, Crusader would be required to submit a Revised RBC Plan to address and incorporate the changes requested by the CA DOI. The CA DOI does have the discretion after notification that an RBC Plan or Revised RBC Plan is unsatisfactory to notify the insurer that a Regulatory Action Level Event has occurred subject to the right of the insurer to request a hearing.

Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. IRIS helps those companies that merit highest priority in the allocation of the regulators’ resources on the basis of 13 financial ratios that are calculated annually. The analytical phase is a review of statutory annual statements and the financial ratios. The ratios and trends are valuable in pointing to companies likely to experience financial difficulties but are not themselves indicative of adverse financial condition. The ratio and benchmark comparisons are mechanically produced and are not intended to replace the state insurance departments’ own in-depth financial analysis or on-site examinations.

An unusual range of ratio results has been established from studies of the ratios of companies that have become insolvent or have experienced financial difficulties. In the analytical phase, companies that receive four or more financial ratio values outside the usual range are analyzed in order to identify those companies that appear to require immediate regulatory action. Subsequently, a more comprehensive review of the ratio results and an insurer’s statutory annual statement is performed to confirm that an insurer’s situation calls for increased or close regulatory attention.

In 2020, Crusader was outside the usual value range on the following three of the 13 IRIS ratio tests:

IRIS Ratio	Unusual Value	Crusader’s Result

5 – two-year overall operating ratio	Over 100%		126.0	%
7 – gross change in policyholders’ surplus	Over 50% or under -10%		-42.0	%
8 – change in adjusted policyholders’ surplus	Over 25% or under -10%		-42.0	%

For the year ended December 31, 2020, Crusader was outside the usual value range on IRIS ratio 5, 7 and 8 due primarily to Crusader’s statutory net loss of $12,862,588. Crusader’s statutory net loss during the year ended December 31, 2020, was due primarily to increases in IBNR reserves associated with the Apartments & Commercial Buildings and Transportation verticals resulting from higher estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses.

In 2019, Crusader was outside the usual value range on the following one of the 13 IRIS ratio tests:

IRIS Ratio

Unusual Value

Crusader’s Result

5 – two-year overall operating ratio

Over 100%

106.0

For the year ended December 31, 2019, Crusader was outside the usual value range on IRIS ratio 5 due primarily to Crusader’s statutory net loss of $2,190,703. Crusader’s statutory net loss during the year ended December 31, 2019, was due primarily to adverse development of insured events of prior years.

In 2018, Crusader was outside the usual value range on the following one of the 13 IRIS ratio tests:

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IRIS Ratio

Unusual Value

Crusader’s Result

5 – two-year overall operating ratio

Over 100%

113.0

For the year ended December 31, 2018, Crusader was outside the usual value range on IRIS ratio 5 due primarily to Crusader’s statutory net loss of $453,966. Crusader’s statutory net loss during the year ended December 31, 2018, was due primarily to adverse development of insured events of prior years.

California Insurance Guarantee Association

The California Insurance Guarantee Association (“CIGA”) was created to provide for payment of claims for which insolvent insurers of most casualty lines are liable but which such insurers’ assets as insufficient to satisfy. The Company is subject to assessment by CIGA for its pro-rata share of such claims based on written premium in the particular line in the year preceding the assessment by insurers writing that line of insurance in California. Such assessments are based upon estimates of losses to be incurred in liquidating an insolvent insurer. Assessments are recouped through a mandated surcharge to policyholders the year after the assessment. No assessment was made by CIGA for the 2020, 2019, and 2018 calendar years.

Holding Company Act

Crusader is subject to regulation by the CA DOI pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company Act, the CA DOI may examine the affairs of Crusader at any time. Certain transactions defined to be of an extraordinary type may not be effected without the prior approval of the CA DOI. Such transactions include, but are not limited to, sales, purchases, exchanges, loans and extensions of credit, and investments made within the immediately preceding 12 months involving the lesser of 3% of admitted assets or 25% of statutory surplus as of the preceding December 31. An extraordinary transaction also includes a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company's statutory surplus as of the preceding December 31 or the insurance company's net income for the preceding calendar year. An insurance company is also required to notify the CA DOI of any dividend after declaration, but prior to payment.

The Holding Company Act also provides that the acquisition or change of control of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the insurance commissioner. In general, a presumption of control arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or a person who controls a California insurance company, such as Crusader. A person seeking to acquire control, directly or indirectly, of the Company must generally file with the insurance commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval. The Company is in compliance with the Holding Company Act.

Rating

Insurance companies are rated to provide both industry participants and insurance consumers with meaningful information on specific insurance companies. Higher ratings generally indicate financial stability and a strong ability to pay claims. These ratings are based upon factors relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security and may be revised or withdrawn at any time. Ratings focus primarily on the following factors: capital resources, financial strength, demonstrated management expertise in the insurance business, credit analysis, systems development, market segment position and growth opportunities, marketing, sales conduct practices, investment operations, enterprise risk management, minimum statutory surplus requirements and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy.

The claims-paying abilities of insurers are rated to provide both insurance consumers and industry participants with comparative information on specific insurance companies. Claims-paying ratings are important for the marketing of certain insurance products.

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On January 17, 2019, A.M. Best Company (“A.M. Best”) downgraded Crusader’s Financial Strength Rating (“FSR”) to B++ (Good) from A- (Excellent) and its Long-Term Issuer Credit Rating (“Long-Term ICR”) to “bbb+” from “a-“. The outlook of the FSR was revised at that time to stable from negative while the outlook of the Long-Term ICR remained negative. The rating downgrades reflected a revision in A.M. Best’s assessment of Crusader’s operating performance to adequate from strong.

On January 30, 2020, A.M. Best affirmed Crusader’s FSR of B++ (Good) and further downgraded Crusader’s Long-Term ICR to “bbb” from “bbb+”. The outlook of the FSR of Crusader remains stable while the outlook of the Long-Term ICR of Crusader was revised to stable from negative. Also on January 30, 2020, A.M Best downgraded the Long-Term ICR of Unico to “bb” from “bb+”. The outlook of the Long-Term ICR of Unico was revised to stable from negative.

On February 5, 2021, A.M. Best affirmed the FSR of B++ (Good) and Long-Term ICR of “bbb” of Crusader and revised Crusader’s FSR and Long-Term ICR outlooks to negative from stable. Additionally, A.M. Best affirmed the Long-Term ICR of “bb” of Unico and revised Unico’s Long-Term ICR outlook to negative from stable.

According to A.M. Best, the negative outlooks capture A.M. Best’s concerns with Crusader’s declining underwriting performance, the Company’s overall capitalization, and the execution risk associated with implementing strategic operating changes to address these conditions.

The Long-Term ICRs reflect Crusader’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.

Terrorism Risk Insurance Act of 2002

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 (the “Act”) was signed into law. The Act was extended in 2005, reauthorized in 2007, 2017 and 2019, and is set to expire on December 31, 2027. The Act establishes a program within the Department of the Treasury in which the federal government will share the risk of loss from acts of terrorism with the insurance industry. Federal participation will be triggered when the Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General of the United States, certifies an act to be an act of terrorism. No act shall be certified as an act of terrorism unless the terrorist act results in aggregate losses in excess of $5 million.

Under the reauthorized Act, the federal government will pay the following percentages of covered terrorism losses exceeding the statutorily established deductible for the reported years and remaining years under the Act:

Loss Year		Coverage Percentage

	2018	82	%
	2019	81	%
	2020-2027	80	%

All property and casualty insurance companies are required to participate in the program to the extent that they must make available property and casualty insurance coverage for terrorism that does not differ materially from the terms, amounts and other coverage limitations applicable to losses arising from events other than acts of terrorism.

The Company does not write policies on properties considered targets of terrorist activities such as airports, large hotels, large office structures, amusement parks, landmark defined structures, or other large scale public facilities. In addition, there is not a high concentration of policies in any one area where increased exposure to terrorist threats exist. Consequently, the Company believes its exposure relating to acts of terrorism is low. Crusader received $56,975, $64,330, and $94,014 in terrorism coverage premium from approximately 5%, 5%, and 6% of its policyholders during the years ended December 31, 2020, 2019, and 2018, respectively. Crusader’s terrorism deductible was $6,791,640, $7,046,682, and $7,799,966 during the years ended December 31, 2020, 2019, and 2018, respectively. Crusader’s 2021 terrorism deductible is $7,252,974.

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Data Privacy and Security

The Company may be subject to a range of complicated, diverse, and expanding federal, state, and local laws and regulations governing the collection, use, storage, and transfer of personal information. In California, where the Company is headquartered and conducts business, certain laws such as the California Consumer Privacy Act of 2018 (“CCPA”), the California Privacy Rights Act (“CPRA”), and California Insurance Information Privacy and Protection Act (“IIPPA”) may directly impact the Company’s operations. At the federal level, standards set forth by the Federal Trade Commission (“FTC”), the privacy and security rules under the Gramm-Leach Bliley Act (GLBA), and the privacy and security rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), and their respective implementing regulations may, from time to time, impact the Company depending on the nature of the Company’s operations and the types of suppliers and vendors utilized by the Company.

OTHER INSURANCE OPERATIONS

General Agency Operations

Unifax primarily sells and services CMP business insurance policies for Crusader in California.

As a general agent, this subsidiary markets, rates, underwrites, inspects and issues policies, bills and collects insurance premiums, and maintains accounting and statistical data. Unifax is the exclusive general agent for Crusader. The Company's marketing is conducted through advertising to independent insurance agents and brokers. For its services, the general agent receives a commission (based on the written premium) from the insurance company and, in some cases, a policy fee from the customer. This subsidiary holds licenses issued by the CA DOI and other states where applicable.

Insurance Premium Finance Operation

American Acceptance Corporation (“AAC”), a subsidiary of the Company, is a licensed insurance premium finance company that provides insurance purchasers with the ability to pay their insurance premium on an installment basis. The premium finance company pays the insurance premium to the insurance company in return for a premium finance note from the insured. These notes are paid off by the insured in nine monthly installments and are secured by the unearned premium held by the insurance company. AAC provides premium financing solely for Crusader and assumed USIC policies that are produced by Unifax in California.

Association Operation

Insurance Club, Inc., dba AAQHC, An Administrator (“AAQHC”) (formerly American Association for Quality Health Care), a subsidiary of the Company, is a membership association and a third party administrator. AAQHC provides various consumer benefits to its members, including participation in group dental, vision, and life insurance policies that it negotiates. AAQHC also provides services as a third party administrator and is licensed by the CA DOI. For these services, AAQHC receives membership and fee income from its members.

Health Insurance Operation

American Insurance Brokers, Inc. (“AIB”), a subsidiary of the Company, markets health insurance in California as a general agency and an independent broker through non-affiliated insurance companies for individuals and groups. The services provided consist of marketing, sales and customer service. For these services AIB receives commissions from insurance companies. AIB holds licenses issued by the CA DOI.

Claims Management

In March 2020, the Company re-activated its U.S. Risk subsidiary so that it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company.

INVESTMENTS

The Company’s Board of Directors approved investment guidelines which reflect the Company’s risk, balance sheet, and profile.

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Under the Company’s investment guidelines, investments may only include U.S. Treasury notes, U.S. government agency notes, mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral, commercial mortgage-backed securities, U.S. corporate obligations, asset backed securities, (including but not limited to credit card, automobile and home equity backed securities), tax-exempt bonds, preferred stocks, common stocks, commercial paper, repurchase agreements (treasuries only), mutual funds, exchange traded funds, bank certificates of deposits and time deposits. The investment guidelines provide for certain investment limitations in each investment category.

Unless agreed to in advance in writing by Crusader, investments in the following types of securities are prohibited:

	•		Mortgage loans, except for mortgage backed securities issued by an agency of the U.S. government.
	•		Derivative mortgage-backed securities including interest only, principal only and inverse floating rate securities.
	•		All fixed maturity real estate securities, except mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral and commercial mortgage-backed securities.
	•		Options and futures contracts.
	•		All non-U.S. dollar denominated securities.
	•		Any security that would not be in compliance with the regulations of Crusader’s state of domicile.

An independent investment advisor manages Crusader’s investments. The advisor’s role currently is limited to maintaining Crusader’s portfolio within the investment guidelines and providing investment accounting services to the Company. The investments continue to be held by Crusader’s current custodian, Union Bank Global Custody Services.

COMPETITION

Insurance Company and General Agency Operations (Property and Casualty)

The property and casualty markets in which the Company operates are highly competitive. Property and casualty insurers generally compete on many factors, including price, commission rates, consumer recognition, coverages offered, financial stability, customer service and geographic coverage. Competition is also affected by the pace of technological developments. An insurer’s ability to innovate, develop and implement new applications and other technology can affect its competitive position. The Company continues to invest in technology in order to compete more effectively in the insurance marketplace. The marketplace is highly cyclical, characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess underwriting capacity.

The profitability of insurers is affected by many factors including premium adequacy, the frequency and severity of claims, state regulations, interest rates, general business conditions, and court decisions redefining and expanding the extent of coverage. One of the challenging and unique features of the property and casualty insurance business is the fact that since premiums are collected before losses are paid, its products are normally priced before its costs are known.

Additional information regarding competition in the insurance marketplace is discussed in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.”

Insurance Premium Financing Operation

AAC’s insurance premium financing operation currently finances policies produced only through its sister company, Unifax. Consequently, AAC’s growth is primarily dependent on the growth of Crusader and Unifax business. From July 2010 to March 1, 2018, AAC offered 0% financing on policies produced by Unifax for Crusader. Effective March 1, 2018, the annual percentage rate charged on AAC new loans increased from 0% to a single fixed interest rate. Effective April 1, 2019, the Company converted from the single fixed interest rate for all financed policies to a tiered interest rate structure under which different fixed interest rates are charged based on amount of underlying financed premium. The Company believes the interest rates charged by AAC are competitive and will not have a negative impact on its business.

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Health Insurance Operation

The health insurance market is uncertain due to changes in healthcare insurance mandated by recent federal legislation. AIB markets a variety of health and life insurance products to individuals and groups. These same products are offered by most of the Company’s competitors; thus service, reliability and stability are important to obtain and retain customers.

EMPLOYEES

As of March 31, 2021, the Company employed 76 persons of which 76 are full time employees at its facility located in Calabasas, California. The Company has no collective bargaining agreements and believes its relations with its employees are excellent.

CONCENTRATION OF RISKS

99.9%, 99.9%, and 99.8% of Crusader’s gross written premium was derived from California during the years ended December 31, 2020, 2019, and 2018, respectively. In 2020, approximately 30% and 56% of the $727,515 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively. In 2019, approximately 39% and 49% of the $939,689 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively. In 2018, approximately 37% and 46% of the $944,755 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively.

Crusader’s reinsurance recoverable on paid and unpaid losses and loss adjustment expenses is as follows:

		Year ended December 31
Name of Reinsurer	A.M.Best Rating (1)	2020		2019		2018

Renaissance Reinsurance U.S. Inc.	A+	$	11,906,416	$	8,095,647	$	4,911,922
Hannover Ruck SE	A+		10,673,173		6,869,914		4,142,308
TOA Reinsurance Company of America	A		295,188		438,308		476,101
Other	A		172		7,827		(48	)
Total		$	22,874,949	$	15,411,696	$	9,530,283

(1) A.M. Best ratings are as of December 31, 2020.

Item 1A. Risk Factors.

An investment in the Company’s securities involves a high degree of risk. The Company operates in a dynamic and rapidly changing industry that involves numerous risks and uncertainties. The risks and uncertainties described below are not the only ones the Company faces. Other risks and uncertainties, including those that the Company does not currently consider material, may impair the Company’s business. If any of the risks discussed below actually occur, the Company’s business, financial condition, operating results or cash flows could be materially adversely affected. This could cause the value of the Company’s securities to decline, and you may lose all or part of your investment.

RISKS RELATED TO THE COMPANY’S BUSINESS AND INDUSTRY

The Company has a history of net losses and could continue to incur substantial net losses in the future.

The Company has incurred recurring net losses on an annual basis over the last several years. The Company incurred net losses of $21,491,113, $3,115,703, and $3,169,559 for the years ended December 31, 2020, 2019, and 2018, respectively. Although the Company was able to slightly increase revenues in fiscal year 2020, increases in its expenses significantly outpaced revenue growth, and the Company generated a loss for the year. To achieve profitability and growth, the Company may need to change certain aspects of its business model. As such, the Company faces risks, expenses and uncertainties related to its specific business model, as well as those typically encountered by similar companies. While the Company continues to work towards profitability and growth, it may not realize sufficient revenues or be able to achieve cost reductions to reach that goal.

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The principal driver of the Company’s losses to date is its insured losses and loss adjustment expenses associated with insured events by its customers. Establishing adequate premium rates is necessary to generate sufficient revenue to offset losses, loss adjustment expenses and other costs. If the Company does not accurately assess the risks that it underwrites, the premiums that it charges may not be adequate to cover its losses and expenses, which would continue to adversely affect its results of operations and profitability. Moreover, as the Company continues to invest in its business, it expects certain expenses to continue to increase in the near term. Such expenses may occur in the areas of information technology, marketing and advertising, consumer-facing technologies, core insurance operations services and lines of business not presently offered by the Company. These investments may not result in increased revenue or growth in the Company’s business. If the Company fails to manage its losses or to grow its revenue sufficiently to keep pace with its investments and other expenses, its business will be seriously harmed.

Crusader is subject to minimum capital and surplus requirements, and any failure to meet these requirements could subject Crusader to regulatory action.

Crusader is subject to RBC standards and other minimum capital and surplus requirements imposed under applicable laws of its state of domicile. The RBC standards adopted by California and the NAIC require Crusader to report the results of RBC calculations to its domiciliary insurance regulator and the NAIC. If Crusader fails to meet these standards and requirements, the CA DOI may require specified actions to be taken, which could have a material and adverse impact on the Company’s competitiveness, operational flexibility, financial condition, and results of operations.

Crusader’s adjusted capital below 300% as of December 31, 2020, and combined loss ratio in excess of 120% for the year ended December 31, 2020, triggered a Company Action Level Event. Crusader has submitted to the insurance commissioner of the CA DOI a comprehensive plan to increase the adjusted capital above 300% to resolve the Company Action Level Event and is awaiting response from the CA DOI.

Crusader may be adversely affected if it cannot obtain additional capital for its business and operations. The strength of an insurer is measured in large part by is policyholder surplus. Crusader has sustained net losses for several years which have decreased its policyholder surplus. The Company does not have current resources to infuse additional capital into Crusader to increase its policyholder surplus.

The Company’s business is vulnerable to climate change and significant catastrophic property loss, which could have an adverse effect on its financial condition and results of operations.

The Company faces a significant risk of loss in the ordinary course of its business for property damage resulting from climate change, natural disasters, man-made catastrophes and other catastrophic events, particularly hurricanes, earthquakes, hail storms, explosions, tropical storms, fires, sinkholes, war, acts of terrorism, severe winter weather and other natural and man-made disasters. Such events typically increase the frequency and severity of commercial property claims. Because catastrophic loss events are by their nature unpredictable, historical results of operations may not be indicative of future results of operations, and the occurrence of claims from catastrophic events may result in substantial volatility in the Company’s financial condition and results of operations from period to period. In addition, catastrophic events could harm the financial condition of issuers of obligations the Company holds in its investment portfolio, resulting in impairments to these investments, and the financial condition of the Company’s reinsurers, thereby increasing the probability of default on reinsurance recoveries. Although the Company attempts to manage its exposure to such events, the occurrence of one or more major catastrophes in any given period could have a material and adverse impact on the Company’s financial condition and results of operations and could result in substantial outflows of cash as losses are paid.

The Company’s business may be adversely affected by the recent coronavirus pandemic.

In December 2019, a novel strain of coronavirus, SARS CoV-2 (COVID-19), emerged in China, rapidly spread to other countries, including the United States, and has been declared to be a pandemic by the World Health Organization. The coronavirus pandemic has resulted in numerous deaths, adversely impacted global commercial activity and resulted in extensive governmental responses, including quarantines, prohibitions on travel and the closure of offices, businesses, restaurants, schools, retail stores and other public venues. The coronavirus pandemic and any preventative or protective actions that the Company, its clients, their respective suppliers, or governments may take in respect of COVID-19 may disrupt the Company’s business and the business of its clients. If global, national or regional economies are unable to substantially reopen, or, if reopened, are forced to close again, these disruptions will be exacerbated. The Company is diligently working to ensure that it can operate with minimal disruption, and to mitigate the impact of the pandemic on its employees’ health and safety. However, given the interconnectivity of the global economy and the possible rate of future global transmission, the full extent to which the coronavirus pandemic could affect the global economy is unknown and its impact may extend beyond the areas which are currently known to be impacted. Any resulting financial impact will depend on future developments and cannot be reasonably estimated at this time, but may materially affect the business, financial condition and results of operations of the Company. The Company has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which has adversely impacted the gross written premium for that niche.

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Additionally, the continued pandemic has led to severe disruption and volatility in the global capital markets, which could increase the Company’s cost of capital, and adversely affect the Company’s ability to access the capital and debt markets, and adversely affect the value of the Company’s investment portfolio. It is possible that the continued spread of the coronavirus could cause an economic slowdown or recession (which could adversely affect the demand for the Company’s insurance products and increase delinquencies and defaults by its customers) or cause other unpredictable events, each of which could adversely affect the business, results of operations or financial condition of the Company.

The Company’s success may depend on its ability to adjust claims accurately.

Many factors can affect the Company’s ability to adjust claims accurately, including the following:

	•		the training, experience, and skill of the Company’s claims representatives,
	•		continued access to independent or outside adjusters,
	•		the extent of fraudulent or inflated claims and the Company’s ability to recognize and respond to, such claims
	•		the claims organization’s culture and the effectiveness of its management, and
	•		the Company’s ability to develop or select and implement appropriate procedures, technologies, and systems to support claims functions.

The Company’s failure to pay claims fairly, accurately, and in a timely manner, or to deploy claims resources appropriately, could result in unanticipated costs, lead to material litigation, undermine customer goodwill and the Company’s reputation in the marketplace, impair its brand image and, as a result, materially adversely affect its competitiveness, financial results, prospects, and liquidity.

Loss and loss adjustment expense reserves are based on estimates and may not be sufficient to cover future losses.

Loss and loss adjustment expense reserves represent an estimate of amounts needed to pay and administer claims with respect to insured events that have occurred, including events that have occurred but have not yet been reported to Crusader. If claims exceed the related reserves, the Company may not have sufficient funds available to satisfy all such claims, and in any event, the Company’s operating results and financial condition would be adversely affected. There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for Crusader. The long-tailed nature of liability claims and the volatility of jury awards exacerbate that uncertainty. The difficulty in estimating the loss and loss adjustment expense reserves contributed to adverse development of insured events of prior years in the amount of $7,959,048 which Crusader experienced in 2020. During the twelve months ended December 31, 2020, the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as changes in market conditions. This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the increase of $12,066,793 in losses and loss adjustment expenses from $22,576,127 recognized for the twelve months ended December 31, 2019 to $34,642,920 recognized for the twelve months ended December 31, 2020. Crusader sets loss and loss adjustment expense reserves at each balance sheet date based upon management’s best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and related loss adjustment expenses incurred as of that date for both reported and unreported losses. The ultimate cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Crusader claim reserving procedures and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Crusader operations and management philosophy also may cause actual developments to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made.

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Any inability of the Company to realize its deferred tax assets may have a materially adverse effect on the Company’s financial condition and results of operations.

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases, and for tax credits. The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability, reversal patterns of recorded deferred tax assets and deferred tax liabilities, and capital gain generation. Some or all of the Company’s unused deferred tax assets could expire if the Company is unable to generate taxable income of a sufficient nature in the future to utilize them.

If the Company determines it is more-likely-than-not that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce the deferred tax asset through a charge to earnings in the period in which the determination is made. This charge could have a materially adverse effect on the Company’s results of operations and financial condition. In light of the net losses that were generated in recent years, for the twelve months ended December 31, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,557,080 that, in management’s judgment, are not more-likely-than-not to be realized. In addition, the assumptions used to make this determination are subject to change from period to period based on changes in tax laws or variances between the Company’s projected operating performance and actual results. As a result, management’s judgment is required in assessing the possible need for a deferred tax asset valuation allowance.

The Company may be negatively impacted by emerging claim and coverage issues.

As insurance industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge, including new or expanded theories of liability. This phenomenon is sometimes referred to as “social inflation.” These or other changes could impose new financial obligations on the Company by extending coverage beyond its underwriting intent or otherwise require the Company to make unplanned modifications to the products and services that the Company provides, or cause the delay or cancellation of products and services that the Company provides. Examples of emerging claims and coverage issues include, without limitation:

	•		Judicial expansion of policy coverage and a greater propensity to grant claimants more favorable amounts and the impact of new theories of liability.
	•		Plaintiffs targeting property and casualty insurers, including the Company, in purported class action litigation relating to claims-handling and other practices.
	•		Social and litigation trends, including higher and more frequent claims, more favorable judgments and legislated increases.
	•		Medical developments that link health issues to particular causes, resulting in liability claims.
	•		Claims relating to unanticipated consequences of current or new technologies, including cyber security related risks.
	•		Claims relating to potentially changing climate conditions.
	•		Increased claims due to third party funding of litigation.

In some instances, these changes may not become apparent for some time after the Company has issued insurance policies that are affected by the changes. As a result, the full extent of liability under the Company’s insurance policies may not be known for many years after a policy is issued. For example, social changes and litigation trends have resulted in significantly larger verdicts awarded by juries in recent years in connection with altercations in bars and taverns, and in significantly larger settlements on cases which do not go to trial in connection with tenants-rights, rent-control, property-utilization and property-maintenance laws, as well as other forms of social inflation, and these trends may continue. In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on the Company’s business.

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The Company’s success depends on its ability to accurately underwrite risks and to charge adequate premium to policyholders.

The Company’s financial condition, liquidity and results of operations largely depend on the Company’s ability to underwrite and set premium accurately for the risks it faces. Premium rate adequacy is necessary to generate sufficient premium to offset losses, loss adjustment expenses, underwriting expenses, and to earn a profit. In order to price its products accurately, the Company must collect and properly analyze a substantial volume of data; develop, test and apply appropriate rating formulas; closely monitor and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. The Company’s ability to undertake these efforts successfully is subject to a number of risks and uncertainties, including, without limitation:

	•		Availability of sufficient reliable data.
	•		Incorrect or incomplete analysis of available data.
	•		Uncertainties inherent in estimates and assumptions.
	•		Selection and application of appropriate rating formulae or other pricing methodologies.
	•		Adoption of successful pricing strategies.
	•		Prediction of policyholder retention (e.g., policy life expectancy).
	•		Unanticipated court decisions, legislation or regulatory action.
	•		Ongoing changes in the Company’s claim settlement practices.
	•		Unexpected inflation.
	•		Social changes, particularly those affecting litigation patterns.

Such risks may result in the Company’s pricing being based on outdated, inadequate, or inaccurate data, or inappropriate analyses, assumptions, or methodologies, and may cause the Company to estimate incorrectly future changes in the frequency or severity of claims. As a result, the Company could underprice risks, which would negatively affect the Company’s margins, or it could overprice risks, which could reduce the Company’s volume and competitiveness. The Company’s ability to accurately underwrite risks in insurance contracts depends in part on its ability to forecast such changes and trends. If it is not successful in doing so, the Company’s operating results, financial condition, and cash flow could be materially adversely affected.

Inability to obtain reinsurance or to collect ceded losses and loss adjustment expenses could adversely affect Crusader’s ability to write new policies.

The availability, amount and cost of reinsurance depend on market conditions and may vary significantly. Any decrease in the amount of Crusader’s reinsurance will increase the risk of loss and could materially adversely affect its business and financial condition. Lack of reasonably priced reinsurance may preclude Crusader from writing certain risks or may reduce Crusader’s underwriting profit due to higher cost of reinsurance, both of which could materially adversely affect its business and financial condition. Ceded reinsurance does not discharge Crusader’s direct obligations under the policies it writes, which exposes Crusader to credit risk with regard to its reinsurance counterparties. Crusader remains liable to its policyholders even if it is unable to make recoveries that it believes it is entitled to under the reinsurance contracts. Losses may not be recovered from the reinsurers until claims are paid, which may create timing and liquidity risk. Additionally, any losses in excess of Crusader’s reinsurance limits would remain direct obligations of Crusader and would therefore have a negative impact on the Company’s financial condition and results of operations.

The property and casualty insurance business is historically cyclical in nature, and the Company may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.

Historically, insurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, adverse litigation trends, regulatory constraints, general economic conditions and other factors. The supply of insurance is related to prevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry. As a result, the insurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity increased premium levels. Demand for insurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, the introduction of new capital providers, and general economic conditions. All of these factors fluctuate and may contribute to price declines generally in the insurance industry.

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The Company cannot predict with certainty whether market conditions will improve, remain constant or deteriorate. Negative market conditions may impair the Company’s ability to underwrite insurance at rates it considers appropriate and commensurate relative to the risk assumed. If the Company cannot underwrite insurance at appropriate rates, its ability to transact business will be materially and adversely affected. Any of these factors could lead to an adverse effect on the Company’s business, financial condition and results of operations.

The insurance business is subject to extensive regulation and such regulation may become more extensive in the future, which may adversely affect the Company’s business, financial condition and results of operations.

Crusader is subject to extensive regulations and supervision in the states in which it operates or is licensed to conduct business. These regulations are generally designed to protect the interests of policyholders and not necessarily the interests of insurers, their stockholders or other investors. The regulations relate to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and nonfinancial components of an insurance company’s business. These powers include, among other things, the ability to:

	•		Place limitations on Crusader’s investments and dividends.
	•		Place limitations on Crusader’s ability to transact business with its affiliates.
	•		Establish standards of solvency including minimum reserves and capital surplus requirements.
	•		Prescribe the form and content of and to examine Crusader’s financial statements.

Federal legislation currently does not directly impact the property and casualty business, but the business can be indirectly affected by changes in federal regulations. From time to time, the U.S. Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. The Company cannot predict whether, and to what extent, new laws and regulations that would affect its business will be adopted, the timing of any such adoption and what effects, if any, they may have on the Company’s business, financial condition, and results of operations. The Company is unable to predict whether such laws will be enacted and how and to what extent this could affect the Company.

Crusader, along with other licensed insurers, is required to bear a portion of the losses suffered by some insureds as the result of impaired or insolvent insurance companies. In addition, Crusader must participate in mandatory arrangements to provide various types of insurance coverage to individuals or other entities that otherwise are unable to purchase that coverage from private insurers. The effect of these and similar arrangements could reduce its profitability in any given period or limit its ability to grow the business. The NAIC and state insurance regulators are continually reexamining existing laws and regulations, specifically focusing on modifications to statutory accounting principles, interpretations of existing laws and the development of new laws and regulations.

Many states have adopted measures related to the NAIC’s Solvency Modernization Initiative (“SMI”), which have included model regulations that require insurers to summarize their key risks and risk management strategies to regulators. The SMI resulted in a 2010 amendment to the NAIC’s Model Insurance Holding Company System Regulatory Act, which requires the ultimate controlling person in an insurer’s holding company structure to identify and report material enterprise risks to the state insurance regulator. The SMI also produced the NAIC Risk Management and Own Risk Solvency Model Act (“ORSA”), which requires insurers meeting premium thresholds to maintain a risk management framework, and annually submit a comprehensive report designed to assess the adequacy of an insurer’s risk management practices, including risks related to the insurer’s future solvency position. The Company is currently exempt from providing an ORSA summary report as it does not meet the minimum premium requirements. On the federal level, the Dodd-Frank Act, enacted in July 2010, mandated significant changes to the regulation of U.S. insurance effective as of July 21, 2011. Currently, the impact of these regulations has not materially affected the Company’s business. Any proposed or future state or federal legislation or NAIC initiatives, if adopted, may be more restrictive on the ability of Crusader to conduct business and/or may result in higher costs.

The extensive regulation to which the Company is subject may affect the cost of or demand for the Company’s products and may limit the ability to obtain rate increases or to take other actions that the Company might desire to do in order to increase its profitability.

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The Company’s risk management framework could prove inadequate, which could adversely affect the Company.

The Company’s risk management framework is designed to identify, monitor and mitigate risks that could have a negative impact on the Company’s financial condition or reputation. This framework includes departments or groups dedicated to risk management, information security, disaster recovery and other information technology-related risks, business continuity, legal and compliance, compensation structures and other human resource matters, vendor management and internal audit, among others. Many of the processes are overseen by these departments function at the enterprise level, but many also function through, or rely to a certain degree upon, risk mitigation efforts in local operating groups. Similarly, with respect to the risks the Company assumes in the ordinary course of its business the Company employs localized as well as centralized risk mitigation efforts. If the Company’s risk mitigation efforts prove inadequate, the Company could be adversely affected.

Unico is a holding company that relies on its subsidiaries to satisfy its obligations.

As a holding company, Unico does not generate revenue sufficient to pay operating expenses or stockholders’ dividends. Consequently, Unico relies on the ability of its subsidiaries to meet its obligations. The ability of Crusader to pay dividends to Unico is regulated by state insurance laws, which limit the amount of, and in certain circumstances may prohibit the payment of, cash dividends. The inability of Crusader to pay dividends in an amount sufficient to enable Unico to meet its cash requirements could have a materially adverse effect on the Company’s results of operations, financial condition, and its ability to pay dividends to its shareholders.

Past and future downgrades in the financial strength rating or long-term issuer credit rating of Crusader could reduce the amount of business it may be able to write.

Rating agencies rate insurance companies based on financial strength as an indication of an ability to pay claims. The financial strength rating of A.M. Best is subject to periodic review using, among other things, proprietary capital adequacy models and is subject to revision or withdrawal at any time. Insurance financial strength ratings are directed toward the concerns of policyholders and insurance agents and are not intended for the protection of investors. Crusader and Unico have experienced downgrades in such ratings in the past, and may experience further downgrades in the future. Any downgrade in Crusader’s A.M. Best rating could cause a reduction in the number of policies it writes and could have a materially adverse effect on the Company’s results of operations and financial position.

On January 17, 2019, A.M. Best downgraded Crusader’s FSR to B++ (Good) from A- (Excellent) and its Long-Term ICR to “bbb+” from “a-“. The outlook of the FSR was revised at that time to stable from negative while the outlook of the Long-Term ICR remained negative. The rating downgrades reflected a revision in A.M. Best’s assessment of Crusader’s operating performance to adequate from strong.

On February 5, 2021, A.M. Best Company affirmed the FSR of B++ (Good) and Long-Term ICR” of “bbb” of Crusader and revised Crusader’s FSR and Long-Term ICR outlooks to negative from stable. Additionally, A.M. Best affirmed the Long-Term ICR of “bb” of Unico and revised Unico’s Long-Term ICR outlook to negative from stable.

According to A.M. Best, the negative outlooks capture A.M. Best’s concerns with Crusader’s declining underwriting performance, the Company’s overall capitalization and the execution risk associated with implementing strategic operating changes to address these conditions.

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The Company’s earnings may be affected by changes in interest rates.

Investment income is an important component of the Company’s revenues and net income. The ability to achieve investment objectives is affected by factors that are beyond the Company’s control. Many of the instruments in which the Company may invest are subject to interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Any significant decline in investment income as a result of falling interest rates or general market conditions may have an adverse effect on net income and, as a result, on the Company’s stockholders' equity and statutory surplus.

The outlook for the Company’s investment income is dependent on the composition of its investment portfolio, the future direction of interest rates and the amount of cash flows from operations that are available for investment. The fair values of fixed maturity investments that are available-for-sale fluctuate with changes in interest rates and cause fluctuations in stockholders' equity.

The Company’s investments may be subject to credit, prepayment and other risks.

The Company’s investment guidelines allow investing in new classes of securities which are subject to additional risks. Rating errors by agencies, such as Moody’s, Standard & Poor’s, and Fitch, and/or economic downturn may create credit risk, a decline in interest rates may create prepayment risk, and a decrease in tax rates may reduce attractiveness of state and municipal bonds and may impact their market valuation. Any significant loss on investments or general market downturn may have an adverse effect on the Company’s stockholders' equity and statutory surplus and its business.

The Company’s geographic concentration ties its performance to the business, economic, and regulatory conditions in California.

The Company’s insurance business is concentrated in California (99.9% of gross written premium (before reinsurance ceded) in 2020 and 2019). Accordingly, unfavorable business, economic or regulatory conditions in the state of California could negatively impact the Company’s performance. In addition, California is exposed to severe natural perils, such as earthquakes and fires along with the possibility of terrorist acts. Accordingly, the Company could suffer losses as a result of catastrophic events, and such losses could be magnified as a result of its business concentration in California.

The Company’s single operating location exposes it to geographic risk.

The Company conducts its business from a single facility located in the Calabasas building. The Company may not be able to access the building due to natural disasters, civil unrests, closures of public roads or utilities, or other unforeseen events. While the Company has procedures and insurance in place to mitigate short-term access limitations to the building, an extended building access limitation may have an adverse impact on the Company’s results of operation.

The Company relies on independent insurance agents and brokers.

The failure or inability of independent insurance agents and brokers to market the Company’s insurance programs successfully could have a materially adverse effect on its business, financial condition and results of operations. Independent brokers are not obligated to promote the Company’s insurance programs and may sell competitors' insurance programs. The Company’s business largely depends on the marketing efforts of independent brokers and on the Company’s ability to offer insurance programs and services that meet the requirements of the customers of those brokers.

The Company’s reserve for doubtful accounts is based on estimates.

The Company may not be able to collect the premiums it estimates are collectible from its agents and brokers and, therefore, the Company’s reserve for doubtful accounts may not be sufficient.

Litigation may have an adverse effect on the Company’s business.

The Company’s is routinely involved in litigation, which can be unpredictable and costly, and may result in negative effects on the Company’s business, reputation, financial condition or results of operations. By virtue of the nature of its business, the Company is subject to numerous legal proceedings in which it may be named as either plaintiff or defendant. Such disputes may concern the issuance or non-issuance of individual insurance policies, coverage disputes or other matters. In addition, the insurance industry is the target of class action lawsuits and other types of litigation, some of which involve claims for substantial and/or indeterminate amounts and the outcomes of which are unpredictable. This litigation can be based on a variety of issues including insurance and claim settlement practices. Although the Company has not been the target of any specific class action lawsuits, it is possible that a lawsuit of this type could have a negative impact on the Company’s business.

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The exclusions and limitations in the Company’s policies may not be enforceable.

Many of the Company’s policies include exclusions or other conditions that define and limit coverage; these exclusions and conditions are designed to manage the Company’s exposure to certain types of risks and expanding theories of legal liability. In addition, many of the Company’s policies limit the period during which a policyholder may bring a claim under the policy; this period in many cases is shorter than the statutory period under which these claims can be brought by the policyholders. While these exclusions and limitations help the Company assess and control its loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion or limitation, or legislation could be enacted modifying or barring the use of these exclusions and limitations. This could result in higher than anticipated losses and loss adjustment expenses by extending coverage beyond the Company’s underwriting intent or increasing the number or size of claims, which could have a materially adverse effect on the Company’s operating results. In some instances, these changes may not become apparent for some time after the Company has issued the insurance policies that are affected by the changes. As a result, the full extent of liability under the Company’s insurance policies may not be known for many years after a policy is issued.

The Company may find it difficult to acquire necessary data.

Certain data used and supplied by the Company are subject to regulation at the federal, state, and local level. Compliance with these emerging laws and regulations has not had a material adverse effect on the Company’s operations to date. However, federal, state, and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the commercial use of such information may affect the Company’s operations and could result in substantial regulatory compliance expense, litigation expense, and loss of revenue. The vendors and suppliers of the Company face similar burdens. As a result of these and other factors, the Company may find it financially difficult or burdensome to acquire necessary data.

The Company relies on its information technology systems, and the data within those systems, to manage many aspects of its business. Cybersecurity risks, the failure of these systems to operate properly, and/or the failure to maintain the confidentiality, integrity, and availability of policyholder and claims data, including personal identifying information, could result in a materially adverse effect on the Company’s business, reputation, financial condition and results of operations.

The Company collects and retains large volumes of internal and policyholder data, including personal identifying information. The Company uses this information for a variety of business purposes, including but not limited to underwriting, claims, billing, and administration. The Company also collects and retains the personal identifying information of its employees and job applicants. The Company therefore depends on the security, accuracy, reliability, and proper functioning of its information technology systems to effectively manage many aspects of its business, including underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, job applications, employee management, and maintaining its policyholder data.

The failure of hardware or software that supports the Company’s information technology systems or the loss of data contained in the systems could disrupt its business and could result in decreased premiums, increased overhead costs, and inaccurate reporting, all of which could have a materially adverse effect on the Company’s business, financial condition, and results of operations. In addition, despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for the Company’s information technology systems, these systems are vulnerable to damage or interruption from events such as:

	•		Earthquake, fire, flood, and other natural disasters.
	•		Terrorism acts and attacks by computer viruses or hackers.
	•		Power loss.
	•		Unauthorized access.
	•		Computer systems or data network failure.

It is possible that a system failure, accident, security breach, or unauthorized internal or external knowledge, or misuse of confidential Company data could result in a material disruption to the Company’s business and reputation, as well as an increased risk of remedial and other expenses, fines, or lawsuits.

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Although the Company seeks to mitigate the impact and severity of potential cyber threats more generally, not every risk or liability can be mitigated against. To the extent that a critical system fails or is not properly implemented and the failure cannot be corrected in a timely manner, the Company may experience disruptions to the business that could have a materially adverse effect on the Company’s results of operations. In addition, the costs associated with the development or acquisition of new computer software, such as in the case of the Company’s planned replacement of its policy administration system, may result in impairment charges if such acquisition or development is not successfully implemented. Any such impairment charges may adversely impact the Company’s results of operation.

During the first quarter of 2020, the Company concluded an investigation regarding potential unauthorized access to non-public personal information as a result of a vulnerability in one of the Company’s websites. The investigation identified non-public personal information pertaining to approximately 15 individuals that likely were accessed without authorization. These 15 individuals were notified and offered complimentary credit monitoring services, and the vulnerability was remediated. While the incident did not have a material impact on the Company’s business, it increases the risk associated with future incidents, investigations, and lawsuits, particularly the risk of damage to the Company’s reputation.

In conducting its business and delivering its products and services, the Company also uses various third party vendors and service providers. These service providers and the systems they utilize are typically subject to the same types of security-related risks the Company faces. The Company provides certain of these vendors with data, including non-public personal identifying information. There is no guarantee that the Company’s due diligence or ongoing vendor oversight will be sufficient to ensure the integrity and security of the systems used by these vendors or the protection of information that resides thereon. Adverse consequences for the Company in the event of a significant event involving the systems of its vendors or the information provided to the vendors, among others, could delay the Company’s delivery of products and services, result in a direct or indirect financial loss, and/or result in loss of business and/or reputational damage.

Certain laws and contracts the Company has entered into require it to notify various parties, including consumers or customers, in the event of certain actual or potential data breaches or systems failures, including those of the Company’s service providers. These notifications can result, among other things, in the loss of customers, lawsuits, adverse publicity, diversion of management’s time and energy, the attention of regulatory authorities, fines and disruptions in sales. If the Company or its service providers fail to comply with applicable regulations and contractual requirements, the Company could be exposed to lawsuits, governmental proceedings or the imposition of fines, among other consequences.

Any inability to prevent or adequately respond to the issues described above could disrupt the Company’s business, inhibit its ability to retain existing customers or attract new customers, otherwise harm its reputation and/or result in financial losses, litigation, increased costs or other adverse consequences that could be material to the Company.

Data privacy and security laws and regulations are continuing to change.

The legal and regulatory environment in the United States governing data privacy and security is becoming increasingly complex, and continues to evolve. An increasing number of federal and state laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and otherwise processing of personal data, including HIPAA, HITECH, the GLBA, the CCPA, CPRA, and IIPPA. The effects of these laws, including the cost of compliance and required changes in the manner in which the Company conducts its business, are not fully known and are potentially significant, and the failure to comply could adversely affect the Company. The Company has, and continues to incur costs to comply with these laws and to respond to inquiries about its compliance with the same. Maintaining compliance with applicable data privacy and security laws and regulations may increase the Company’s operating costs and adversely impact its ability to market products and service policyholders. Any inability to prevent or adequately respond to these legal and regulatory challenges could disrupt the Company’s business, inhibit its ability to retain existing customers or attract new customers, otherwise harm its reputation and/or result in financial losses, litigation, increased costs, or other adverse consequences that could be material to the Company.

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The Company has experienced delays and cost overruns in connection with the upgrade of its legacy information technology system.

In 2018, the Company identified the need to replace or upgrade its legacy information technology system to process its smaller premium accounts more efficiently. At that time, the Company determined that the cost to replace its legacy IT system would be between $4 million and $8 million, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system, an upgrade that then seemed to offer more incremental benefits in a shorter timeframe. While initially expected to be completed by the end of 2019, the system upgrade is now expected to be completed by the end of the first quarter of 2021, due to unexpected technical challenges and personnel changes. The Company has also experienced repeated cost overruns in connection with the system upgrade, which have adversely impacted the Company’s results of operations. The Company believes that the failure to have replaced or upgraded its legacy information technology system has contributed to its operating losses in recent years. If the Company experiences further delays or cost overruns, its results of operations may be adversely affected in future periods.

The ability of the Company to attract, develop and retain employees and to maintain appropriate staffing levels is critical to the Company’s success.

The Company must hire and train new employees and retain current employees to handle its operations. The failure of the Company to successfully hire and retain a sufficient number of skilled employees could have an adverse effect on the Company’s business. In the third quarter of 2020, the Company’s management team underwent significant changes, including the retirement of its former Chairman of the Board, Chief Executive Officer and President, who was replaced by Ronald Closser as the Interim Chairman of the Board, Chief Executive Officer and President. Upon the end of the term of Ronald Closser’s employment agreement in the first quarter of 2021, Michael Budnitsky was appointed as the Interim Chief Executive Officer and President. If the Company is unsuccessful in hiring and retaining a permanent Chief Executive Officer and President, as well as other key employees, the resulting disruption could have a significant adverse effect on the Company’s operations.

The Company’s financial condition may be adversely affected if one or more parties that have significant contracts or relationships with the Company become insolvent, experience other financial difficulties, or default in the performance of obligations.

The Company’s business is dependent on the performance by third parties of their responsibilities under various contractual or services arrangements. These include, for example, contracts for the acquisition of goods and services (such as telecommunications and information technology facilities, equipment and support, and other systems and services that are integral to its operations), agreements with independent or outside claim adjusters, agreements with other insurance carriers to sell products that the Company does not offer, and arrangements for transferring certain risks (including reinsurance used in connection with certain insurance products and corporate insurance policies). The Company is also dependent on its dealings with banks and other financial institutions. If one or more of these parties were to default in the performance of their obligations or determine to abandon or terminate support for a system, product, or service that is significant to the Company’s business, it could suffer significant financial losses and operational interruptions or other problems, which could in turn adversely affect its financial performance, cash flows, or results of operations and cause damage to its brand and reputation.

The property casualty insurance industry is highly competitive, and the Company may not be able to compete effectively against larger and/or better capitalized companies.

The Company faces intense competition in the property and casualty insurance industry. Competition in the property and casualty marketplace is based on many factors including premiums charged, services provided, financial strength ratings assigned by independent rating agencies, speed of claims payments, reputation, perceived financial strength, technology, and general experience. The Company competes with many regional and national property and casualty insurance companies. Many of these competitors are better capitalized than the Company, have greater financial, marketing and management resources than the Company, and have higher A.M. Best ratings. The superior capitalization, resources and ratings of the Company’s competitors may enable them to offer lower rates, to withstand larger losses, and to more effectively take advantage of new marketing opportunities and attract new customers. Intense competitive pressure on prices can result from the actions of even a single large competitor. The Company’s competition may also become increasingly better capitalized in the future as the traditional barriers between insurance companies and banks and other financial institutions erode and as the property and casualty industry continues to consolidate.

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The Company may undertake strategic marketing and operating initiatives to improve its competitive position and drive growth. If the Company is unable to successfully implement new strategic initiatives or if the Company’s marketing campaigns do not attract new customers, the Company’s competitive position may be harmed, which could adversely affect the Company’s business and results of operations.

Crusader is a participant in various underwriting pools and programs which have legal power to levy assessments to Crusader.

As an admitted insurer in several states, Crusader is obligated to participate in various underwriting pools and programs run at federal and state levels. Examples include, but not limited to, a program established by the Terrorism Risk Insurance Act of 2002 within the Department of the Treasury, California Assigned Risk Plan, California FAIR Plan, and California Insurance Guarantee Association. These underwriting pools and programs have legal powers to assess their participants for net losses sustained in these underwriting pools and programs operations. Such assessments could have an adverse effect on the Company’s financial condition and results of operations.

RISKS RELATED TO THE COMPANY’S STOCK

The Company’s primary goal is to maximize the long-term value of the enterprise which may sometimes conflict with short-term earnings expectations.

The Company does not manage its business to maximize short-term stock performance. It also does not provide earnings estimates to the market and does not comment on earnings estimates by analysts. As a result, its reported results for a particular period may vary, perhaps significantly, from investors’ expectations, which could result in significant volatility in the price of its common shares.

In addition, due to the Company’s focus on the long-term value of an enterprise, it may undertake business strategies and establish related financial goals for a specific year that are designed to enhance its longer-term performance, while understanding that such strategies may not always similarly benefit short-term results, such as its annual underwriting profit or earnings per share.

The Company is controlled by a small number of shareholders who will be able to exert significant influence over matters requiring shareholder approval.

A small number of holders of the Company’s stock own a majority of the voting power of the Company. Accordingly, those holders have the ability to exert significant influence on the outcome of corporate actions, involving the Company requiring shareholder approval, including the election of directors, change of control transactions or any other significant corporate transactions. This concentration of ownership may conflict with the interests of the Company’s other shareholders.

Insurance laws make it difficult to effect a change of control of the Company or the sale of any subsidiaries.

To acquire control of a U.S. insurance company or any holding company of a U.S. insurance company, prior written approval must be obtained from the Department of Insurance in the state where the insurer is domiciled. The Department of Insurance of the state will consider a number of factors relating to the acquirer and the transaction prior to granting approval of the application to acquire control of the insurer or the holding company. These laws and regulations may discourage potential acquisition proposals and may delay, deter or prevent a change of control of the Company or the sale by the Company of any of its insurance subsidiaries, including transactions that some or all of the Company’s shareholders might consider to be desirable.

The trading market for the Company’s stock is relatively illiquid.

There has been relatively limited trading volume in the market for the Company’s common stock, and a more active, liquid public trading market may not develop or may not be sustained. Limited liquidity in the trading market for the Company’s common stock may adversely affect shareholders’ ability to sell their shares of common stock at the time they wish to sell them or at a price that they considers acceptable.

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GENERAL RISK FACTORS

Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect the Company’s consolidated financial statements.

The Company’s consolidated financial statements are subject to the application of GAAP, which is periodically revised and/or expanded. Accordingly, the Company is required to adopt new or revised accounting standards from time to time issued by recognized authoritative bodies, including the FASB. It is possible that future changes the Company is required to adopt could change the current accounting treatment that the Company applies to its consolidated financial statements and that such changes could have a material effect on the Company’s financial condition and results of operations.

Changes in federal or state tax laws could have a materially adverse effect on the Company’s financial condition and results of operations.

The Company’s financial condition and results of operations are dependent, in part, on tax policy implemented at the federal and/or state level. The Company’s results are also subject to federal and state tax rules applicable to dividends received from its subsidiaries. Additionally, changes in tax laws could have an adverse effect on deferred tax assets and liabilities included in the Company’s consolidated balance sheets and results of operations. The Company cannot predict whether any tax legislation will be enacted in the near future or whether any such changes to existing federal or state tax law would have a material adverse effect on the Company's financial condition and results of operations.

The Company’s disclosure controls and procedures may not prevent or detect all acts of fraud.

The Company’s disclosure controls and procedures are designed to reasonably ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s management believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and the Company cannot ensure that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be detected.

Changes in general economic conditions may have an adverse effect on the Company’s revenues and profitability.

The Company’s financial condition and results of operations may be negatively impacted by national and local economic conditions, such as recessions, increased levels of unemployment, inflation and the disruption in the financial markets. The Company is not able to predict the effect of these factors or their duration and severity.

The Company depends on key personnel, the loss of which could negatively impact its business.

The Company’s current and future success is dependent to a large extent on the retention and continued service of its key personnel, which includes its executive officers. The loss or unavailability of any key personnel, which includes its executive officers, could have an adverse effect on the Company’s financial condition and results of operations.

The Company cannot assure you that it will declare or pay dividends on its common shares in the future so any returns may be limited to the value of its stock.

The Company currently anticipates that it will retain future earnings for the development, operation and expansion of its business and does not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to shareholders will therefore be limited to appreciation in value of their stock, if any.

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In addition, any determination to declare or pay future dividends to the Company’s shareholders will be at the discretion of the Company’s Board and will depend on a variety of factors, including (1) the Company’s financial condition, liquidity, results of operations (including its ability to generate cash flow in excess of expenses and its expected or actual net income), retained earnings and collateral and capital requirements, (2) general business conditions, (3) legal, tax and regulatory limitations, (4) contractual prohibitions and other restrictions, (5) the effect of a dividend or dividends upon the Company’s financial strength ratings and (6) any other factors that the Board deems relevant.

The Company incurs significant costs as a result of operating as a public company, and its management is required to devote substantial time to related compliance initiatives.

As a public company, the Company incurs significant legal, accounting and other expenses that it did not incur as a private company. In addition, the Company is subject to the reporting requirements of the Exchange Act, which require, among other things, that it files with the SEC, annual, quarterly and current reports with respect to its business and financial condition. The Company is also subject to other reporting and corporate governance requirements, including certain requirements of Nasdaq and provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which imposes significant compliance obligations upon it.

The Sarbanes-Oxley Act and the Dodd-Frank Act, as well as rules subsequently implemented by the SEC and Nasdaq, have increased regulation of, and imposed enhanced disclosure and corporate governance requirements on, public companies. Our efforts to comply with these laws, regulations and standards have increased the Company’s operating costs and may divert management’s time and attention from revenue-generating activities.

Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on the Company’s stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by the SEC require the Company to include in its Form 10-K a report by its management regarding the effectiveness of the Company’s internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of the Company’s internal control over financial reporting as of the end of its fiscal year, including a statement as to whether or not the Company’s internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in the Company’s internal control over financial reporting identified by management. Areas of the Company’s internal control over financial reporting may require improvement from time to time. If management is unable to assert that the Company’s internal control over financial reporting is effective now or in any future period, investors may lose confidence in the accuracy and completeness of the Company’s financial reports, which could have an adverse effect on its stock price.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

On September 26, 2013, Crusader purchased land and a two-story building located at 26050 Mureau Road, Calabasas, California (the “Headquarters”). The Company moved its home office to this location on October 9, 2015, and has been occupying the building through the present time. On February 12, 2021, Crusader sold the Headquarters, the leasehold improvements and substantially all existing furniture, fixtures and equipment to a third party for a sale price of $12,695,000, and leased back a portion of the Headquarters for continued use as the Company’s home office.

Item 3. Legal Proceedings.

The Company, by virtue of the nature of the business conducted by it, becomes involved in numerous legal proceedings in which it may be named as either plaintiff or defendant. Incidental actions are sometimes brought by customers or others that relate to disputes concerning the issuance or non-issuance of individual insurance policies or other matters. In addition, the Company resorts to legal proceedings from time to time in order to enforce collection of premiums, commissions, or fees for the services rendered to customers or to their agents. These routine items of litigation do not materially affect the Company’s operations and are handled on a routine basis through independent counsel.

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Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company's common stock is traded on the Nasdaq Global Market under the symbol "UNAM." As of March 31, 2021, the number of shareholders of record of the Company's common stock was 179. That number does not include beneficial owners of the Company’s common stock held in the name of nominees.

There were no cash dividends declared or paid by the Company in the years ending December 31, 2020 and 2019, respectively. The Company considers its profitability, cash requirements, capital requirements, general business conditions and other factors prior to the declaration of cash dividends.

On August 10, 2020, the Board authorized a share repurchase program (the “2020 Program”) for up to $5,000,000 of the currently outstanding shares of the Company’s common stock. The 2020 Program is effective immediately and replaces the Company’s existing share repurchase program that was adopted by the Board on December 19, 2008 (the “2008 Program”) to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. The purchases under the 2020 Program may be made from time to time in the open market, through block trades, 10b5-1 trading plans, privately negotiated transactions or otherwise and in accordance with applicable laws, rules and regulations. The timing and actual number of the shares repurchased under the 2020 Program will depend on a variety of factors including price, market conditions and corporate and regulatory requirements. The Company intends to fund the share repurchases under the 2020 Program from cash on hand. The 2020 Program does not commit the Company to repurchase shares of its common stock and it may be amended, suspended or discontinued at any time. During the three months ended December 31, 2020, the Company repurchased its shares under the 2020 Program in unsolicited transactions as follows:

		Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Dollar Value that May Yet Be Purchased Under the Program
Period
	October 1 – 31, 2020	—		—		—	$	4,996,721
	November 1 – 30, 2020	—		—		—		4,996,721
	December 1 – 31, 2020	227	$	5.35		227		4,995,507
	Total	227	$	5.35		227	$	4,995,507

The Company has remaining authority under the 2020 Program to repurchase up to $4,995,507 of the currently outstanding shares of the Company’s common stock as of December 31, 2020. The Company has retired or will retire all stock repurchased under the 2020 Program and 2008 Program.

Item 6. Selected Financial Data.

As a smaller reporting company, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this Item.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Management's Discussion and Analysis (“MD&A”) is intended to provide an understanding of the Company’s financial condition and results of operations by focusing on changes in certain key measures from year to year. This MD&A should be read in conjunction with the Company’s consolidated financial statements and notes thereto. This discussion contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report on Form 10-K, particularly in Item 1A – “Risk Factors.”

Overview

General

Total revenues for the year ended December 31, 2020, were $32,560,111 compared to $31,372,814 for the year ended December 31, 2019, an increase of $1,187,297. The Company’s net loss for the year ended December 31, 2020 was $21,491,113 compared to net loss of $3,115,703 for the year ended December 31, 2019.

Repeated and sustained underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in the Transportation vertical, a product which is generally known for its difficulty to be underwritten profitably, coupled with changes in market conditions, caused Crusader’s management to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves. This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the $12,066,793 increase in losses and loss adjustment expenses of $34,642,920 recognized for the twelve months ended December 31, 2020 compared to $22,576,127 recognized for the twelve months ended December 31, 2019.

Another significant contributor to the Company’s increased net loss for the year ended December 31, 2020 was an increase in income tax expense of $3,681,785 during the twelve months ended December 31, 2020, due primarily to an increase in the valuation allowance related to deferred tax assets on federal net operating losses.

This overview discusses some of the relevant factors that management considers in evaluating the Company's performance, prospects and risks. It is not all inclusive and is meant to be read in conjunction with the entirety of the MD&A, the Company's consolidated financial statements and notes thereto, and all other items contained within this Annual Report on Form 10-K.

As a result of the ongoing coronavirus (“COVID-19”) pandemic, economic uncertainties have arisen, which negatively impacted and may continue to negatively impact the fair value of investments, day to day administration of the Company’s business and the Company’s results of operations, financial condition and prospects.

The effects of the ongoing COVID-19 pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the twelve months ended December 31, 2020, and the economic uncertainty caused by the pandemic may lead to further investment valuation volatility. In addition, the recent decline in investment yields resulted in lower reinvestment rates, compared to the previous years, which will cap the Company’s investment portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy.

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Although the COVID-19 pandemic did not have a material impact on Crusader’s overall gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) during the twelve months ended December 31, 2020, Crusader has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which had adversely impacted the gross written premium for that niche.

Crusader has received a number of coronavirus-related business interruption claims. While the Company does not believe it is exposed to substantial risk from those claims under the insurance policies written by Crusader, the individual circumstances of each such claim are reviewed to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of loss emergence and ultimate loss ratios for certain of Crusader’s products due to postponements of civil court cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or judicial developments, which could result in loss reserve deficiencies and negative impact on results of operations.

The Company’s financial results for the twelve months ended December 31, 2020, do not fully reflect the potential adverse impacts that the ongoing coronavirus pandemic has had or will have on its business due to a high degree of uncertainty around this relatively new and continuously evolving environment. The financial impact of these uncertainties is unknown at this time but could result in a material adverse effect on the Company’s business, results of operations, financial condition and prospects.

While the coronavirus pandemic is also affecting the Company’s internal operations, the Company implemented a plan at the onset of the COVID-19 pandemic to help its operations continue effectively during the ongoing pandemic, including processes to limit the spread of COVID-19 among employees. For example, the Company modified its business practices in accordance with social distancing and safety guidelines, allowing many employees work-from-home arrangements, flexible work schedules, and restricted business travel. The Company’s employees are following the guidelines and approximately 75% are working from their homes. The Company will follow governmental safety guidelines to determine when to remove the coronavirus-related business restrictions and to allow employees working from home to return to the workplace. At this point, the Company does not have an estimate on when these changes will occur. While the pandemic has created new challenges for the Company, the Company’s ability to maintain its operations, internal controls and relationships has not been adversely affected.

The Company’s financial performance suffered in recent years, reporting net losses for each fiscal year beginning with the year ended December 31, 2015. While losses in recent years have been driven primarily by losses from Crusader’s policies and their high loss ratios, management believes that other contributing factors include (1) the growth of some of the Company’s non-routine expenses relative to flat or declining revenues, (2) the failure to replace or upgrade the Company’s legacy IT system in order to process Crusader’s smaller premium accounts more efficiently, and (3) the failure to shift focus to larger premium accounts and fee-for-service operations.

In light of the challenges faced and operational results, the Company has taken several steps to improve its results. To improve Crusader's loss ratios, beginning in January 2017, the Company made significant changes in its staffing and in its pricing and risk selection practices. To improve revenues the Company is working to improve its sales in the markets that it has historically served, to gain access to markets that it has not previously served, and to generate new sources of revenue on a fee-for-service basis. For example, the Company also re-activated its U.S. Risk Managers, Inc. subsidiary so that it can provide claims adjustment services to non-affiliated insurers and to self-insurers on a fee-for-service basis (i.e., where Crusader will not be underwriting the risk), providing the potential for an alternative revenue source to the Company.

On April 1, 2020, Crusader and Unifax, entered into a reinsurance arrangement with United Specialty Insurance Company (“USIC”), pursuant to which USIC would underwrite property and casualty insurance policies by and through Unifax and such policies would be reinsured by Crusader. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC by Unifax pending negotiations among Crusader, Unifax, and USIC pursuant to the issues raised by the DOI regarding the structure of the reinsurance arrangement and its compliance with the California Insurance Holding Company System Act (the “Insurance Act”).

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On November 24, 2020, as a result of such negotiations with the DOI, Crusader, Unifax and USIC agreed to rescind certain agreements by and among USIC, Crusader and Unifax. The effect of such rescissions was that the rescinded agreements were deemed never to have existed and no insurance policies were deemed issued, and no premium deemed written, collected or reported with respect to those agreements. Further, on November 24, 2020, the parties entered into various restructured arrangements in order to address the issues raised by the DOI with respect to California insurance laws. In particular, the parties eliminated all intercompany duties so that the arrangement would not require prior approval by the DOI under the Insurance Act. Details of the restructured arrangements with USIC include the following:

On November 24, 2020, USIC and Crusader entered into a new Quota Share Reinsurance Agreement, effective April 1, 2020, (the “New Reinsurance Agreement”), pursuant to which Crusader will reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax for property, general liability, CMP property, CMP liability and other miscellaneous coverages, subject to certain maximum policy limits. Policies placed with USIC by Unifax and reinsured with Crusader prior to November 24, 2020 remain in place without interruption or change and are subject to the New Reinsurance Agreement.

On November 24, 2020, USIC and Unifax entered into a Surplus Line Broker Agreement, effective April 1, 2020 (the “Broker Agreement”), pursuant to which, and subject to the terms, conditions and limitations set forth therein, USIC authorized Unifax to act as its broker and agent for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the New Reinsurance Agreement. Under the Broker Agreement, Unifax is entitled to retain a commission for policies produced based on a percentage of the premiums on business placed with USIC. Unifax has agreed to indemnify and hold USIC harmless from any losses relating to the Broker Agreement. The Broker Agreement may be terminated in specified events, including by any party upon 90 days written notice to the other parties and automatically upon cancellation or termination of the New Reinsurance Agreement.

On November 24, 2020, USIC and U.S. Risk Managers, Inc. (“U.S. Risk”) entered into a Claims Administration Agreement, effective as of April 1, 2020 (the “Claims Administration Agreement”). Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk, which is a licensed claims adjuster in the state of California, to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the New Reinsurance Agreement. U.S. Risk will be paid a fee by Unifax on behalf of USIC based on a percentage of earned premium. U.S. Risk will establish an account for payment of claims by U.S. Risk (the “Loss Fund Account”) pursuant to the Claims Administration Agreement. Pursuant to the terms of the New Reinsurance Agreement, Crusader will fund the Loss Fund Account provided for in the Claims Administration Agreement on behalf of USIC.U.S. Risk has agreed to indemnify and hold USIC harmless from any losses relating to the Claims Administration Agreement. The Claims Administration Agreement may be terminated in specified events, including by any party upon 90 days written notice to the other parties and automatically upon cancellation or termination of the Broker Agreement.

In 2018, the Company determined that the cost to replace its legacy IT system would be between $4,000,000 and $8,000,000, and the installation of such a system would take between two to four years. After weighing the time and expense involved against the anticipated benefit from such an investment, the Company opted for what it then perceived to be a less expensive upgrade to its legacy system, an upgrade that then seemed to offer more incremental benefits in a shorter timeframe. While initially expected to be completed by the end of 2019, at a cost of approximately $300,000, excluding costs of Unico’s employees involved in the upgrade, the system upgrade is now expected to be completed by the end of first quarter of 2021 at a cost not to exceed $1,500,000, excluding costs of Unico’s employees involved in the upgrade, due to unexpected technical challenges. In light of the significant delays and increases in cost associated with its legacy upgrade project, the Company has deployed additional resources toward the management of this project and has renegotiated the relationship that it has with the non-affiliated vendor working on this project.

Revenue and Income Generation

The Company receives its revenues primarily from earned premium derived from the insurance company operation, commission and fee income generated from the insurance agency operations, finance fee income from the premium finance operations, and investment income from cash generated primarily from the insurance company operation. The insurance company operation generated approximately 94% of the Company’s total revenue for the years ended December 31, 2020 and 2019. None of the Company’s other operations is individually material to consolidated revenues.

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Insurance Company Operation

As of December 31, 2020, Crusader was licensed as an admitted insurance carrier in the states of Arizona, California, Nevada, Oregon, and Washington. From 2004 until June 2014, all of Crusader’s business was written in the state of California. Crusader’s business remains concentrated in California (99.9% of gross written premium, which represents written premium before cession to reinsurers, in the years ended 2020 and 2019)). During the years ended December 31, 2020 and 2019, 99.6% and 98.3% of Crusader’s business was CMP policies, respectively.

Crusader’s total gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties), as reported on Crusader’s statutory financial statements, was produced geographically as follows:

	Year ended December 31
	2020		2019

California	$	36,618,013	$	35,773,506
Arizona		24,817		31,593
Washington		—		(1,149	)
Total gross written premium	$	36,642,830	$	35,803,950

Crusader believes that it can grow its sales and profitability through improved specialization and sales incentives. Crusader currently focuses in four underwriting verticals: (1) Transportation, (2) Food, Beverage & Entertainment, (3) Garage & Mercantile, and (4) Apartments & Commercial Buildings. Crusader also is evaluating the possibility of expanding its operations geographically, on an admitted or non-admitted basis, so as to offer similar products in other states, but the timing of any such expansion is not yet determined.

Written premium is a non-GAAP financial measure that is defined, under SAP, as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies. Written premium is a required statutory measure. Written premium is defined under GAAP in Accounting Standards Codification Topic 405, “Liabilities,” as “premiums on all policies an entity has issued in a period.” Earned premium, the most directly comparable GAAP measure to written premium, represents the portion of written premium that is recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the terms of the policies. Written premium is intended to reflect production levels and is meant as supplemental information and not intended to replace earned premium. Such information should be read in connection with the Company’s GAAP financial results.

The following is a reconciliation of gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) to net earned premium (after premium ceded to reinsurers under reinsurance treaties):

	Year ended December 31
	2020			2019

Direct written premium	$	36,338,800		$	35,803,950
Assumed written premium		304,030			—
Less: written premium ceded to reinsurers		(8,078,748	)		(7,153,130	)
Net written premium		28,564,082			28,650,820
Change in direct unearned premium		(230,570	)		(1,845,748	)
Change in assumed unearned premium		(147,391	)		—
Change in ceded unearned premium		(17,953	)		(67,604	)
Net earned premium	$	28,168,168		$	26,737,468

The insurance company operation’s underwriting profitability is defined by pre-tax underwriting gain or loss which is calculated as net earned premium less losses and loss adjustment expenses and policy acquisition costs.

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Crusader’s underwriting loss before income taxes is as follows:

	Year ended December 31
	2020			2019

Net written premium	$	28,564,082		$	28,650,820
Change in net unearned premium		(395,914	)		(1,913,352	)
Net earned premium		28,168,168			26,737,468
Less:
Losses and loss adjustment expenses		34,642,920			22,576,127
Policy acquisition costs		4,898,807			4,960,846
Total underwriting expenses		39,541,727			27,536,973
Underwriting loss before income taxes	$	(11,373,559	)	$	(799,505	)

Underwriting gain or loss before income taxes is a non-GAAP financial measure. Underwriting gain or loss before income taxes represents one measure of the pretax profitability of the insurance company operation and is derived by subtracting losses and loss adjustment expenses, and policy acquisition costs from net earned premium, which are all GAAP financial measures. Management believes disclosure of underwriting profit or loss before income taxes is useful supplemental information that helps align the reader’s understanding with management’s view of insurance company operations profitability. Each of these captions is presented in the Consolidated Statements of Operations but is not subtotaled.

The following is a reconciliation of Crusader’s underwriting loss before income taxes to the Company’s loss before taxes:

	Year ended December 31
	2020			2019

Underwriting loss before income taxes	$	(11,373,559	)	$	(799,505	)
Insurance company operation revenues:
Net Investment income		1,988,243			2,097,942
Net realized investment gains (losses)		97,771			(12,661	)
Net unrealized investment gains on equity securities		198,266			—
Other income		32,713			123,050
Other insurance operations revenues:
Gross commissions and fees		1,827,263			2,176,658
Finance charges and fees earned		240,589			239,524
Other income		7,098			10,833
Less expenses:
Salaries and employee benefits		6,364,170			4,067,852
Commissions to agents/brokers		95,315			173,796
Other operating expenses		4,502,414			2,844,083
Loss before taxes	$	(17,943,515	)	$	(3,249,890	)

Unearned premiums represent premium applicable to the unexpired terms of policies in force. The Company evaluates its unearned premiums periodically for premium deficiencies by comparing the sum of expected claim costs, unamortized deferred policy acquisition costs, and maintenance costs partially offset by net investment income to related unearned premiums. To the extent that any of the Company’s programs become unprofitable, a premium deficiency reserve may be required. The Company recognized a premium deficiency of $150,000 as of December 31, 2020. The Company did not carry a premium deficiency reserve as of December 31, 2019. The premium deficiency was recorded as a reduction in deferred policy acquisition costs.

The insurance company operation combined ratio is the sum of (1) the ratio of net losses and loss adjustment expenses incurred (including a provision for IBNR) to net earned premium (loss ratio) and (2) the ratio of policy acquisition costs to net earned premium (expense ratio). If the combined ratio is below 100%, an insurance company has an underwriting profit; if it is above 100%, the company has an underwriting loss.

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The following table shows the loss ratios, expense ratios, and combined ratios of Crusader:

	Year ended December 31
	2020			2019

Loss ratio (1)		123	%		84	%
Expense ratio (2)		38	%		34	%
Combined ratio (3)		161	%		118	%

(1) Loss ratio is defined as losses and loss adjustment expenses divided by net earned premium.

(2) Expense ratio is defined as a sum of policy acquisition costs and portions of indirect salaries and employee benefits and other operating expenses allocation to the insurance company operations, reduced by allocation of gross commissions and fees and other income, divided by net earned premium.

(3) Combined ratio is defined as a sum of loss ratio and expense ratio.

The following table provides an analysis of losses and loss adjustment expenses:

	Year ended December 31
	2020		2019
Losses and loss adjustment expenses

Provision for insured events of current year	$	26,683,872	$	19,384,942
Development of insured events of prior years		7,959,048		3,191,185
Total losses and loss adjustment expenses	$	34,642,920	$	22,576,127

On February 5, 2021, A.M. Best Company revised the outlooks to negative from stable and affirmed the FSR of B++ (Good) and Long-Term ICR of “bbb” of Crusader. Additionally, A.M. Best has revised the outlook to negative from stable and affirmed the Long-Term ICR of “bb” of the Company. Crusader is a wholly owned subsidiary of the Company.

The negative outlooks capture A.M. Best’s concerns with Crusader’s declining underwriting performance, the Company’s overall capitalization and the execution risk associated with implementing strategic operating changes to address these conditions.

Some of Crusader’s policyholders, or the lenders, landlords or clients of Crusader’s policyholders, require insurance from a company that has an A.M. Best FSR of “A-” or higher, and the A.M. Best’s changed ratings of Crusader may also have a negative impact on Crusader’s reputation. Therefore, Crusader’s and Unico’s changed ratings may have a negative impact on the Company’s revenue and results of operations. The Company cannot quantify the impact that the rating changes have had or will have on its revenue and results of operations, and the Company cannot determine if or when Crusader might regain the “A-” FSR from A.M. Best.

The reinsurance arrangement with USIC allows Unifax to offer its customers policies written on USIC paper, which has A.M. Best FSR of “A,” when such rating is required.

The property and casualty insurance business is cyclical in nature. The conditions of a “soft market” include premium rates that are stable or falling and insurance is readily available. Contrarily, “hard market” conditions occur during periods in which premium rates rise and coverage may be more difficult to find. The Company believes that the California property and casualty insurance market is relatively mature and intensely competitive, with different products in different stages of the soft/hard market cycle at any given time.

Other Insurance Operations

The Company’s revenues from other insurance operations consist of commissions, fees, investment and other income. Excluding investment and other income, these operations accounted for approximately 6% and 8% of total revenues for the years ended December 31, 2020 and 2019, respectively.

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Investments

The Company generated revenues from its total invested assets of $83,617,720 (fixed maturities at amortized cost, equity securities at cost and short-term investments at fair value) and $84,997,226 (fixed maturities at amortized cost and short-term investments at fair value) as of December 31, 2020 and 2019, respectively.

Net investment income (net of investment expenses) decreased $109,699 (5%) for the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease in net investment income was due primarily to decrease in the average invested assets.

Due to the current interest rate environment, the current target effective duration for the Company’s investment portfolio is between 2.0 and 4.0 years. As of December 31, 2020, all of the Company’s investments are in U.S. Treasury securities, corporate fixed maturity securities, agency mortgage-backed securities, equity securities, Federal Deposit Insurance Corporation (“FDIC”) insured certificates of deposit, and short-term investments. All of the Company’s investments, except for the certificates of deposit, are readily marketable. As of December 31, 2020, the weighted average maturity of the Company’s investments was approximately 8.0 years, and the effective duration for available-for-sale investments (investments managed under the investment guidelines) was 2.9 years.

Liquidity and Capital Resources

The most significant liquidity risk faced by the Company is adverse development of the insurance company’s loss and loss adjustment expense reserves. Based on the Company’s current loss and loss expense reserves and expected current and future payments, the Company believes that there are no current liquidity issues. However, no assurance can be given that the Company’s estimate of ultimate loss and loss adjustment expense reserves will be sufficient.

Crusader has a significant amount of cash, cash equivalents and investments as a result of its holdings of unearned premium reserves, its reserves for loss and loss adjustment expense payments and its capital and surplus. Crusader's loss and loss adjustment expense payments are the most significant cash flow requirement of the Company. These payments are continually monitored and projected to ensure that the Company has the liquidity to cover these payments without the need to liquidate its investments. Cash, cash equivalents, and investments (at amortized cost) of the Company at December 31, 2020, were $87,575,700 compared to $90,778,865 at December 31, 2019. Crusader's cash, cash equivalents, and investments were 98% and 99% of the total cash, cash equivalents, and investments (at amortized cost) held by the Company as of December 31, 2020 and 2019, respectively.

The composition of Company’s investment portfolio is as follows:

	December 31, 2020				December 31, 2019
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Fixed maturities:
U.S. Treasury securities	$	10,596,808	$	10,832,181	$	15,105,795	$	15,235,332
Corporate securities		44,159,926		46,451,905		41,953,378		43,029,333
Agency mortgage-backed securities		25,314,546		26,125,608		24,943,238		25,235,045
Certificates of deposit		798,000		798,000		798,000		798,000
Total fixed maturity investments		80,869,280		84,207,694		82,800,411		84,297,710
Equity securities		2,548,440		2,746,706		—		—
Short-term cash investments		200,000		200,000		2,196,815		2,196,815
Total investments	$	83,617,720	$	87,154,400	$	84,997,226	$	86,494,525

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The short-term investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between three and twelve months. Amortized costs of the short-term investments approximate their fair values.

The Company is required to classify its debt securities into one of three categories: held-to-maturity, available-for-sale, or trading securities. Although part of the Company's investments in fixed maturity securities is classified as available-for-sale and, while the Company may sell investment securities from time to time in response to economic, regulatory and market conditions, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity.

The Company’s Board of Directors has approved investment guidelines which reflect the Company’s risk, balance sheet, and profile.

Under the Company’s investment guidelines, investments may only include U.S. Treasury notes, U.S. government agency notes, mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral, commercial mortgage-backed securities, U.S. corporate obligations, asset backed securities (including but not limited to credit card, automobile and home equity backed securities), tax-exempt bonds, preferred stocks, common stocks, commercial paper, repurchase agreements (treasuries only), mutual funds, exchange traded funds, bank certificates of deposits and time deposits. The investment guidelines provide for certain investment limitations in each investment category.

Unless agreed to in advance in writing by Crusader, investments in the following types of securities are prohibited:

	•		Mortgage loans, except for mortgage backed securities issued by an agency of the U.S. government.
	•		Derivative mortgage-backed securities including interest only, principal only and inverse floating rate securities.
	•		All fixed maturity real estate securities, except mortgage-backed securities (including pass through securities and collateralized mortgage obligations) that are backed by agency and non-agency collateral and commercial mortgage-backed securities.
	•		Options and futures contracts.
	•		All non-U.S. dollar denominated securities.
	•		Any security that would not be in compliance with the regulations of Crusader’s state of domicile.

An independent investment advisor manages Crusader’s investments. The advisor’s role currently is limited to maintaining Crusader’s portfolio within the investment guidelines and providing investment accounting services to the Company. Primarily all investments continue to be held by Crusader’s current custodian, Union Bank Global Custody Services.

As of December 31, 2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica Bank & Trust, N. A. (“Comerica”), pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was $824,500 and $787,653 on December 31, 2020, respectively.

On August 10, 2020, the Board authorized a share repurchase program (the “2020 Program”) for up to $5,000,000 of the currently outstanding shares of the Company’s common stock. The 2020 Program is effective immediately and replaces the Company’s existing share repurchase program that was adopted by the Board on December 19, 2008 (the “2008 Program”) to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. The purchases under the 2020 Program may be made from time to time in the open market, through block trades, 10b5-1 trading plans, privately negotiated transactions or otherwise and in accordance with applicable laws, rules and regulations. The timing and actual number of the shares repurchased under the 2020 Program will depend on a variety of factors including price, market conditions and corporate and regulatory requirements. The Company intends to fund the share repurchases under the 2020 Program from cash on hand. The 2020 Program does not commit the Company to repurchase shares of its common stock and it may be amended, suspended or discontinued at any time. The Company repurchased its shares under the 2020 Program and 2008 Program in unsolicited transactions as follows:

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	December 31		December 31
	2020		2019

2020 Program
Number of shares repurchased		857		—
Cost of shares repurchased
Allocated to retained earnings	$	4,071	$	—
Allocated to capital		422		—
Total cost of shares repurchased	$	4,493	$	—

2008 Program
Number of shares repurchased		978		383
Cost of shares repurchased
Allocated to retained earnings	$	5,760	$	2,108
Allocated to capital		480		188
Total cost of shares repurchased	$	6,240	$	2,296

The Company reported net cash used by operating activities for each of the years ended December 31, 2020 and 2019. Cash used by operating activities in 2020 was $2,436,399 compared to $3,163,210 in 2019. Fluctuations in cash flows from operating activities relate to changes in loss and loss adjustment expense payments, unearned premium holdings, and the timing of the collection and the payment of insurance-related receivables and payables. Although the Consolidated Statements of Cash Flows reflect net cash used by operating activities, the Company does not anticipate future liquidity problems, and the Company believes it continues to be well capitalized and adequately reserved.

While material capital expenditures may be funded through borrowings, the Company believes that its cash, cash equivalents, and short-term investments at December 31, 2020, net of statutory deposits of $710,000 and California insurance company statutory dividend restrictions applicable to Crusader plus the cash to be generated from operations, should be sufficient to meet its operating requirements during the next 12 months without the necessity of borrowing funds.

Crusader's statutory capital and surplus as of December 31, 2020, was $26,893,515, a decrease of $19,605,445 (42%) from December 31, 2019. On each of September 14, 2020, and May 20, 2020, Crusader paid cash dividends of $2,000,000 to Unico, its parent and sole shareholder. These two dividends totaling $4,000,000 were used primarily for general corporate purposes. During the year ended December 31, 2019, Crusader issued cash dividends of $2,000,000 to Unico, its parent and sole shareholder. Based on Crusader’s statutory surplus for the year ended December 31, 2020, the maximum aggregate dividend that could be made by Crusader to Unico without prior regulatory approval in 2021 is $2,689,352.

During the years ended December 31, 2020 and 2019, no cash dividends were declared or issued by the Company to its shareholders. Declaration of future cash dividends, if any, will be subject to the Company’s profitability, cash requirements, capital requirements, and general business conditions, among other factors.

As a California insurance company, Crusader is obligated to pay a premium tax on gross written premium in all states that Crusader is admitted. Premium taxes are deferred and amortized as the related premium is earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.

Results of Operations

General

Total revenues for the year ended December 31, 2020, were $32,560,111, an increase of $1,187,297 (4%) compared to $31,372,814 for the year ended December 31, 2019. For the year ended December 31, 2020, the Company had loss before taxes of $17,943,515 compared to loss before taxes of $3,249,890 for the year ended December 31, 2019. For the year ended December 31, 2020, the Company had net loss of $21,491,113 compared to net loss of $3,115,703 for the year ended December 31, 2019.

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The increase in total revenues for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily to an increase in net earned premium of $1,430,700 (5%).

The increase in net loss for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily to an increase in losses and loss adjustment expenses of $12,066,793 (53%), increase in salaries and employee benefits of $2,296,318 (56%), an increase in other operating expenses of $1,658,331 (58%), and an increase in income tax expense of $3,681,785 (2744%), partially offset by the increase in net earned premium.

During the twelve months ended December 31, 2020, the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as changes in market conditions. This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the increase of $12,066,793 in losses and loss adjustment expenses from $22,576,127 recognized for the twelve months ended December 31, 2019 to $34,642,920 recognized for the twelve months ended December 31, 2020.

The increase in salaries and employee benefits during the twelve months ended December 31, 2020 of $2,296,318 was due primarily to costs associated with a termination of an employment agreement with an executive, increases in executive compensation, increases in employee benefits due to higher medical insurance rates, and vacation accruals due to less vacation taken by the employees as a result of the ongoing coronavirus pandemic.

The increase in other operating expenses of $1,658,331 during the twelve months ended December 31, 2020, was due primarily to increases in legal, depreciation and communication expenses, fees associated with the reinsurance arrangement with USIC, and higher board of director fees.

The increase in income tax expense of $3,681,785 during the twelve months ended December 31, 2020, was due primarily to an increase in the valuation allowance related to deferred tax assets on federal net operating losses.

The effect of inflation on the Company’s net loss during the years ended December 31, 2020 and 2019 was not significant.

Revenues

Crusader Premium

Crusader’s primary lines of business are written on Commercial Multi Peril policies. These policies represented approximately 99.6% and 98.3% of Crusader’s total written premium for the years ended December 31, 2020 and 2019, respectively.

Gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) reported on Crusader’s statutory financial statements increased $838,880 (2%) to $36,642,830 for the year ended December 31, 2020, compared to $35,803,950 for the year ended December 31, 2019.

The increase in gross written premium for the year ended December 31, 2020, was due primarily to growth in the Company’s Transportation vertical, transacted by Crusader. The Transportation vertical transacts insurance primarily for long-haul trucking operations that are domiciled in California. The growth in the Company’s Transportation vertical was partially offset by coronavirus-related contraction in the Food, Beverage & Entertainment underwriting vertical for Crusader.

Although the ongoing coronavirus pandemic did not have a significant impact on Crusader’s overall gross written premium (direct and assumed written premium before cessions to reinsurers under reinsurance treaties) during the year ended December 31, 2020, Crusader has experienced a decrease in new business submissions and renewals related to the pandemic in its Bars/Taverns market sector niche as a result of government regulations, such as shelter-in-place orders and in-door dining limitations, which had adversely impacted the gross written premium for that niche.

Written premium

Written premium is a required statutory measure. Written premium is a non-GAAP financial measure that is defined, under SAP, as the contractually determined amount charged by the insurance company to the policyholder for the effective period of the contract based on the expectation of risk, policy benefits, and expenses associated with the coverage provided by the terms of the policies.

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Written premium is defined under GAAP in Accounting Standards Codification Topic 405, “Liabilities,” as “premiums on all policies an entity has issued in a period.” Earned premium, the most directly comparable GAAP measure to written premium, represents the portion of written premium that is recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the terms of the policies. Written premium is intended to reflect production levels and is meant as supplemental information and not intended to replace earned premium. Such information should be read in connection with the Company’s GAAP financial results.

Gross earned premium

Gross earned premium (direct and assumed earned premium before cessions to reinsurers under reinsurance treaties) increased $2,306,667 (7%) to $36,264,869 for the year ended December 31, 2020, compared to $33,958,202 for the year ended December 31, 2019. The Company writes annual policies. Earned premium represents a portion of written premium that is recognized as income in the financial statements for the period presented and earned daily on a pro-rata basis over the terms of the policies, and, therefore, premiums earned in the current year are related to policies written during both the current year and immediately preceding year. The increase in gross earned premium for the year ended December 31, 2020, was due primarily to an increase in gross written premium in 2019.

Ceded earned premium

Ceded earned premium (premium ceded to reinsurers under reinsurance treaties) increased $875,967 (12%) to $8,096,701 for the year ended December 31, 2020, compared to $7,220,734 for the year ended December 31, 2019. Ceded earned premium as a percentage of gross earned premium was 22% for the year ended December 31, 2020, and 21% for the year ended December 31, 2019. The increase in the ceded earned premium as a percentage of gross earned premium for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily to higher gross earned premium subject to reinsurance treaties and higher rates on excess of loss reinsurance treaties.

Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2020 and 2019, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).

Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is a sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2020, all such ceded contracts are accounted for as risk transfer reinsurance.

A tabular presentation of Crusader’s direct, assumed, ceded and net earned premium is as follows:

	Year ended December 31
	2020			2019

Direct earned premium	$	36,108,230		$	33,958,202
Assumed earned premium		156,639			—
Ceded earned premium		(8,096,701	)		(7,220,734	)
Net earned premium	$	28,168,168		$	26,737,468
Ratio of ceded earned premium to gross earned premium (direct and assumed earned premium)		22	%		21	%

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Investment Income, Net Realized Investment Gains and Losses, and

Net Unrealized Investment Gains on Equity Securities

Net investment income decreased $109,699 (5%) to $1,988,243 for the year ended December 31, 2020, compared to $2,097,942 for the year ended December 31, 2019. This decrease in net investment income was due primarily to a decrease in average invested assets. The Company had net realized investment gains of $97,771 and net unrealized investment gains on equity securities of $198,266, for the year ended December 31, 2020, compared to net realized investment losses of $12,661 and no net unrealized investment gains on equity securities for the year ended December 31, 2019.

Net investment income, excluding net realized investment losses/gains, and yields on Company’s average invested assets are as follows:

	Year ended December 31
	2020			2019

Average invested assets (1) – at amortized cost	$	84,307,473		$	89,350,796

Net investment income from:
Invested assets (2)	$	1,984,548		$	2,051,428
Cash equivalents		3,695			46,528
Total	$	1,988,243		$	2,097,956

Yield on average invested assets (3)		2.4	%		2.3	%

(1) The average is based on the beginning and ending balances of the amortized cost of the invested assets for each respective year.

(2) Investment income from invested assets included $133,679 of investment expense for the year ended December 31, 2020, compared to $129,842 for the year ended December 31, 2019.

(3) Annualized yield on average invested assets did not include the investment income from cash equivalents.

The par value, amortized cost, estimated market value and weighted average yield of fixed maturity investments at December 31, 2020, by contractual maturity are as follows:

Maturities by Calendar Year	Par Value		Amortized Cost		Fair Value		Weighted Average Yield

Due in one year	$	11,070,641	$	11,064,202	$	11,169,232		2.57	%
Due after one year through five years		30,065,671		30,090,910		31,260,694		2.59	%
Due after five years through ten years		18,363,570		18,476,051		19,806,444		2.51	%
Due after ten years and beyond		20,927,571		21,238,117		21,971,324		2.63	%
Total	$	80,427,453	$	80,869,280	$	84,207,694		2.58	%

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

The weighted average maturity of the Company’s investments was approximately 8.0 years as of December 31, 2020, and 7.7 years as of December 31, 2019.

As of December 31, 2020, all of the Company’s investments are in U.S. Treasury securities, FDIC insured certificates of deposit, corporate fixed maturity securities, agency mortgage-backed securities, equity securities and short-term investments. The investments in the certificates of deposit are classified as held-to-maturity investments, and all other fixed maturity investments are classified as available-for-sale. All of the Company’s investments, except for the certificates of deposit, are readily marketable. The following table sets forth the composition of the investment portfolio of the Company at the dates indicated:

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	December 31, 2020				December 31, 2019
	Amortized		Fair		Amortized		Fair
Type of Security	Cost		Value		Cost		Value

Available-for-sale fixed maturity investments:
U.S. Treasury securities	$	10,596,808	$	10,832,181	$	15,105,795	$	15,235,332
Corporate securities		44,159,926		46,451,905		41,953,378		43,029,333
Agency mortgage-backed securities		25,314,546		26,125,608		24,943,238		25,235,045
Held-to-maturity fixed maturity investments:
Certificates of deposit		798,000		798,000		798,000		798,000
Total fixed maturity investments		80,869,280		84,207,694		82,800,411		84,297,710
Equity securities		2,548,440		2,746,706		—		—
Short-term cash investments:
U.S. Treasury bills		—		—		1,996,815		1,996,815
Certificates of deposit		200,000		200,000		200,000		200,000
Short-term cash investments		200,000		200,000		2,196,815		2,196,815
Total investments	$	83,617,720	$	87,154,400	$	84,997,226	$	86,494,525

A summary of estimated fair value and gross unrealized losses in a gross unrealized loss position by the length of time in which the securities have continually been in that position is shown below:

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses		Number of Securities
December 31, 2020
U.S. Treasury securities	$	—	$	—			—	$	—	$	—		—
Corporate securities		2,101,986		(55,847	)		2		—		—		—
Agency mortgage-backed securities		3,223,329		(22,274	)		12		—		—		—
Total debt securities		5,325,315		(78,121	)		14		—		—		—
Equity securities		723,346		(37,357	)		25		—		—		—
Total	$	6,048,661	$	(115,478	)		39	$	—	$	—		—

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
December 31, 2019
U.S. Treasury securities	$	1,996,562	$	(253	)		1	$	1,002,031	$	(775	)		1
Corporate securities		999,818		(56	)		1		—		—			—
Agency mortgage-backed securities		750,058		(1,950	)		2		—		—			—
Total	$	3,746,438	$	(2,259	)		4	$	1,002,031	$	(775	)		1

While the fair value of Company’s investment portfolio at December 31, 2020, has recovered from the declines recorded for the three months ended March 31, 2020, the effects of the coronavirus pandemic were a major contributor to the variability in fair value of the Company’s fixed income and equity investments during the year ended December 31, 2020, and the economic uncertainty caused by the pandemic may lead to further investment valuation volatility. In addition, the recent decline in investment yields resulted in lower reinvestment rates, compared to the previous years, which will cap the Company’s investment portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base or a change in investment philosophy

The Company closely monitors its investments. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. During the year ended December 31, 2020, one fixed maturity corporate security experienced a significant decline in market value; the market and book value of that security at December 31, 2020, was $867,375 and $910,893, respectively. The unrealized losses on all securities as of December 31, 2020 and December 31, 2019, were determined to be temporary.

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Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic, regulatory, and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity. The fixed maturity securities previously held by the Company were sold and called prior to maturity as follows:

	December 31		December 31
	2020		2019

Fixed maturities securities sold
Number of securities sold		15		3
Amortized cost of sold securities	$	5,529,470	$	2,997,098
Realized gains (losses) on sales	$	52,053	$	(12,679	)

Fixed maturities securities called
Number of securities called		4		1
Amortized cost of called securities	$	2,449,503	$	999,982
Realized gains on calls	$	497	$	18

The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income or loss,” which is a separate component of stockholders’ equity, net of any deferred tax effect.

Other Income

Other income included in insurance company operation and other insurance operations decreased $94,072 (70%) to $39,811 for year ended December 31, 2020, compared to $133,883 for the year ended December 31, 2019. The decrease during the year ended December 31, 2020, is due primarily to decreases in rental income of $27,277 and Crusader’s share of California FAIR Plan Equity of $58,646.

Gross commissions and fees

Gross commissions and fees decreased $349,395 (16%) to $1,827,263 for the year ended December 31, 2020, compared to $2,176,658 for the year ended December 31, 2019.

The comparison of gross commission and fees for the year ended December 31, 2020, to the year ended December 31, 2019, is as follows:

	Year ended December 31
	2020		2019

Brokerage fee income	$	1,006,505	$	1,146,420
Health insurance program		727,515		939,689
Membership and fee income		93,243		90,549
Gross commissions and fees	$	1,827,263	$	2,176,658

Unifax sells and services insurance policies for Crusader and USIC. For these brokerage services, Unifax receives commissions from insurance companies and fees from policyholders. The commissions paid by Crusader to Unifax are eliminated as intercompany transactions and are not reflected as income in the consolidated financial statements. Policy fee income received by Unifax is related to the Crusader policies and service fee income received by Unifax is related to the USIC policies. For financial statement reporting purposes, brokerage fees are earned ratably over the life of the related insurance policy. The unearned portion of the brokerage fees is recorded as a liability on the Consolidated Balance Sheets under “Accrued expenses and other liabilities.” The earned portion of the brokerage fees charged to the policyholder by Unifax is recognized as income in the consolidated financial statements. Brokerage fee income for the year ended December 31, 2020, decreased $139,915 (12%) as compared to the year ended December 31, 2019. This decrease in brokerage fee income in 2020 compared to 2019 was primarily the result of a 826 (13%) decrease in the number of policies issued of 5,401 during 2020 compared to 6,227 policies issued during 2019.

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AIB markets health insurance in California through non-affiliated insurance companies for individuals and groups. For these services, AIB receives commission based on the premium that it writes. Commission income for the year ended December 31, 2020, decreased $212,174 (23%) compared to the year ended December 31, 2019. The decrease in commission income is primarily a result of a loss of a large group account.

In 2020, approximately 30% and 56% of the commission income from health insurance sales was from Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life insurance programs, respectively. In 2019, approximately 39% and 49% of the commission income from health insurance sales was from Guardian Life Insurance Company of America dental and group life plan programs and the Blue Shield Care Trust health and life insurance programs, respectively.

AAQHC is a third party administrator for contracted insurance companies and is a membership association that provides various consumer benefits to its members, including participation in group health care insurance policies that AAQHC negotiates for the association. For these services, AAQHC receives membership and fee income from its members. Membership and fee income for the year ended December 31, 2020, increased $2,694 (3%) compared to the year ended December 31, 2019. The increase is a result of an increase in administration fees.

Finance charges and fees earned

Finance charges and fees earned consist of finance charges, late fees, returned check fees and payment processing fees. These charges and fees earned by AAC increased $1,065 (0%) to $240,589 for the year ended December 31, 2020, compared to $239,524 for the year ended December 31, 2019, due primarily to the increase in earned finance charges as a result of the change in annual percentage rate charged on AAC new loans from a single fixed interest rate to a tiered interest rate structure effective April 1, 2019 offset by a decrease in number of polices financed. During the year ended December 31, 2020, AAC issued 1,111 loans and had 821 loans outstanding as of December 31, 2020. During the year ended December 31, 2019, AAC issued 1,547 loans and had 1,173 loans outstanding as of December 31, 2019. AAC provides premium financing only for Crusader and USIC policies produced by Unifax in California. The number of loans issued decreased by 436 (28%) during 2020 when compared to 2019. The average premium financed by AAC was $6,477 and $5,672 in 2020 and 2019, respectively. During 2020, 48% of all Unifax generated policies were financed and 43% of those policies were financed by AAC. During 2019, 44% of all Unifax generated policies were financed and 56% of those policies were financed by AAC.

Expenses

Losses and Loss Adjustment Expenses

Crusader’s emerging loss ratios for each accident year are reviewed in detail at the end of each quarter as part of the reserve review process. Losses and loss adjustment expenses for the calendar years ended December 31, 2020 and 2019 were $34,642,920 and $22,576,127, respectively. Loss ratio, which is calculated by dividing losses and loss adjustment expenses by net earned premium, was 123% for the year ended December 31, 2020, compared to 85% for the year ended December 31, 2019.

Losses and loss adjustment expenses and loss ratios are as follows:

	Year ended December 31
	2020		2020 Loss Ratio			2019		2019 Loss Ratio

Net earned premium	$	28,168,168				$	26,737,468

Losses and loss adjustment expenses:
Provision for insured events of current year		26,683,872		95	%		19,384,942		72	%
Development of insured events of prior years		7,959,048		28	%		3,191,185		12	%
Total losses and loss adjustment expenses	$	34,642,920		123	%	$	22,576,127		84	%

Some lines of insurance are commonly referred to as "long-tail" lines because of the extended time required before claims are ultimately settled. Lines of insurance in which claims are settled relatively quickly are called "short-tail" lines. It is generally more difficult to estimate loss reserves for long-tail lines because of the long period of time that elapses between the occurrence of a claim and its final disposition and the difficulty of estimating the settlement value of the claim. Crusader’s short-tail lines consist of its property coverages, and its long-tail lines consist of its liability coverages. However, Crusader’s long-tail liability claims tend to be settled relatively quicker than other long-tail lines not underwritten by Crusader, such as workers’ compensation, professional liability, umbrella liability, and medical malpractice. Since trends develop over longer periods of time on long-tail lines of business, the Company generally gives credibility to those trends more slowly than for short-tail or less volatile lines of business.

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The difficulty in estimating the loss and loss adjustment expense reserves contributed to adverse development of insured events of prior years in the amount of $7,959,048 which Crusader experienced in 2020. During the twelve months ended December 31, 2020, the Company reevaluated certain assumptions used in its process for estimating loss and loss adjustment reserves due to its experiences in Crusader’s Apartments & Commercial Buildings and Transportation verticals as well as changes in market conditions. This reevaluation resulted in a $9,399,547 increase in Crusader’s IBNR reserves, net of reinsurance, which was a primary contributor to the increase of $12,066,793 in losses and loss adjustment expenses from $22,576,127 recognized for the twelve months ended December 31, 2019 to $34,642,920 recognized for the twelve months ended December 31, 2020. Crusader sets loss and loss adjustment expense reserves at each balance sheet date based upon management’s best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and related loss adjustment expenses incurred as of that date for both reported and unreported losses. The ultimate cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Crusader claim reserving procedures and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Crusader operations and management philosophy also may cause actual developments to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made.

The $26,683,872 provision for insured events of current year for the year ended December 31, 2020, was $7,298,930 higher than the $19,384,942 provision for insured events of current year for the year ended December 31, 2019, due primarily to increased IBNR reserves associated with the Apartments & Commercial Buildings and Transportation verticals. The increases in IBNR reserves were due to higher actuarially developed ultimate incurred losses and loss adjustment expenses primarily as a result of elevated expected claims severity.

The $7,959,048 adverse development of insured events of prior years for the year ended December 31, 2020, was $4,767,863 higher than the $3,191,185 adverse development of insured events of prior year for the year ended December 31, 2019, due primarily to increases in 2018 and 2019 accident year IBNR reserves associated with the Apartments & Commercial Buildings and Transportation verticals. The increases in IBNR were due to higher actuarially developed ultimate incurred losses and loss adjustment expenses primarily as a result of elevated expected claims severity.

Crusader has received 151 coronavirus-related business interruption claims through December 31, 2020. While the Company does not believe it is exposed to substantial risk from those claims under the insurance policies written by Crusader or USIC, the individual circumstances of each such claim are reviewed to fulfill Crusader’s obligation to its policyholders if coverage applies. Further, there may be impacts to the timing of loss emergence and ultimate loss ratios for certain Crusader’s products due to postponements of civil court cases, extensions of various statutes of limitations, changes in settlement trends and other new legislative, regulatory or judicial developments which could result in loss reserve deficiencies and negative impact on results of operations.

Crusader has received seven claims related to the recent civil unrest through December 31, 2020. Crusader has sufficient excess of loss and catastrophe reinsurance treaties to protect from exposure of such claims. The Company believes the losses and loss adjustment expenses associated with those claims will not exceed Crusader’s $500,000 excess of loss reinsurance treaty retention.

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The following table breaks out adverse (favorable) development from total losses and loss adjustment expenses by accident year is as follows:

		Year ended December 31
		2020						2019

Accident Year		Adverse (Favorable) Development			% of Total			Adverse (Favorable) Development			% of Total

	Prior to 2011	$	64,196			1	%	$	67,320			2	%
	2011		(6,000	)		—			60,490			2	%
	2012		(27,901	)		—			117,414			4	%
	2013		(56,367	)		(1	)%		459,602			14	%
	2014		149,181			2	%		(139,187	)		(4	)%
	2015		1,559,422			20	%		1,452,170			45	%
	2016		663,546			8	%		1,547,242			48	%
	2017		1,201,175			15	%		404,322			13	%
	2018		2,539,483			32	%		(778,188	)		(24	)%
	2019		1,872,313			23	%		—			—
	Total prior accident years	$	7,959,048			100	%	$	3,191,185			100	%

At the end of each fiscal quarter, Crusader’s loss and loss adjustment expense reserves for each accident year (i.e., for all claims incurred within each year) are re-evaluated independently by the Company’s president, the Company’s chief financial officer, and by an independent consulting actuary. Generally accepted actuarial methods, including the widely used Bornhuetter-Ferguson and loss development methods, are employed to estimate ultimate claims costs. An actuarial central estimate of the ultimate claims costs and IBNR reserves is ultimately determined by management and tested for reasonableness by the independent consulting actuary.

Repeated and sustained underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in Crusader’s Transportation vertical, a product which is generally known for its difficulty to be underwritten profitably, coupled with changes in the market conditions and increases in social inflation (discussed below), caused Crusader management to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves. This reevaluation and the use of updated assumptions led to higher estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the quarterly reevaluation of the loss and loss adjustment expense reserves as of September 30, 2020. The increase in the ultimate incurred losses and loss adjustment expenses manifested primarily through higher IBNR reserves as of December 31, 2020 for 2018, 2019, and 2020 accident year claims pertaining to Apartments & Commercial Buildings and Transportation liability coverages.

Crusader attributes much of its adverse loss development experienced in the three most recent years ending December 31, 2020, to social inflation. Used here, social inflation is a term that encompasses a relatively new adverse trend related to society’s application of the law when it comes to insurance. In this context, social inflation is generally described by the rising costs of insurance claims due to societal trends which results in increased litigation, broader definitions of liability and contractual interpretations, plaintiff friendly legal decisions, larger compensatory jury awards, and larger awards for non-economic damages Crusader has experienced increased costs due to social inflation in all three of its largest market sector niches, Long-haul Transportation, Residential Apartment Buildings, and Bars/Taverns, resulting in higher-than-expected frequency and severity of third-party liability claims.

The variability of Crusader’s losses and loss adjustment expenses for the periods presented is primarily due to the small and diverse population of Crusader’s policyholders and claims, which may result in greater fluctuations in claim frequency and/or severity. In addition, Crusader’s reinsurance retention, which is relatively high in relationship to its net earned premium, can result in increased loss ratio volatility when large losses are incurred in a relatively short period of time. Nevertheless, management believes that its reinsurance retention is reasonable given the amount of Crusader’s surplus and its goal to minimize ceded premium.

The preparation of the Company’s consolidated financial statements requires estimation of certain liabilities, most significantly the liability for unpaid losses and loss adjustment expenses. Management makes its best estimate of the liability for these unpaid claims costs as of the end of each fiscal quarter. Due to the inherent uncertainties in estimating the Crusader’s unpaid claims costs, actual loss and loss adjustment expense payments are expected to vary, perhaps significantly, from any estimate made prior to the settling of all claims. Variability is inherent in establishing loss and loss adjustment expense reserves, especially for a small insurer such as Crusader. For any given line of insurance, accident year, or other group of claims, there is a continuum of possible loss and loss adjustment expense reserve estimates, each having its own unique degree of propriety or reasonableness. Due to the complexity and nature of the insurance claims process, there are potentially an infinite number of reasonably likely scenarios. Management draws on its collective experience to judgmentally determine its best estimate. In addition to applying a variety of standard actuarial methods to the data, an extensive series of diagnostic tests are applied to the resultant loss and loss adjustment expense reserve estimates to determine management’s best estimate of the unpaid claims liability. Among the statistics reviewed for each accident year are: loss and loss adjustment expense development patterns; frequencies; severities; and ratios of loss to premium, loss adjustment expense to premium, and loss adjustment expense to loss.

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When there is clear evidence that the actual claims costs emerged are different than expected for any prior accident year, the claims cost estimates for that year are revised accordingly. If the claims costs that emerge are less favorable than initially anticipated, generally, Crusader increases its loss and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially anticipated, generally, Crusader reduces its loss and loss adjustment expense reserves over time while it continues to assess the validity of the observed trends based on the subsequent emerged claim costs.

The establishment of loss and loss adjustment expense reserves is a detailed process as there are many factors that can ultimately affect the final settlement of a claim. Estimates are based on a variety of industry data and on Crusader’s current and historical accident year claims data, including but not limited to reported claim counts, open claim counts, closed claim counts, closed claim counts with payments, paid losses, paid loss adjustment expenses, case loss reserves, case loss adjustment expense reserves, earned premiums and policy exposures, salvage and subrogation, and unallocated loss adjustment expenses paid. Many other factors, including changes in reinsurance, changes in pricing, changes in policy forms and coverage, changes in underwriting and risk selection, legislative changes, results of litigation and inflation are also taken into account.

Based on the loss and loss adjustment expense reserve estimates as of December 31, 2020, the estimated ultimate loss ratio is within five percentage points of the initial expected loss ratio in 8 of Crusader’s 36 years. Since Crusader’s net earned premium in 2020 was $28,168,168, a difference between the accident year 2020 actual and initial expected loss ratios of five percentage points will or may ultimately impact losses and loss adjustment expenses by $1,408,408. The estimated ultimate loss ratio is within ten percentage points of the initial expected loss ratio in 13 of Crusader’s 36 years. A ten percentage point difference between the accident year 2020 actual and the initial expected loss ratios will or may ultimately impact losses and loss adjustment expenses by $2,816,817. The estimated ultimate loss ratio is within twenty percentage points of the initial expected loss ratio in 28 of Crusader’s 36 years. A twenty percentage point difference between the accident year 2020 actual and the initial expected loss ratios will or may ultimately impact losses and loss adjustment expenses by $5,633,634.

Loss and Loss Adjustment Expense Reserves

Crusader's liability for unpaid loss and loss adjustment expense reserves consists of case reserves and reserves for IBNR claims. Case reserves are established by claims personnel based on a review of the facts known at the time the claim is reported and are subsequently revised as more information about a claim becomes known. IBNR is estimated using various actuarial methods and techniques and includes (1) reserves for losses and loss adjustment expenses on claims that have occurred but for which claims have not yet been reported to Crusader, and (2) a provision for expected future development on case reserves for information not currently known.

Crusader’s loss and loss adjustment expense reserves are as follows:

	Year ended December 31
	2020		2019

Gross reserves:
Case reserves	$	26,363,695	$	23,663,743
IBNR reserves		48,529,814		31,402,737
Total gross reserves	$	74,893,509	$	55,066,480

Reserves net of reinsurance:
Case reserves	$	21,027,703	$	18,128,008
IBNR reserves		31,612,164		22,212,617
Total net reserves	$	52,639,867	$	40,340,625

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Reserves for losses and loss adjustment expenses before reinsurance for each of Crusader’s lines of business are as follows:

	Year ended December 31
Line of Business	2020				2019

CMP	$	73,545,182	98.2	%	$	54,270,633	98.6	%
Other liability		1,283,174	1.7	%		776,957	1.4	%
Other		65,153	0.1	%		18,890	0.0	%
Total	$	74,893,509	100.0	%	$	55,066,480	100.0	%

The Company‘s consolidated financial statements include estimated reserves for both reported and unreported claims. The Company sets these reserves at each quarterly balance sheet date based upon management’s best estimate of the ultimate loss and loss adjustment expense payments that it anticipates will be made to settle all reported and unreported claims.

The following table is a roll forward of Crusader’s loss and loss adjustment expense reserves, including a reconciliation of the beginning and ending balance sheet liability for the periods indicated:

	Year ended December 31
	2020		2019

Reserve for unpaid losses and loss adjustment expenses at beginning of year – net of reinsurance	$	40,340,625	$	42,125,553

Incurred losses and loss adjustment expenses:
Provision for insured events of current year		26,683,872		19,384,942
Provision for incurred events of prior years		7,959,048		3,191,185
Total incurred losses and loss adjustment expenses		34,642,920		22,576,127

Payments:
Losses and loss adjustment expenses attributable to insured events of the current year		8,285,021		6,210,475
Losses and loss adjustment expenses attributable to insured events of prior years		14,058,657		18,150,580
Total payments		22,343,678		24,361,055

Reserve for unpaid losses and loss adjustment expenses at end of year – net of reinsurance		52,639,867		40,340,625
Reinsurance recoverable on unpaid losses and loss adjustment expenses at end of year		22,253,642		14,725,855
Reserve for unpaid losses and loss adjustment expenses at end of year per balance sheet, gross of reinsurance	$	74,893,509	$	55,066,480

Since underwriting profit is a significant part of income, a small percentage change in reserve estimates may result in a substantial effect on future reported earnings. Such changes might result from a variety of factors, including claims costs emerging in a different pattern than the average historical development patterns.

If future development ultimately differs by five percent from Crusader’s 2020 net reserve, $2,631,993 would be reflected in future periods as an increase or decrease in the development of insured events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods. If future development ultimately differs by ten percent from Crusader’s 2020 net reserve, $5,263,987 would be reflected in future periods as an increase or decrease in the development of insured events of prior years and would be recognized in the Company’s Consolidated Statements of Operations in future periods.

Policy Acquisition Costs

Policy acquisition costs decreased $62,039 (1%) to $4,898,807 for the year ended December 31, 2020, compared to $4,960,846 for the year ended December 31, 2019. Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs that are directly related to and vary with the successful production of Crusader insurance policies. These costs include both Crusader expenses and the allocated expenses of other Unico subsidiaries. Crusader's reinsurers pay Crusader a ceding commission, which is primarily a reimbursement of the acquisition cost related to the ceded premium. No ceding commission is received on ceded premium associated with property facultative excess of loss or catastrophe excess of loss reinsurance treaties. Policy acquisition costs, net of ceding commission, are deferred and amortized as the related premiums are earned. The Company annually reevaluates its acquisition costs to determine that costs related to successful policy acquisition are capitalized and deferred.

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Policy acquisition costs and the ratio to net earned premium are as follows:

	Year ended December 31
	2020			2019

Policy acquisition costs	$	4,898,807		$	4,960,846
Ratio to net earned premium (GAAP ratio)		17	%		19	%

Policy acquisition costs decreased in the year ended December 31, 2020, compared to the year ended December 31, 2019, due primarily to increase of ceding commission that Crusader received as a result of increase in premium ceded to its reinsurers.

Salaries and Employee Benefits

Total salaries and employee benefits incurred increased $2,334,794 (30%) to $10,058,536 for the year ended December 31, 2020, compared to $7,723,742 for the year ended December 31, 2019.

Salaries and employee benefits incurred and charged to operating expenses are as follows:

	Year ended December 31
	2020			2019

Total salaries and employee benefits incurred	$	10,058,536		$	7,723,742
Less: charged to losses and loss adjustment expenses		(2,027,978	)		(2,025,088	)
Less: capitalized to policy acquisition costs		(1,383,315	)		(1,320,792	)
Less: capitalized to IT system upgrade		(283,073	)		(310,010	)
Net amount charged to operating expenses	$	6,364,170		$	4,067,852

The increase in the total salaries and employee benefits incurred for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily to costs associated with a termination of an employment agreement with an executive, increases in executive compensation, increases in employee benefits due to higher medical insurance rates, and vacation accruals due to less vacation taken by the employees as a result of the ongoing coronavirus pandemic.

Commissions to Agents/Brokers

Commissions to agents/brokers (not including commissions on Crusader and USIC policies that are reflected in policy acquisition costs) are generally related to gross commission income from the health insurance program. Commissions to agents and brokers decreased $78,481 (45%) to $95,315 for the year ended December 31, 2020, as compared to $173,796 for the year ended December 31, 2019. This fluctuation in commissions to agents/brokers was due primarily to lower commissions associated with loss of a large group account.

Other Operating Expenses

Other operating expenses increased $1,658,331 (58%) to $4,502,414 for the year ended December 31, 2020, compared to $2,844,083 for the year ended December 31, 2019. The increase in other operating expenses for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due primarily to increases in legal, depreciation and communication expenses, fees associated with the reinsurance arrangement with USIC, and higher board of director fees.

Income Tax Expense/Benefit

Income tax expense was $3,547,598 (-20% of pre-tax loss) for the twelve months ended December 31, 2020 and income tax benefit was $134,187 (4% of pre-tax loss) for the twelve months ended December 31, 2019. The fluctuation in the income tax rate as a percentage of pre-tax loss for the twelve months ended December 31, 2020, when compared to the twelve months ended December 31, 2019, is primarily due to an increase in the valuation allowance related to deferred tax assets on federal net operating losses.

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As of December 31, 2020, the Company had deferred tax assets of $7,769,603 generated from $36,998,110 of federal net operating loss carryforwards that will begin to expire in 2035 and deferred tax assets of $2,402,438 generated from state net operating loss carryforwards which expire between 2028 and 2040. In connection with preparation of its consolidated financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the twelve months ended December 31, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,557,080 that, in management’s judgment, are not more-likely-than-not to be realized. For the year ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses in the amount of $600,000 and $1,931,665, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While every effort is made to ensure the integrity of such estimates, actual results could differ.

Management believes the Company’s current critical accounting policies comprise the following:

Losses and Loss Adjustment Expenses

The preparation of the Company’s consolidated financial statements requires estimation of certain liabilities, most significantly the liability for unpaid losses and loss adjustment expenses. Management makes its best estimate of the liability for these unpaid claims costs as of the end of each fiscal quarter. Due to the inherent uncertainties in estimating the Company’s unpaid claims costs, actual loss and loss adjustment expense payments are expected to vary, perhaps significantly, from any estimate made prior to the settling of all claims. Variability is inherent in establishing loss and loss adjustment expense reserves, especially for a small insurer such as Crusader. For any given line of insurance, accident year, or other group of claims, there is a continuum of possible loss and loss adjustment expense reserve estimates, each having its own unique degree of propriety or reasonableness. Due to the complexity and nature of the insurance claims process, there are potentially an infinite number of reasonably likely scenarios. Management draws on its collective experience to judgmentally determine its best estimate. In addition to applying a variety of standard actuarial methods to the data, extensive series of diagnostic tests are applied to the resultant loss and loss adjustment expense reserve estimates to determine management’s best estimate of the unpaid claims liability. Among the statistics reviewed for each accident year are: loss and loss adjustment expense development patterns; frequencies; severities; and ratios of loss to premium, loss adjustment expense to premium, and loss adjustment expense to loss.

When there is clear evidence that the actual claims costs emerged are different than expected for any prior accident year, the claims cost estimates for that year are revised accordingly. If the claims costs that emerge are less favorable than initially anticipated, generally, the Company increases its loss and loss adjustment expense reserves immediately. However, if the claims costs that emerge are more favorable than initially anticipated, generally, the Company reduces its loss and loss adjustment expense reserves over time while it continues to assess the validity of the observed trends based on the subsequent emerged claims costs.

Some lines of insurance are commonly referred to as "long-tail" lines because of the extended time required before claims are ultimately settled. Lines of insurance in which claims are settled relatively quicker are called "short-tail" lines. It is generally more difficult to estimate loss reserves for long-tail lines because of the long period of time that elapses between the occurrence of a claim and its final disposition and the difficulty of estimating the settlement value of the claim. Crusader’s short-tail lines consist of its property coverages, and its long-tail lines consist of its liability coverages. However, compared to other long-tail liability lines that are not underwritten by Crusader, such as workers’ compensation, professional liability, umbrella liability, and medical malpractice, Crusader’s liability claims tend to be settled relatively quicker. Since trends develop over longer periods of time on long-tail lines of business, the Company generally gives credibility to those trends more slowly than for short-tail or less volatile lines of business.

Crusader underwrites three statutory annual statement lines of business: (1) CMP, (2) liability other than automobile and products, and (3) fire. CMP policies comprised 99.6% and 98.3% of Crusader’s 2020 and 2019 gross written premium, respectively. CMP policies include both property and liability coverages. For all of Crusader’s coverages and lines of business, Crusader’s actuarial loss and loss adjustment expense reserving methods require assumptions that can be grouped into two key categories: (1) expected loss and loss adjustment expense development patterns and (2) expected loss and loss adjustment expense per premium dollar.

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The Company also segregates most of its business into smaller homogeneous categories primarily for management’s internal detailed reserve review and analysis. These homogeneous categories used by the Company include various combinations and special groupings of its lines of business, programs types, states and coverages. Some categories exclude certain items and/or others include certain items. Not all categories are defined in the same way. This analysis includes the tracking of historical claims costs and development patterns separately for each of these uniquely defined categories. Generally, neither the liability development patterns nor the property development patterns vary significantly by category.

The establishment of loss and loss adjustment expense reserves is a detailed process as there are many factors that can ultimately affect the final settlement of a claim and, therefore, the reserve that is needed. Estimates are based on a variety of industry data and on Crusader’s current and historical accident year claims data, including but not limited to reported claim counts, open claim counts, closed claim counts, closed claim counts with payments, paid losses, paid loss adjustment expenses, case loss reserves, case loss adjustment expense reserves, earned premium and policy exposures, salvage and subrogation, and unallocated loss adjustment expenses paid. Many other factors, including changes in reinsurance, changes in pricing, changes in policy forms and coverage, changes in underwriting and risk selection, legislative changes, results of litigation and inflation are also taken into account.

At the end of each fiscal quarter, the Company’s loss and loss adjustment reserves for each accident year (i.e., for all claims incurred within each year) are re-evaluated independently by the Company’s president, the Company’s chief financial officer, and by an independent consulting actuary. Generally accepted actuarial methods, including the widely used Bornhuetter-Ferguson and loss development methods, are employed to estimate ultimate claims costs. An actuarial central estimate of the ultimate claims costs and IBNR reserves is ultimately determined by management and tested for reasonableness by the independent consulting actuary.

Each year, management compares the actual claims costs that emerge to the claims costs that were expected to emerge and evaluates whether any observed significant differences are due to normal variances in the development process that occur from time to time, particularly in an insurer the size of Crusader, or if they are an indication that changes in the key reserve assumptions or methodologies are appropriate. Repeated and sustained underwriting losses in Crusader’s Apartments & Commercial Buildings vertical and growth in Crusader’s Transportation vertical, a product which is generally known for its difficulty to be underwritten profitably, coupled with changes in the market conditions and increases in social inflation caused Crusader management to reevaluate the assumptions used in its process for estimating loss and loss adjustment expense reserves during the year ended December 31, 2020.

Crusader’s actuarially based loss and loss adjustment expense reserve methodology does not include an implicit or explicit provision for uncertainty. Insurance claims costs are inherently uncertain. There is not a precise means of quantifying in advance a provision for uncertainty when determining an appropriate liability for unpaid claims costs. Rather, the potential for claims costs being less than estimated and the potential for claims costs being more than estimated are considered when selecting the parameters to be used in the application of the actuarial methods and when testing the estimates for reasonableness. Management believes that its recorded loss and loss adjustment expense reserves make reasonable provision for its liability for unpaid claims costs.

The differences between actual and expected claims costs are typically not due to one specific factor but to a combination of many factors such as the period of time between the initial occurrence and the final settlement of the claim, current and perceived social and economic inflation, and many other economic, legal, political, and social factors. The information that management uses to arrive at its booked reserve estimate comes from many sources within the Company, including its accounting, claims, and underwriting departments. Informed managerial judgment is applied throughout the reserving process. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount will tend to be. Accordingly, short-tail claims, such as the emergence of property damage claims costs, tend to be subject to less variability than the emergence of long-tail liability claims costs. The liability for unpaid losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period plus estimates based on experience and industry data for development of case estimates and for unreported losses and loss adjustment expenses. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims should be expected to vary, perhaps significantly, from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Management believes that the aggregate reserves for losses and loss adjustment expenses are reasonable and adequate to cover the cost of claims, both reported and unreported.

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The Company must estimate its ultimate losses and loss adjustment expenses using a very small claim population size. At the beginning of 2020, Crusader had 510 open claim files. During 2020, 793 new claim files were opened and 811 claim files were closed, leaving 492 open claim files at the end of 2020. Due to the small size of Crusader and the related small population of claims, Crusader’s losses and loss adjustment expenses for any accident year can vary significantly from the initial expectations. Due to the small number of claims, changes in claim frequency and/or severity can materially affect Crusader’s reserve estimate. The potential variability from management’s best estimate cannot be measured from any meaningful statistical basis due to the numerous uncertainties in the claims reserving process and the small population of claims.

At each quarterly review, actual claims costs that emerge are compared with the claims costs that were expected to emerge during that development period. Sometimes the previous claims costs estimates prove to have been too high; sometimes they prove to have been too low. The fluctuation in development of insured events of prior years underscores the inherent uncertainty in insurance claims costs, especially for a relatively small insurer, such as Crusader. While the Company believes the reserves were adequate at December 31, 2020 after the reevaluation, adverse or (favorable) development may emerge in the future.

	Year ended December 31
	2020			2019

Net reserves for unpaid losses and loss adjustment expenses at beginning of year	$	40,340,625		$	42,125,553
Adverse development of insured events of prior years	$	7,959,048		$	3,191,185
Percentage of adverse development to beginning reserves		20	%		8	%

Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Management believes that the aggregate reserves for losses and loss adjustment expenses make reasonable provision for all unpaid losses and loss adjustment expenses of the Company.

The changes in estimates of prior accident year incurred losses and loss adjustment expenses was due primarily to increases in IBNR reserves associated with the Apartments & Commercial Buildings and Transportation verticals resulting from higher estimates for expected claims frequency, claims severity and ultimate incurred losses and loss adjustment expenses during the re-evaluation of the loss and loss adjustment expense reserves.

The Company applies judgment in determining estimates for reserves associated with anticipated recoveries of salvage and subrogation on paid losses and loss adjustment expenses. During the year ended December 31, 2019, the Company changed that estimate to be in-line with its historic salvage and subrogation recovery success pattern. The impact of that change was a $968,400 reduction in losses and loss adjustment expenses for the year ended December 31, 2019, and in unpaid losses and loss adjustment expenses. The change was accounted for as a change in accounting estimate.

Reinsurance

Crusader’s recoverable from reinsurers represents an estimate of the amount of future loss and loss adjustment expense payments that will be recoverable from Crusader’s reinsurers. These estimates are based upon estimates of the ultimate losses and loss adjustment expenses that Crusader expects to incur and the portion of those losses that are expected to be allocable to reinsurers based upon the terms of the reinsurance agreements. Given the uncertainty of the ultimate amounts of losses and loss adjustment expenses, the estimates may vary significantly from the eventual outcome. Crusader’s estimate of the amounts recoverable from reinsurers is regularly reviewed and updated by management as new data becomes available. Crusader’s assessment of the collectability of the recorded amounts recoverable from reinsurers is based primarily upon public financial statements and rating agency data. Any adjustments necessary are reflected in the current operations. Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. At December 31, 2020, all such ceded contracts are accounted for as risk transfer reinsurance.

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The following tables provide the effect of reinsurance on the Company’s consolidated financial statements:

The effect of reinsurance on financial position is as follows:

	Year ended December 31
	2020		2019

Ceded losses and loss adjustment expenses recoverable on excess of loss treaties:
Ceded case loss and loss adjustment expense reserves recoverable	$	5,335,992	$	5,535,735
Ceded IBNR loss and loss adjustment expense reserves recoverable		16,917,650		9,190,120
Total ceded loss and loss adjustment expense reserves recoverable	$	22,253,642	$	14,725,855

The effect of reinsurance on the results of operations is as follows:

The effect of reinsurance on earned premium is as follows:

	Year ended December 31
	2020			2019

Direct earned premium	$	36,108,230		$	33,958,202
Assumed earned premium		156,639			—
Ceded earned premium		(8,096,701	)		(7,220,734	)
Net premium earned	$	28,168,168		$	26,737,468
Ratio of ceded earned premium to gross earned premium (direct and assumed earned premium)		22	%		21	%

The effect of reinsurance on losses and loss adjustment expenses is as follows:

	Year ended December 31
	2020			2019

Direct losses and loss adjustment expenses incurred	$	48,971,172		$	36,712,252
Assumed losses and loss adjustment expenses incurred		89,204			—
Ceded losses and loss adjustment expenses incurred on excess of loss treaties:
Ceded paid losses and loss adjustment expenses		(6,889,668	)		(8,941,872	)
Change in ceded case reserves		199,742			(1,742,853	)
Change in ceded IBNR reserves		(7,727,530	)		(3,451,400	)
Total ceded losses and loss adjustment expenses incurred		(14,417,456	)		(14,136,125	)
Net losses and loss adjustment expenses incurred	$	34,642,920		$	22,576,127

Ceded premium and ceded losses and loss adjustment expenses are as follows:

	Year ended December 31
	2020			2019

Ceded earned premium	$	8,096,701		$	7,220,734
Ceded losses and loss adjustment expenses incurred		(14,417,456	)		(14,136,125	)
Ceded earned premium less ceded losses and loss adjustment expenses incurred	$	(6,320,755	)	$	(6,915,391	)

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The effect of reinsurance on cash flow is the sum of the effect of reinsurance on the results of operations reflected above and the following changes in reinsurance recoverable:

	Year ended December 31
	2020			2019

Change in reinsurance recoverable on ceded paid and unpaid losses and loss adjustment expenses	$	(7,463,253	)	$	(5,881,413	)

There were no losses subject to catastrophe reinsurance treaties coverage incurred during the years ended December 31, 2020 and 2019.

There have been no changes in key assumptions of estimating future ceded losses and loss adjustment expenses. The changes in estimates of prior accident year ceded incurred losses and loss adjustment expenses are attributed to the passage of time and a greater amount of actual loss data available for each accident year.

Crusader’s reinsurance strategy is to protect Crusader against liabilities in excess of certain retentions, including major or catastrophic losses that may occur from any one or more of the property and/or casualty risks which it insures. On an annual basis, or sooner if warranted, Crusader evaluates whether any changes to its retention, participation, or retained limits are necessary. Loss and loss adjustment expense reserves are determined separately on both a direct basis and a net of reinsurance basis, and the ceded reserves are determined by subtraction. Therefore, reinsurance recoverable is determined in a manner consistent with the associated loss reserves. There have been no recent changes in key assumptions underlying the estimation of loss and loss adjustment expense reserves, and no changes are anticipated. Ceded paid losses and loss adjustment expenses are determined by the terms of the individual treaties. The Company continually monitors and evaluates the collectability of reinsurance recoverable to determine if any allowance is necessary.

For years ended December 31, 2020 and 2019, Crusader wrote 99.9% of its business in the state of California. The types of businesses and the coverage limits written by Crusader are not considered difficult lines for obtaining reinsurance. In addition, because the major catastrophe exposure is primarily from riots and from fire following earthquakes, Crusader does not anticipate significant limitations on its ability to cede future losses on a basis consistent with its historical results.

Investments

The Company’s fixed maturity investments are classified either as held-to-maturity or available-for-sale and are stated at fair value. Although part of the Company's investments is classified as available-for-sale and the Company may sell investment securities from time to time in response to economic and market conditions, or investment securities may be called by their issuers prior to the securities’ maturity, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates fair value. The Company started investing in common stock equity securities during the year ended December 31, 2020. The Company’s equity securities allocation is intended to enhance the return of and provide diversification for the total investment portfolio. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income,” which is a separate component of stockholders’ equity, net of any deferred tax effect. The net unrealized investment gains on equity securities is reported in the Consolidated Statements of Operations. When a decline in the value of a fixed maturity is considered other-than-temporary, a loss is recognized in the Consolidated Statements of Operations. Realized gains and losses are included in the Consolidated Statements of Operations based on the specific identification method.

Deferred Tax Assets

The provision for federal income taxes is computed on the basis of income as reported for financial reporting purposes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and are measured using the enacted tax rates and laws expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense provisions increase or decrease in the same period in which a change in tax rates is enacted.

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At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more-likely-than-not that any portion of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature and tax-planning strategies when making this assessment. In connection with preparation of its consolidated financial statements, the Company periodically performs an analysis of future income projections to determine the adequacy of the valuation allowance. In light of the net losses that were generated in recent years, for the twelve months ended December 31, 2020, the Company has established a valuation allowance for the aggregate amount of the federal and state net operating losses and other deferred tax assets in the amount of $10,557,080 that, in management’s judgment, are not more-likely-than-not to be realized. For the year ended December 31, 2019, the Company carried a valuation allowance on deferred tax assets generated from federal and state net operating losses in the amount of $600,000 and $1,931,665, respectively.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to its consolidated financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this Item.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO

CONSOLIDATED FINANCIAL STATEMENTS

	Page Number

Report of Independent Registered Public Accounting Firm		57
Consolidated Balance Sheets as of December 31, 2020 and 2019		59
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019		60
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2020 and 2019		61
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2020 and 2019		62
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019		63
Notes to Consolidated Financial Statements		64

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Unico American Corporation and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Unico American Corporation and Subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows, for each of the years in the two-year period ended December 31, 2020, and the related notes and Schedules II and III (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Unpaid Losses and Loss Adjustment Expenses

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As of December 31, 2020, unpaid losses and loss adjustment expenses (“loss reserves”), were $74,893,509. As described in Notes 1 and 8 to the consolidated financial statements, loss reserves are management’s best estimate of the ultimate net cost of all reported and unreported losses and loss adjustment expenses incurred, less payments made. There are significant judgments involved in calculating this estimate as well as inherent uncertainties of the ultimate loss settlement cost.

We identified the evaluation of loss reserves as a critical audit matter due to the complexity and subjective judgment required to audit management’s best estimate, which required assessing the selected methods and assumptions, such as paid and incurred loss development factors, used to estimate loss reserves. Specialized actuarial skills, training, and knowledge were needed to evaluate the Company’s actuarial methodologies and the estimate of future claim payment and reporting patterns.

We tested the completeness of the underlying data generated from the Company’s policy administration system by reconciling it to the data used by the Company’s actuary. We tested the accuracy of the data on a sample basis by tracing it to source documents. Furthermore, we engaged an independent actuary with specialized skills, training, and knowledge to assist in assessing management’s methodologies used to estimate loss reserves by comparing it to generally accepted actuarial methods; evaluating management’s estimates by lines of business by performing independent analysis of loss reserves using the Company’s underlying historical claims data; and developing a reserve range based on actuarial methodologies and comparing it to the Company’s total recorded loss reserves.

/s/JLK Rosenberger LLP

We have served as the Company’s auditor since 2015.

Glendale, California

March 31, 2021

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31

	2020		2019
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at fair value (amortized cost: $80,071,280 at December 31, 2020, and $82,002,411 at December 31, 2019)	$	83,409,694	$	83,499,710
Held-to-maturity:
Fixed maturities, at amortized cost (fair value: $798,000 at December 31, 2020, and $798,000 at December 31, 2019)		798,000		798,000
Equity securities, at fair value (cost: $2,548,440 at December 31, 2020 and $0 at December 31, 2019)		2,746,706		—
Short-term investments, at fair value		200,000		2,196,815
Total Investments		87,154,400		86,494,525
Cash and cash equivalents		3,957,980		5,781,639
Accrued investment income		402,046		397,302
Receivables, net		3,321,337		4,019,437
Reinsurance recoverable:
Paid losses and loss adjustment expenses		621,307		685,841
Unpaid losses and loss adjustment expenses		22,253,642		14,725,855
Deferred policy acquisition costs		3,503,248		3,619,594
Real estate held for sale, net		8,335,017		—
Property and equipment, net		2,038,415		10,226,595
Deferred income taxes		—		3,925,432
Other assets		313,363		430,305
Total Assets	$	131,900,755	$	130,306,525

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Unpaid losses and loss adjustment expenses	$	74,893,509	$	55,066,480
Unearned premium		18,188,298		17,810,337
Advance premium and premium deposits		208,538		219,083
Accrued expenses and other liabilities		3,577,450		2,130,300
Total Liabilities	$	96,867,795	$	75,226,200

Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, no par value – authorized 10,000,000 shares; 5,304,885 and 5,306,720 shares issued and outstanding at December 31, 2020 and 2019, respectively	$	3,771,767	$	3,772,669
Accumulated other comprehensive income		2,637,347		1,182,866
Retained earnings		28,623,846		50,124,790
Total Stockholders’ Equity	$	35,032,960	$	55,080,325

Total Liabilities and Stockholders' Equity	$	131,900,755	$	130,306,525

See accompanying notes to consolidated financial statements.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

	2020			2019
REVENUES
Insurance company operation:
Net earned premium	$	28,168,168		$	26,737,468
Net investment income		1,988,243			2,097,942
Net realized investment gains (losses)		97,771			(12,661	)
Net unrealized investments gains on equity securities		198,266			—
Other income		32,713			123,050
Total Insurance Company Operation		30,485,161			28,945,799

Other insurance operations:
Gross commissions and fees		1,827,263			2,176,658
Finance fees earned		240,589			239,524
Other income		7,098			10,833
Total Revenues		32,560,111			31,372,814

EXPENSES
Losses and loss adjustment expenses		34,642,920			22,576,127
Policy acquisition costs		4,898,807			4,960,846
Salaries and employee benefits		6,364,170			4,067,852
Commissions to agents/brokers		95,315			173,796
Other operating expenses		4,502,414			2,844,083
Total Expenses		50,503,626			34,622,704

Loss before taxes		(17,943,515	)		(3,249,890	)
Income tax expense (benefit)		3,547,598			(134,187	)

Net Loss	$	(21,491,113	)	$	(3,115,703	)


PER SHARE DATA:
Basic
Loss per share	$	(4.05	)	$	(0.59	)
Weighted average shares		5,305,829			5,306,879
Diluted
Loss per share	$	(4.05	)	$	(0.59	)
Weighted average shares		5,305,829			5,306,879

See accompanying notes to consolidated financial statements.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31

	2020			2019

Net loss	$	(21,491,113	)	$	(3,115,703	)
Other changes in comprehensive income (loss):
Changes in unrealized gains on securities classified as available-for-sale arising during the period, net of income tax		1,454,481			2,282,902
Comprehensive Loss	$	(20,036,632	)	$	(832,801	)

See accompanying notes to consolidated financial statements.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019


							Accumulated
	Common Shares						Other
	Issued and						Comprehensive			Retained
	Outstanding			Amount			Income (Loss)			Earnings			Total

Balance – December 31, 2018		5,307,103		$	3,772,857		$	(1,100,036	)	$	53,242,601		$	55,915,422

Shares repurchased		(383	)		(188	)		—			(2,108	)		(2,296	)
Change in unrealized gain (loss), net of deferred income tax		—			—			2,282,902			—			2,282,902
Net loss		—			—			—			(3,115,703	)		(3,115,703	)
Balance – December 31, 2019		5,306,720		$	3,772,669		$	1,182,866		$	50,124,790		$	55,080,325

Shares repurchased		(1,835	)		(902	)		—			(9,831	)		(10,733	)
Change in unrealized gain (loss), net of deferred income tax		—			—			1,454,481			—			1,454,481
Net loss		—			—			—			(21,491,113	)		(21,491,113	)
Balance – December 31, 2020		5,304,885		$	3,771,767		$	2,637,347		$	28,623,846		$	35,032,960

See accompanying notes to consolidated financial statements.

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UNICO AMERICAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

	2020			2019

Cash flows from operating activities:
Net loss	$	(21,491,113	)	$	(3,115,703	)
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization		673,895			565,876
Bond amortization, net		33,072			(19,874	)
Bad debt expense		6,451			7,881
Net realized investment losses (gains)		(97,771	)		12,661
Net unrealized investment gains on equity securities		(198,266	)		—
Changes in assets and liabilities:
Net receivables and accrued investment income		686,905			(97,770	)
Reinsurance recoverable		(7,463,253	)		(5,881,413	)
Deferred policy acquisition costs		116,346			(129,866	)
Other assets		116,942			127,138
Unpaid losses and loss adjustment expenses		19,827,029			3,409,325
Unearned premium		377,961			1,845,748
Advance premium and premium deposits		(10,545	)		(15,359	)
Accrued expenses and other liabilities		1,447,150			284,942
Income taxes current/deferred		3,538,798			(156,796	)
Net Cash Used by Operating Activities		(2,436,399	)		(3,163,210	)

Cash flows from investing activities:
Purchase of fixed maturity investments		(20,580,448	)		(10,975,077	)
Purchase of equity securities		(2,548,440	)		—
Proceeds from maturity of fixed maturity investments		16,050,870			10,137,673
Proceeds from sale or call of investments		6,525,408			3,472,794
Net decrease in short-term investments		1,996,815			2,494,139
Additions to property and equipment		(820,732	)		(1,100,146	)
Net Cash Provided by Investing Activities		623,473			4,029,383

Cash flows from financing activities:
Repurchase of common stock		(10,733	)		(2,296	)
Net Cash Used by Financing Activities		(10,733	)		(2,296	)

Net increase (decrease) in cash and cash equivalents		(1,823,659	)		863,877
Cash and cash equivalents at beginning of year		5,781,639			4,917,762
Cash and Cash Equivalents at End of Year	$	3,957,980		$	5,781,639

Supplemental cash flow information
Cash paid during the period for:		—			—
Interest
Income taxes	$	8,800		$	8,800

See accompanying notes to consolidated financial statements.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Unico American Corporation (the “Company” or “Unico”) is an insurance holding company that underwrites property and casualty insurance through its insurance company subsidiary; provides property, casualty, and health insurance through its agency subsidiaries; and provides insurance premium financing and membership association services through its other subsidiaries. References to Unico or the Company include both the corporation and its subsidiaries, all of which are wholly owned. Unico was incorporated under the laws of Nevada in 1969.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Unico American Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). As described in Note 14, the Company's insurance subsidiary also files financial statements with regulatory agencies prepared on a statutory basis of accounting that differs from GAAP. Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.

Use of Estimates in the Preparation of the Financial Statements

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect its reported amounts of assets and liabilities and its disclosure of any contingent assets and liabilities at the date of its financial statements, as well as its reported amounts of revenues and expenses during the reporting period. The most significant assumptions in the preparation of these consolidated financial statements relate to losses and loss adjustment expenses. While every effort is made to ensure the integrity of such estimates, actual results may differ.

Investments

The Company’s fixed maturity investments are classified either as held-to-maturity or available-for-sale and are stated at fair value. Although part of the Company's investments is classified as available-for-sale and the Company may sell investment securities from time to time in response to economic and market conditions, or investment securities may be called by their issuers prior to the securities’ maturity, its investment guidelines place primary emphasis on buying and holding high-quality investments to maturity. Short-term investments are carried at cost, which approximates fair value. Equity securities are reported at fair value. The Company’s equity securities allocation is intended to enhance the return of and provide diversification for the total investment portfolio. The unrealized gains or losses from fixed maturities are reported as “Accumulated other comprehensive income (loss),” which is a separate component of stockholders’ equity, net of any deferred tax effect. The net unrealized investment gains on equity securities are reported in the Consolidated Statements of Operations. When a decline in the value of a fixed maturity is considered other-than-temporary, a loss is recognized in the Consolidated Statements of Operations. Realized gains and losses are included in the Consolidated Statements of Operations based on the specific identification method.

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired. For each fixed income security in an unrealized loss position, the Company assesses whether it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes, or the credit quality of the underlying security. If a security meets this criteria, the security's decline in fair value is considered other than temporary and is recorded as a net realized investment loss in the Consolidated Statements of Operations and in the Consolidated Statements of Comprehensive Income (Loss) based on the specific identification method. There were no realized investments gains (losses) from other than temporary impairments for any of the periods presented in the accompanying Consolidated Statements of Operations. For each fixed income security that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates the credit loss component of the impairment, if any, from the amount related to all other factors and reports the credit loss component in net realized investment gains (losses). There was no credit loss component for any of the periods presented in the accompanying Consolidated Statements of Operations.

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The short-term investments include U.S. Treasury bills, certificates of deposit, and commercial paper that are all highly rated and have initial maturity between three and twelve months.

Fair Value of Financial Instruments

The Company employs a fair value hierarchy that prioritizes the inputs for valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs to the valuation techniques. (See Note 5.)

The Company has used the following methods and assumptions in estimating its fair value disclosures for instruments carried at fair value:

Available-for-sale fixed securities, equity securities, and short-term investments – Fair values are obtained from widely accepted third party vendors.

The Company has used the following methods and assumptions for estimating fair value for other financial instruments not carried at fair value:

Cash and cash equivalents – The carrying amounts reported in the Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.

Long-term certificates of deposit – The carrying amounts reported in the Consolidated Balance Sheets for these instruments are at amortized cost which approximates their fair value

Receivables, net – The carrying amounts reported in the Consolidated Balance Sheets approximate their fair values given the short-term nature of these instruments.

Accrued expenses and other liabilities – The carrying amounts reported in the Consolidated Balance Sheets approximate the fair values given the short-term nature of these instruments.

Property and Equipment

All property and equipment held for use is stated at cost less accumulated depreciation and amortization on the Consolidated Balance Sheets.

Depreciation on Crusader Insurance Company (“Crusader”), the Company’s subsidiary, owned building, located at 26050 Mureau Road, Calabasas, California, is computed using the straight-line method over 39 years. Improvements to the building structure are amortized over the useful life of the improvements. Depreciation on furniture, fixtures and equipment in the Calabasas building is computed using the straight-line method over 3 to 15 years. Amortization of tenant improvements in the Calabasas building was being computed using the shorter of the useful life of the tenant improvements or the remaining years of the lease.

Income Taxes

The Company and its subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader and American Acceptance Corporation (“AAC”), a subsidiary of Unico, are allocated taxes or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2017 and California state income tax authorities for tax returns filed starting at taxable year 2016. There are no ongoing examinations of income tax returns by federal or state tax authorities.

As a California insurance company, Crusader is obligated to pay a premium tax on direct written premium in all states that Crusader is admitted. Premium taxes are deferred and amortized as the related premium is earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.

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Earnings Per Share

Basic earnings per share exclude the impact of common share equivalents and are based upon the weighted average common shares outstanding. Diluted earnings per share utilize the average market price per share when applying the treasury stock method in determining common share dilution. When outstanding stock options are dilutive, they are treated as common share equivalents for purposes of computing diluted earnings per share and represent the difference between basic and diluted weighted average shares outstanding. In loss periods, the options are excluded from the calculation of diluted earnings per share, as the inclusion of such options would have an anti-dilutive effect.

Revenue Recognition

a. General Agency Operations

Commissions from sales of health insurance are earned in income based on the satisfaction of a single performance obligation. Marketing, selling, billing, collecting, and administering health insurance policies are a series of distinct services combined as a one performance obligation, which is recognized in income monthly over the policy period. Premiums are collected upon the initial sale of health insurance policies and then monthly upon each subsequent periodic payment. As a result there are limited accounts receivable. Policy fee income is recognized on a pro-rata basis over the terms of the policies.

b. Insurance Company Operation

Premium is earned on a pro-rata basis over the terms of the policies. Premium applicable to the unexpired terms of policies in force are recorded as unearned premium.

c. Insurance Premium Financing Operations

Premium finance interest may be charged to policyholders who choose to finance insurance premium. Interest may be charged at rates that vary with the amount of premium financed. Premium finance interest, if any, is recognized using a method that approximates the interest (actuarial) method. Other charges and fees earned include late fees, returned check fees and payment processing fees that are earned when recorded.

Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period plus estimates based on experience and industry data for development of case estimates and for incurred but unreported losses and loss adjustment expenses.

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There is a high level of uncertainty inherent in the evaluation of the required loss and loss adjustment expense reserves for Crusader. The long-tailed nature of liability claims and the volatility of jury awards exacerbate that uncertainty. Crusader records loss and loss adjustment expense reserves at each balance sheet date based upon management’s best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and related expenses incurred as of that date for both reported and unreported losses. The ultimate cost of claims is dependent upon future events, the outcomes of which are affected by many factors. Crusader’s claim reserving procedures and settlement philosophy, current and perceived social and economic inflation, current and future court rulings and jury attitudes, improvements in medical technology, and many other economic, scientific, legal, political, and social factors all can have significant effects on the ultimate costs of claims. Changes in Company operations and management philosophy also may cause actual developments to vary from the past. Since the emergence and disposition of claims are subject to uncertainties, the net amounts that will ultimately be paid to settle claims may vary significantly from the estimated amounts provided for in the accompanying consolidated financial statements. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Management believes that the aggregate reserves for losses and loss adjustment expenses are reasonable and adequate to cover the cost of claims, both reported and unreported.

Restricted Funds

Restricted funds are as follows:

	Year ended December 31
	2020		2019

Premium trust funds (1)	$	1,595,135	$	1,758,915
Assigned to state agencies (2)		710,000		710,000
Funds held as collateral (3)		787,653		—
Total restricted funds	$	3,092,788	$	2,468,915

(1)

As required by law, the Company segregates from its operating accounts the premium collected from insureds that are payable to insurance companies into separate trust accounts.

(2)

$510,000 included in fixed maturity investments as of December 31, 2020 and 2019, and $200,000 included in short-term investments as of December 31, 2020 and 2019, are statutory deposits assigned to and held by the California State Treasurer and the Insurance Commissioner of the State of Nevada. These deposits are required for writing certain lines of business in California and for admission in states other than California.

(3)

Funds held as collateral by Comerica Bank & Trust, N. A. (“Comerica”) included in available-for-sale fixed maturities pursuant to the reinsurance trust agreement among Crusader, United Specialty Insurance Company (“USIC”) and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC.

Deferred Policy Acquisition Costs

Policy acquisition costs consist of commissions, premium taxes, inspection fees, and certain other underwriting costs, which are related to the successful production of Crusader insurance policies. Policy acquisition costs that are eligible for deferral are deferred and amortized as the related premium is earned and are limited to their estimated realizable value based on the related unearned premium plus investment income less anticipated losses and loss adjustment expenses. Ceding commission applicable to the unexpired terms of policies in force is recorded as unearned ceding commission, which is included in deferred policy acquisition costs.

Reinsurance

Crusader employs reinsurance to provide greater diversification of business allowing management to control exposure to potential losses arising from large risks by reinsuring certain levels of risk in various areas of exposure, to reduce the loss that may arise from catastrophes, and to provide additional capacity for growth. Prepaid reinsurance premium and reinsurance receivables are reported as assets and represent ceded unearned premium and reinsurance recoverable on both paid and unpaid losses and loss adjustment expenses, respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. Crusader evaluates each of its ceded reinsurance contracts at its inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting literature. As of December 31, 2020, all such ceded contracts are accounted for as risk transfer reinsurance.

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Crusader evaluates and monitors the financial condition of its reinsurers and factors such as collection periods, disputes, applicable coverage defenses and other factors to assess the need for any allowance against anticipated reinsurance recoveries. No such allowance was considered necessary at December 31, 2020 or 2019.

Concentration of Risks

99.9% of Crusader’s gross written premium was derived from California during the years ended December 31, 2020 and 2019. In 2020, approximately 30% and 56% of the $727,515 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively. In 2019, approximately 39% and 49% of the $939,689 commission income from the Company’s health insurance program was from Guardian Life Insurance Company of America dental and group life plan programs and Blue Shield Care Trust health and life insurance programs, respectively.

Crusader’s reinsurance recoverable on paid and unpaid losses and loss adjustment expenses is as follows:

		Year ended December 31
Name of Reinsurer	A.M. Best Rating (1)	2020		2019

Renaissance Reinsurance U.S. Inc.	A+	$	11,906,416	$	8,095,647
Hannover Ruck SE	A+		10,673,173		6,869,914
TOA Reinsurance Company of America	A		295,188		438,308
Other	A		172		7,827
Total		$	22,874,949	$	15,411,696

(1) A.M. Best ratings are as of December 31, 2020.

Stock-Based Compensation

Share-based compensation expense for all share-based payment awards is based on the grant-date fair value estimated in accordance with the provisions of ASC Topic 718, “Compensation - Stock Compensation” using the modified prospective transition method.

Recently Issued Accounting Standards

Recently adopted standards

In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by all leases, including those historically accounted for as operating leases. The Company adopted ASU 2016-02 effective January 1, 2019. The adoption of ASU 2016-02 did not have a material impact to the Consolidated Statements of Operations and the Consolidated Balance Sheets.

In August, 2018, the FASB issued ASU 2018-13 “Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements for assets and liabilities measured at fair value. The amendments in this ASU require certain existing disclosure requirements to be modified or removed, and certain new disclosure requirements to be added. In addition, this ASU allows entities to exercise more discretion when considering fair value measurement disclosures. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. The Company adopted ASU 2018-13 effective January 1, 2020. The adoption of ASU 2018-13 did not have a material impact to the Company’s disclosures.

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Standards not yet adopted

In June 2016, the FASB issued ASU 2016-13 “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 also requires enhanced disclosures for better understanding of significant estimates and judgments used in estimating credit losses. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's consolidated financial statements, but expects the primary changes to be (i) the use of the expected credit loss model for its premium receivables and reinsurance recoverables and (ii) the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. ASU 2016-13 will primarily impact the Company’s available-for-sale fixed maturities portfolio and reinsurance recoverables. In November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses, Derivatives and Hedging, and Leases.” ASU 2019-10 updated the effective date for implementing ASU 2016-13 for smaller reporting entities, and that effective date will be for fiscal years beginning after December 15, 2022. Since the Company’s fixed income portfolio is invested primarily in higher rated bonds and the reinsurance is purchased from financially strong reinsurers, the Company believes the adoption of ASU 2016-13 will not have a material impact to the Consolidated Statements of Operations and the Consolidated Balance Sheets.

In December of 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes or ASU 2019-12. ASU 2019-12 is expected to reduce the cost and complexity related to the accounting for income taxes. The ASU removes specific exceptions to the general principles in Topic 740 and improves the financial statement preparer's application of income tax related guidance. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

NOTE 2 – CASH AND CASH EQUIVALENTS

The following table provides a reconciliation of cash and cash equivalents reported within the Consolidated Balance Sheets to the amounts shown in the Consolidated Statements of Cash Flows:

	Year ended December 31
	2020		2019

Cash	$	3,383,048	$	2,490,902
Cash equivalents		574,932		3,290,737
Cash and cash equivalents	$	3,957,980	$	5,781,639

Cash equivalents were comprised of highly liquid investments with initial maturity of 90 days or less. As of December 31, 2020 and 2019, cash equivalents included custodial trust, bank money market accounts, and a bank savings account.

NOTE 3 – ADVANCE PREMIUM AND PREMIUM DEPOSITS

The insurance company operation records an advance premium liability that represents the deposits on written premium on policies that have been submitted to the Company and are bound, billed, and recorded prior to their effective date of coverage. The advance premium is not included in written premium or in the liability for unearned premium.

Some of the Company’s health and life programs require payments of premium prior to the effective date of coverage; and, accordingly, invoices are sent out as early as two months prior to the coverage effective date. Insurance premium received for coverage months effective after the balance sheet date are recorded as advance premium.

NOTE 4 – INVESTMENTS

A summary of investment income, net of investment expenses, net realized gains, and net unrealized investment gains on equity securities is as follows:

	Year ended December 31
	2020			2019

Fixed maturities	$	2,068,592		$	2,162,142
Equities		28,727			—
Short-term investments and cash equivalents		24,603			65,642
Gross investment income		2,121,922			2,227,784
Less investment expenses		(133,679	)		(129,842	)
Net investment income		1,988,243			2,097,942
Net realized gains (losses)		97,771			(12,661	)
Net unrealized gains on equity securities		198,266			—
Net investment income, realized gains (losses) and unrealized gains	$	2,284,280		$	2,085,281

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The amortized cost and estimated fair value of fixed maturity investments at December 31, 2020, by contractual maturity are as follows:

	Amortized Cost		Estimated Fair Value

Due in one year or less	$	11,064,202	$	11,169,232
Due after one year through five years		30,090,910		31,260,694
Due after five years through ten years		18,476,051		19,806,444
Due after ten years and beyond		21,238,117		21,971,324
Total fixed maturities	$	80,869,280	$	84,207,694

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

The amortized cost and estimated fair values of investments in fixed maturities by category are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2020
Available-for-sale fixed maturities:
U.S. Treasury securities	$	10,596,808	$	235,373	$	—		$	10,832,181
Corporate securities		44,159,926		2,347,826		(55,847	)		46,451,905
Agency mortgage-backed securities		25,314,546		833,336		(22,274	)		26,125,608
Held-to-maturity fixed maturities:
Certificates of deposit		798,000		—		—			798,000
Total fixed maturities	$	80,869,280	$	3,416,535	$	(78,121	)	$	84,207,694

December 31, 2019
Available-for-sale fixed maturities:
U.S. Treasury securities	$	15,105,795	$	130,564	$	(1,027	)	$	15,235,332
Corporate securities		41,953,378		1,076,012		(57	)		43,029,333
Agency mortgage-backed securities		24,943,238		293,757		(1,950	)		25,235,045
Held-to-maturity fixed maturities:
Certificates of deposit		798,000		—		—			798,000
Total fixed maturities	$	82,800,411	$	1,500,333	$	(3,034	)	$	84,297,710

As of December 31, 2020, one corporate security, included in available-for-sale fixed maturities, was held as collateral with Comerica, pursuant to the reinsurance trust agreement among Crusader, USIC and Comerica to secure payment of Crusader’s liabilities and performance of its obligations under the reinsurance arrangement with USIC. The estimated fair value and amortized cost of that security was $824,500 and $787,653 on December 31, 2020, respectively.

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A summary of the unrealized gains (losses) on investments carried at fair value and the applicable deferred federal income taxes is as follows:

	Year ended December 31
	2020			2019

Gross unrealized gains of fixed maturities	$	3,416,535		$	1,500,333
Gross unrealized losses of fixed maturities		(78,121	)		(3,034	)
Net unrealized gains on investments		3,338,414			1,497,299
Deferred federal tax expense		(701,067	)		(314,433	)
Net unrealized gains, net of deferred income taxes	$	2,637,347		$	1,182,866

A summary of estimated fair value and gross unrealized losses in a gross unrealized loss position by the length of time in which the securities have continually been in that position is shown below:

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses		Number of Securities
December 31, 2020
U.S. Treasury securities	$	—	$	—			—	$	—	$	—		—
Corporate securities		2,101,986		(55,847	)		2		—		—		—
Agency mortgage-backed securities		3,223,329		(22,274	)		12		—		—		—
Total debt securities		5,325,315		(78,121	)		14		—		—		—
Equity securities		723,346		(37,357	)		25		—		—		—
Total	$	6,048,661	$	(115,478	)		39	$	—	$	—		—

	Less than 12 Months							12 Months or Longer
	Estimated Fair Value		Gross Unrealized Losses			Number of Securities		Estimated Fair Value		Gross Unrealized Losses			Number of Securities
December 31, 2019
U.S. Treasury securities	$	1,996,562	$	(253	)		1	$	1,002,031	$	(775	)		1
Corporate securities		999,818		(56	)		1		—		—			—
Agency mortgage-backed securities		750,058		(1,950	)		2		—		—			—
Total	$	3,746,438	$	(2,259	)		4	$	1,002,031	$	(775	)		1

The Company monitors its investments closely. If an unrealized loss is determined to be other-than-temporary, it is written off as a realized loss through the Consolidated Statements of Operations. The Company’s methodology of assessing other-than-temporary impairments is based on security-specific analysis as of the balance sheet date and considers various factors including the length of time to maturity and the extent to which the fair value has been less than the cost, the financial condition and the near-term prospects of the issuer, and whether the debtor is current on its contractually obligated interest and principal payments. The unrealized losses as of December 31, 2020, and December 31, 2019, were determined to be temporary.

Although the Company does not intend to sell its fixed maturity investments prior to maturity, the Company may sell investment securities from time to time in response to cash flow requirements, economic and/or market conditions or investment securities may be called by their issuers prior to the securities’ maturity.

	December 31		December 31
	2020		2019

Fixed maturities securities sold
Number of securities sold		15		3
Amortized cost of sold securities	$	5,529,470	$	2,997,098
Realized gains (losses) on sales	$	52,053	$	(12,679	)

Fixed maturities securities called
Number of securities called		4		1
Amortized cost of called securities	$	2,449,503	$	999,982
Realized gains on calls	$	497	$	18

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The Company started investing in common stock equity securities during the year ended December 31, 2020. The Company’s equity securities allocation is intended to enhance the return of and provide diversification for the total investment portfolio. A summary of equity securities is shown below:

	December 31		December 31
	2020		2019

Cost	$	2,548,440	$	—
Unrealized gain		198,266		—
Fair market value of equity securities	$	2,746,706	$	—

The Company’s investment in certificates of deposit included $598,000 of brokered certificates of deposit as of December 31, 2020 and 2019. All of the Company’s certificates of deposit are within the Federal Deposit Insurance Corporation (“FDIC”) insured permissible limits. Due to the nature of the Company’s business, certain bank accounts may exceed FDIC insured permissible limits.

The following securities from three different banks represent statutory deposits that are assigned to and held by the California State Treasurer and the Insurance Commissioner of the State of Nevada. These deposits are required for writing certain lines of business in California and for admission in the state of Nevada.

	Year ended December 31
	2020		2019

Certificates of deposit	$	200,000	$	200,000
Short-term investments		200,000		200,000
Total state held deposits	$	400,000	$	400,000

Short-term investments have an initial maturity of one year or less and consist of the following:

	Year ended December 31
	2020		2019

U.S. Treasury bills	$	—	$	1,996,815
Certificates of deposit		200,000		200,000
Total short-term investments	$	200,000	$	2,196,815

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

In determining the fair value of its financial instruments, the Company employs a fair value hierarchy that prioritizes the inputs for the valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Financial assets and financial liabilities recorded on the Consolidated Balance Sheets at fair value are categorized based on the reliability of inputs for the valuation techniques as follows:

Level 1 – Financial assets and financial liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date.

Level 2 – Financial assets and financial liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non-active markets; or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability as of the reporting date.

Level 3 – Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities as of the reporting date.

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The hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the fair value hierarchy level within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) or unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following table presents information about the Company’s financial instruments and their estimated fair values, which are measured on a recurring basis, allocated among the three levels within the fair value hierarchy as of December 31, 2020 and 2019:

	Level 1		Level 2		Level 3		Total
December 31, 2020
Financial instruments:
Available-for-sale fixed maturities:
U.S. Treasury securities	$	10,832,181	$	—	$	—	$	10,832,181
Corporate securities		—		46,451,905		—		46,451,905
Agency mortgage-backed securities		—		26,125,608		—		26,125,608
Equity securities		2,746,706		—		—		2,746,706
Short-term investments		200,000		—		—		200,000
Total financial instruments at fair value	$	13,778,887	$	72,577,513	$	—	$	86,356,400

December 31, 2019
Financial instruments:
Available-for-sale fixed maturities:
U.S. Treasury securities	$	15,235,332	$	—	$	—	$	15,235,332
Corporate securities		—		43,029,333		—		43,029,333
Agency mortgage-backed securities		—		25,235,045		—		25,235,045
Short-term investments		2,196,815		—		—		2,196,815
Total financial instruments at fair value	$	17,432,147	$	68,264,378	$	—	$	85,696,525

Fair value measurements are not adjusted for transaction costs. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. The Company did not have any transfers between Levels 1, 2 and 3 of the fair value hierarchy during the years ended December 31, 2020 and 2019.

As a result of the spread of the ongoing coronavirus (“COVID-19”) pandemic, economic uncertainties have arisen which are likely to impact the fair value of investments, day to day administration of the business and premium volume. While the Company does not believe it is exposed to substantial risk from coronavirus-related claims under the insurance policies written by Crusader, it is likely that the fair value of its investment portfolio will be adversely affected by the volatility in the capital markets, as well as general economic conditions as a result of the coronavirus and governmental responses to the pandemic. The financial impact of these uncertainties is unknown at this time.

NOTE 6 – REAL ESTATE HELD FOR SALE, NET AND PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

	Year ended December 31
	2020			2019

Real estate held for sale, located in Calabasas, California	$	10,202,676		$	—
Accumulated depreciation and amortization		(1,867,659	)		—
Real estate held for sale, net	$	8,335,017		$	—

Building and tenant improvements, located in Calabasas, California		—			8,411,541
Furniture, fixtures, equipment		2,191,411			2,110,653
Computer software		467,275			459,899
Accumulated depreciation and amortization		(2,423,617	)		(3,617,381	)
Computer software under development		1,803,346			1,074,398
Land located in Calabasas, California		—			1,787,485
Property and equipment, net	$	2,038,415		$	10,226,595

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Real estate held for sale, owned by Crusader, includes land, building, and leasehold improvements. On September 29, 2020, the real estate was listed for sale at a price of $12,999,000. Upon the listing, the Company stopped recording the depreciation expense on the Calabasas building and the leasehold improvements in the Calabasas building. On October 23, 2020, Crusader entered into an agreement to sell the building, the leasehold improvements and substantially all existing furniture, fixtures and equipment for a sale price of $12,695,000. The building was sold on February 12, 2021.

Through the date of the real estate listing, depreciation on the Calabasas building was computed using the straight line method over 39 years. Depreciation on furniture, fixtures, and equipment in the Calabasas building is computed using the straight line method over 3 to 15 years. Through the date of the real estate listing, amortization of leasehold improvements in the Calabasas building was computed using the shorter of the useful life of the leasehold improvements or the remaining years of the lease. Depreciation and amortization expense on all property and equipment for the years ended December 31, 2020 and 2019 were $673,895 and $565,876, respectively.

For the years ended December 31, 2020 and 2019, the Calabasas building has generated rental revenue from non-affiliated tenants in the amount of $150,319 and $177,596, and incurred operating expenses in the amount of $677,930 and $669,359, which included depreciation, respectively. These amounts are included in “Other income” from insurance company operation and other operating expenses, respectively, in the Company’s Consolidated Statements of Operations.

The total square footage of the Calabasas building is 46,884, including common areas. As of December 31, 2020, 6,942 square feet of the Calabasas building was leased to non-affiliated entities and 7,539 square feet was vacant and available to be leased to non-affiliated entities.

The Company capitalizes certain computer software costs purchased from outside vendors for internal use or incurred internally to upgrade the existing systems. These costs also include configuration and customization activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrade and enhancements are capitalized if it is probable that such expenditure will result in additional functionality. The capitalized costs are not depreciated until the software is placed into production.

NOTE 7 – RECEIVABLES, NET

Receivables, net, include premium, commissions and notes receivable and are as follows:

	Year ended December 31
	2020			2019

Premium and commission receivable	$	2,476,679		$	2,178,476
Premium finance notes receivable		2,036,960			3,041,931
Total premium and notes receivable		4,513,639			5,220,407
Allowance for doubtful accounts		(1,192,302	)		(1,200,970	)
Receivables, net	$	3,321,337		$	4,019,437

Premium receivable and premium finance notes receivables are substantially secured by unearned premium and funds held as security for performance. Premium finance notes receivable represents the balance due to AAC, the Company's premium finance subsidiary, from policyholders who elected to finance their premium over a nine-month term. These notes are net of unearned finance charges and credit loss reserves.

Bad debt expense was $6,450 and $7,881 for the years ended December 31, 2020 and 2019, respectively.

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NOTE 8 – UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Crusader’s loss and loss adjustment expense case and incurred but not reported (“IBNR”) reserves are as follows:

	Year ended December 31
	2020		2019

Gross reserves:
Case reserves	$	26,363,695	$	23,663,743
IBNR reserves		48,529,814		31,402,737
Total gross reserves	$	74,893,509	$	55,066,480

Reserves net of reinsurance:
Case reserves	$	21,027,703	$	18,128,008
IBNR reserves		31,612,164		22,212,617
Total net reserves	$	52,639,867	$	40,340,625

Reserves for losses and loss adjustment expenses before reinsurance for each of Crusader’s lines of business are as follows:

	Year ended December 31
Line of Business	2020				2019

CMP	$	73,545,181	98.2	%	$	54,270,633	98.6	%
Other liability		1,283,174	1.7	%		776,957	1.4	%
Other		65,154	0.1	%		18,890	0.0	%
Total	$	74,893,509	100.0	%	$	55,066,480	100.0	%

The Company‘s consolidated financial statements include estimated reserves for unpaid losses and related loss adjustment expenses of the insurance company operation. Crusader sets loss and loss adjustment expense reserves at each balance sheet date based upon management’s best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and all related loss adjustment expenses incurred as of that date for both reported and unreported claims.

The following table provides an analysis of the roll forward of Crusader’s loss and loss adjustment expense reserves, including a reconciliation of the ending balance sheet liability for the periods indicated:

	Year ended December 31
	2020		2019

Reserve for unpaid losses and loss adjustment expenses at beginning of year – net of reinsurance	$	40,340,625	$	42,125,553

Incurred losses and loss adjustment expenses:
Provision for insured events of current year		26,683,872		19,384,942
Provision for incurred events of prior years		7,959,048		3,191,185
Total incurred losses and loss adjustment expenses		34,642,920		22,576,127

Payments:
Losses and loss adjustment expenses attributable to insured events of the current year		8,285,021		6,210,475
Losses and loss adjustment expenses attributable to insured events of prior years		14,058,657		18,150,580
Total payments		22,343,678		24,361,055

Reserve for unpaid losses and loss adjustment expenses at end of year – net of reinsurance		52,639,867		40,340,625
Reinsurance recoverable on unpaid losses and loss adjustment expenses at end of year		22,253,642		14,725,855
Reserve for unpaid losses and loss adjustment expenses at end of year per balance sheet, gross of reinsurance	$	74,893,509	$	55,066,480

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At each review period, actual claims costs that emerge are compared with the claims costs that were expected to emerge during that development period. Sometimes the previous claims costs estimates prove to have been too high; sometimes they prove to have been too low. The fluctuation in development of insured events of prior years’ underscores the inherent uncertainty in insurance claims costs, especially for a relatively small insurer, such as Crusader. Management reviews claims costs that appear to be different from the historical claims costs to determine whether those differences are a normal part of the process or an indication that a change in reserve assumptions is appropriate. Management concluded that the differences noted above are differences between actual and expected claims costs that emerge from time to time, particularly in an insurer the size of Crusader.

The following table presents loss development information by accident year, including cumulative incurred and paid losses and allocated loss adjustment expenses (“ALAE”), net of reinsurance, as well as cumulative claim frequency and the total of incurred but not reported liabilities plus expected development on reported claims as of December 31, 2020:

Accident Year		Cumulative Incurred		Cumulative Paid		Total of Incurred But Not Reported Liabilities Plus Expected Development on Reported Claims	Cumulative Number of Reported Claims

2011	$	19,150,281	$	19,150,278	$	—	1,020
2012		18,327,346		18,020,565		222	967
2013		22,802,931		22,802,275		2	849
2014		18,048,285		17,806,537		150,672	760
2015		24,495,614		21,502,400		635,716	749
2016		26,337,621		23,326,143		1,565,938	803
2017		25,091,934		18,869,369		3,060,474	807
2018		20,670,880		12,129,118		6,146,217	605
2019		19,182,851		7,603,418		7,134,966	639
2020		24,302,958		6,004,292		12,910,459	699
Total	$	218,410,701	$	167,214,395	$	31,604,666

The following table reconciles the above cumulative incurred and paid data to Crusader’s loss and loss adjustment expense reserves:

	Year ended December 31
	2020			2019

Cumulative incurred losses and ALAE	$	218,410,701		$	203,000,161
Less cumulative paid losses and ALAE		(167,214,395	)		(164,132,073	)
Reserve for unpaid losses and ALAE (latest 10 accident years)		51,196,306			38,868,088
Reserves for unpaid losses and ALAE (beyond latest 10 accident years)		79,703			126,042
Reserves for unpaid unallocated loss adjustment expenses		1,363,858			1,346,495
Reserve for unpaid losses and loss adjustment expenses, net of reinsurance		52,639,867			40,340,625
Reinsurance recoverable on unpaid losses and loss adjustment expenses		22,253,642			14,725,855
Reserve for unpaid losses and loss adjustment expenses, gross of reinsurance	$	74,893,509		$	55,066,480

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Crusader’s liability for unpaid loss and loss adjustment expense reserves consists of case reserves and reserves for IBNR claims. Case reserves are established by claims personnel based on a review of the facts known at the time the claim is reported and are subsequently revised as more information about a claim becomes known. IBNR is estimated using various actuarial methods and techniques and includes (1) reserves for losses and loss adjustment expenses on claims that have occurred but for which claims have not yet been reported to Crusader, and (2) a provision for expected future development on case reserves for information not currently known.

At the end of each fiscal quarter, Crusader’s reserves for each accident year (i.e., for all claims occurring within each year) are re-evaluated independently by the Company’s president, the Company’s chief financial officer, and an independent consulting actuary. Generally accepted actuarial methods, including the widely used Bornhuetter-Ferguson and loss development methods, are employed to estimate ultimate claims costs. An actuarial central estimate of the ultimate claims costs and IBNR reserves is ultimately determined by management and tested for reasonableness by the independent consulting actuary.

The Company determines the number of reported claims based on the number of loss events. A claim is considered a single loss event, per policy, and it may include multiple claimants and multiple coverages on a single policy. The cumulative number of reported claims is a sum of open claims, closed claims, and claims closed without payment.

NOTE 9 – DEFERRED POLICY ACQUISITION COSTS

The following table provides an analysis of the roll forward of the Company’s deferred policy acquisition costs:

	Year ended December 31
	2020			2019

Deferred policy acquisition costs at beginning of year	$	3,619,594		$	3,489,728
Policy acquisition costs deferred during year		4,782,461			5,090,712
Policy acquisition costs amortized during year		(4,898,807	)		(4,960,846	)
Deferred policy acquisition costs at end of year	$	3,503,248		$	3,619,594

Deferred policy acquisition costs consist of commissions (net of ceding commission), premium taxes, inspection fees, and certain other underwriting costs, which are related to and vary with the production of Crusader policies. Policy acquisition costs are deferred and amortized as the related premium is earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income on insurance policies generated from these costs, including investment income. The Company recognized a premium deficiency of $150,000 as of December 31, 2020. The Company did not carry a premium deficiency reserve as of December 31, 2019.

NOTE 10 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following:

	Year ended December 31
	2020		2019

Premium payable	$	393,466	$	480,078
Unearned policy fee income		454,883		520,064
Retirement plans		145,473		112,827
Accrued salaries and employee benefits		973,504		501,414
Commission payable		869		1,764
Security deposit for Calabasas building sale		380,850		—
Other		1,228,405		514,153
Total accrued expenses and other liabilities	$	3,577,450	$	2,130,300

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Crusader is also subject to regulatory and governmental examinations, requests for information, inquiries, investigations, and threatened legal actions and proceedings by state regulators and others. Crusader receives numerous requests, orders for documents, and information in connection with various aspects of its regulated activities. Regulatory and governmental requests for information, inquires, certain examinations and investigations are routinely handed by Crusader. Crusader may involve outside counsel in regulatory matters depending on the nature of the matter.

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The Company establishes reserves for lawsuits, regulatory actions and other contingencies for which the Company is able to estimate its potential exposure and believes a loss is probable. For loss contingencies believed to be reasonably possible, the Company discloses the nature of the loss contingency, an estimate of the possible loss, a range of loss, or a statement that such an estimate cannot be made.

Likewise, the Company is sometimes named as a cross-defendant in litigation, which is principally directed against an insured who was issued a policy of insurance directly or indirectly through the Company. Incidental actions related to disputes concerning the issuance or non-issuance of individual policies are sometimes brought by customers or others. These items are also handled on a routine basis by counsel, and they do not generally affect the operations of the Company. Management is confident that the ultimate outcome of pending litigation should not have an adverse effect on the Company’s consolidated results of operations or financial position. The Company vigorously defends itself unless a reasonable settlement appears appropriate.

NOTE 12 – REINSURANCE

A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on policies written to a reinsurer that assumes that risk for a premium (ceded premium). Reinsurance does not legally discharge the Company from primary liability under its policies. If the reinsurer fails to meet its obligations, the Company must nonetheless pay its policy obligations.

Crusader’s primary excess of loss reinsurance agreements during the years ended December 31, 2020 and 2019 are as follows:

Loss Year		Reinsurers	A.M. Best Rating	Retention

	2020	Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE	A+ A+	$	500,000

	2019	Renaissance Reinsurance U.S. Inc. & Hannover Ruck SE	A+ A+	$	500,000

Crusader also has catastrophe reinsurance treaties from various highly rated California authorized and California unauthorized reinsurance companies. These reinsurance treaties help protect Crusader against losses in excess of certain retentions from catastrophic events that may occur on property risks which Crusader insures. In calendar years 2020 and 2019, Crusader retained a participation in its catastrophe excess of loss reinsurance treaties of 5% in its 1^st layer (reinsured losses between $1,000,000 and $10,000,000) and 0% in its 2^nd layer (reinsured losses between $10,000,000 and $46,000,000).

On April 1, 2020, Crusader and Unifax Insurance Systems, Inc. (“Unifax”), a subsidiary of the Company, entered into a reinsurance arrangement with United Specialty Insurance Company (“USIC”), pursuant to which USIC would underwrite property and casualty insurance policies by and through Unifax and such policies would be reinsured by Crusader. On September 2, 2020, the Company placed a moratorium on placing any new risks with USIC by Unifax pending negotiations among Crusader, Unifax, and USIC pursuant to the issues raised by the DOI regarding the structure of the reinsurance arrangement and its compliance with the California Insurance Holding Company System Act (the “Insurance Act”).

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On November 24, 2020, USIC and Crusader entered into a new Quota Share Reinsurance Agreement, effective April 1, 2020, (the “New Reinsurance Agreement”), pursuant to which Crusader will reinsure all of USIC’s liability for policies issued by USIC and produced by Unifax for property, general liability, CMP property, CMP liability and other miscellaneous coverages, subject to certain maximum policy limits. Policies placed with USIC by Unifax and reinsured with Crusader prior to November 24, 2020 remain in place without interruption or change and are subject to the New Reinsurance Agreement.

On November 24, 2020, USIC and Unifax entered into a Surplus Line Broker Agreement, effective April 1, 2020 (the “Broker Agreement”), pursuant to which, and subject to the terms, conditions and limitations set forth therein, USIC authorized Unifax to act as its broker and agent for the purpose of producing and administering certain specified classes of insurance policies, which are the subject of the New Reinsurance Agreement. Under the Broker Agreement, Unifax is entitled to retain a commission for policies produced based on a percentage of the premiums on business placed with USIC. Unifax has agreed to indemnify and hold USIC harmless from any losses relating to the Broker Agreement. The Broker Agreement may be terminated in specified events, including by any party upon 90 days written notice to the other parties and automatically upon cancellation or termination of the New Reinsurance Agreement.

On November 24, 2020, USIC and U.S. Risk Managers, Inc. (“U.S. Risk”), a subsidiary of the Company, entered into a Claims Administration Agreement, effective as of April 1, 2020 (the “Claims Administration Agreement”). Pursuant to the Claims Administration Agreement, USIC appointed U.S. Risk, which is a licensed claims adjuster in the state of California, to adjust and settle claims on its behalf in connection with the surplus lines policies issued by USIC in connection with the New Reinsurance Agreement. U.S. Risk will be paid a fee by Unifax on behalf of USIC based on a percentage of earned premium. U.S. Risk will establish an account for payment of claims by U.S. Risk (the “Loss Fund Account”) pursuant to the Claims Administration Agreement. Pursuant to the terms of the New Reinsurance Agreement, Crusader will fund the Loss Fund Account provided for in the Claims Administration Agreement on behalf of USIC.U.S. Risk has agreed to indemnify and hold USIC harmless from any losses relating to the Claims Administration Agreement. The Claims Administration Agreement may be terminated in specified events, including by any party upon 90 days written notice to the other parties and automatically upon cancellation or termination of the Broker Agreement.

Crusader has no reinsurance recoverable balances in dispute.

On most of the premium that Crusader cedes to the reinsurer, the reinsurer pays a commission to Crusader that includes a reimbursement of the cost of acquiring the portion of the premium that is ceded. Crusader intends to continue obtaining reinsurance although the availability and cost may vary from time to time. The unpaid losses and loss adjustment expenses ceded to the reinsurer are recorded as an asset on the Consolidated Balance Sheets.

The effect of reinsurance on written premium, earned premium, and incurred losses and loss adjustment expenses is as follows:

	Year ended December 31
	2020			2019
Written premium:
Direct	$	36,338,800		$	35,803,950
Assumed		304,030			—
Ceded		(8,078,748	)		(7,153,130	)
Net written premium	$	28,564,082		$	28,650,820

Earned premium:
Direct	$	36,108,230		$	33,958,202
Assumed		156,639			—
Ceded		(8,096,701	)		(7,220,734	)
Net earned premium	$	28,168,168		$	26,737,468

Incurred losses and loss adjustment expenses:
Direct	$	48,971,172		$	36,712,252
Assumed		89,204			—
Ceded		(14,417,456	)		(14,136,125	)
Net incurred losses and loss adjustment expenses	$	34,642,920		$	22,576,127

Ceded earned premium as a percentage of gross earned premium (direct and assumed earned premium) was 22% in 2020 and 21% in 2019.

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NOTE 13 – PROFIT SHARING PLAN

The Unico American Corporation Profit Sharing Plan (“Plan”) covers Company’s employees who are at least 21 years of age and have met certain service and eligibility requirements. Unico American Corporation is the Plan sponsor and the Plan administrator. Fidelity Management Trust Company is the Plan trustee. The Plan is intended to be a qualified retirement plan under the Internal Revenue Code. As required by the Plan, on an annual basis, the Company must contribute 3% of participants’ eligible compensation to the account of each participant. In addition, pursuant to the terms of the Plan, the Company may contribute to participants an amount determined by the Board. Under the Plan, participants have the option to make 401(k) and/or Roth 401(k) deferral contributions which are not matched by the Company. Participants must be employed by the Company on the last day of the Plan year and must have met certain service and eligibility requirements to be eligible for a contribution. Participants are eligible to request a distribution of their vested account balance upon death, retirement, minimum required distributions and termination of employment.

Contributions to the Plan are as follows:

	Year ended December 31, 2020			$	154,331
	Year ended December 31, 2019			$	138,670

NOTE 14 – STATUTORY CAPITAL AND SURPLUS

Crusader is required to file statutory financial statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities. Statutory accounting practices differ in certain respects from GAAP. The more significant of the differences for statutory accounting practices are (a) policy acquisition and commission costs are expensed when incurred rather than over the periods covered by the policies; (b) fixed maturity securities are reported at amortized cost, or the lower of amortized cost or fair value, depending on the quality of the security as specified by the National Association of Insurance Commissioners (“NAIC”); (c) non-admitted assets are charged directly against surplus; (d) loss and loss adjustment expense reserves and unearned premium reserves are stated net of reinsurance; (e) federal income taxes are recorded when payable and deferred taxes, subject to limitations, are recognized but only to the extent that they do not exceed a specified percentage of statutory surplus; and (f) changes in deferred taxes are recorded directly to surplus as regards policyholders. Additionally, the cash flow presentation is not consistent with GAAP and reconciliation from net income to cash provided by operations is not presented. Comprehensive income is not presented under statutory accounting practices.

Crusader’s statutory capital and surplus are as follows:

	As of December 31, 2020			$	26,893,515
	As of December 31, 2019			$	46,498,960

Crusader’s statutory net loss is as follows:

	Year ended December 31, 2020			$	(12,862,588	)
	Year ended December 31, 2019			$	(2,190,703	)

The California Department of Insurance (“CA DOI”) conducts periodic financial examinations of Crusader. During 2017, the CA DOI completed a financial examination of Crusader’s December 31, 2015, statutory financial statements. On June 23, 2017, a report of examination was officially filed and became part of the records of the CA DOI. The Company has complied with all comments and recommendations identified in the report of examination, and none of the issues in that report of examination had any material effect on Crusader.

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The Company believes that Crusader’s statutory capital and surplus are sufficient to support the written premium guidelines established by the NAIC.

Crusader is restricted in the amount of dividends it may pay to its parent in any 12-month period without prior approval of the CA DOI. Presently, without prior regulatory approval, Crusader may pay a dividend in any 12-month period to Unico up to the greater of (a) 10% of its statutory surplus or (b) its statutory net income for the preceding calendar year. Based on Crusader’s statutory surplus for the year ended December 31, 2020, the maximum dividend that could be made by Crusader to Unico without prior regulatory approval in 2021 is $2,689,351. During the years ended December 31, 2020 and 2019, Crusader issued cash dividends of $4,000,000 and $2,000,000 to Unico, respectively.

The NAIC uses a Risk-Based Capital (“RBC”) Model Law for property and casualty companies. The RBC Model Law is intended to provide standards for calculating a variable regulatory capital requirement related to a company’s current operations and its risk exposures (asset risk, underwriting risk, credit risk and off-balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for regulators that establishes uniform capital levels and specific authority levels for regulatory intervention when an insurer falls below minimum capital levels. The RBC Model Law specifies four distinct action levels at which a regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company’s RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. Crusader’s adjusted capital at December 31, 2020, was 278% of authorized control level RBC.

Crusader’s adjusted capital below 300% as of December 31, 2020, and combined loss ratio in excess of 120% for the year ended December 31, 2020, triggered a company action level event. Crusader has submitted to the insurance commissioner of the CA DOI a comprehensive plan to increase the adjusted capital above 300% to resolve the company action level event and is awaiting response from the CA DOI.

NOTE 15 – STOCK PLANS

The Unico American Corporation 2011 Incentive Stock Plan (“2011 Plan”) covers 200,000 shares of the Company’s common stock (subject to adjustment in the case of stock splits, reverse stock splits, stock dividends, etc.) and was approved by shareholders on May 26, 2011. The 2011 Plan terminates on May 13, 2021. Options to purchase 8,760 and 91,240 shares of common stock were granted under the 2011 Plan to one non-executive employee during the years ended December 31, 2012 and 2011, respectively. Due to termination of the employee during 2017, all options granted under the 2011 Plan became null and void.

No options were granted to employees or non-employees during the years ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, there was no unrecognized compensation cost. There were no stock options outstanding at December 31, 2020 and 2019. As of December 31, 2020, 100,000 share of the Company’s common stock were available under the 2011 Plan.

NOTE 16 – TAXES ON INCOME

The provision for taxes on income consists of the following:

	Year ended December 31
	2020			2019
Federal expense (benefit):
Current	$	—		$	13,809
Deferred		3,566,840			(51,809	)
Total tax expense (benefit)	$	3,566,840		$	(38,000	)

State expense (benefit):
Current	$	8,800		$	8,800
Deferred		(28,042	)		(104,987	)
Total tax benefit	$	(19,242	)	$	(96,187	)

Total expense (benefit):
Current	$	8,800		$	22,609
Deferred		3,538,798			(156,796	)
Total tax expense (benefit)	$	3,547,598		$	(134,187	)

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The income tax provision reflected in the Consolidated Statements of Operations is different than the expected federal income tax rate of 21% on income as shown in the following table:

	Year ended December 31
	2020			2019

Computed income tax benefit at 21%	$	(3,768,138	)	$	(682,477	)
Tax effect of:
State tax benefit, net of federal tax benefit		(572,511	)		(139,765	)
Change in valuation allowance – state net operating losses		557,310			63,777
Change in valuation allowance – federal		7,319,959			600,000
Other, including nondeductible expenses		10,920			23,989
Other – prior year true up		58			289
Income tax expense (benefit)	$	3,547,598		$	(134,187	)

Significant components of the Company’s net deferred tax assets and liabilities are as follows:

	Year ended December 31
	2020		2019
Deferred tax assets:
Discount on loss reserves	$	531,845	$	329,065
Unearned premium		759,659		747,217
Unearned commission income		438,574		432,969
Unearned policy fee income		127,293		145,533
Net operating loss carryforwards		7,769,603		4,145,783
State net operating loss carryforwards		2,402,438		1,931,665
Bad debt reserve		333,649		336,075
Other		237,803		205,292
Total gross deferred tax assets		12,600,864		8,273,599
Less valuation allowance		10,557,080		2,531,665
Total deferred tax assets	$	2,043,784	$	5,741,934

Deferred tax liabilities:
Policy acquisition costs	$	858,705	$	892,349
State tax on undistributed insurance company earnings		84,219		343,735
Federal tax liability on state deferred tax assets		91,277		90,461
Depreciation and amortization		266,880		175,524
Unrealized gains on investments		742,703		314,433
Total deferred tax liabilities	$	2,043,784	$	1,816,502

Net deferred tax assets	$	—	$	3,925,432

The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases, and for tax credits. The Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future profitability, reversal patterns of recorded deferred tax assets and deferred tax liabilities, and capital gain generation. Some or all of the Company’s deferred tax assets could expire unused if the Company is unable to generate taxable income of a sufficient nature in the future to utilize them.

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The current federal effected state tax rate is 6.98%.

The Company and its subsidiaries file consolidated federal and state income tax returns. Pursuant to the tax allocation agreement, Crusader and AAC are allocated taxes, or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The Company files income tax returns under U.S. federal and various state jurisdictions. The Company is subject to examination by U.S. federal income tax authorities for tax returns filed starting at taxable year 2017 and California state income tax authorities for tax returns filed starting at taxable year 2016. There are no ongoing examinations of income tax returns by federal or state tax authorities.

As a California insurance company, Crusader is obligated to pay a premium tax on direct written premium in all states where Crusader is admitted. Premium taxes are deferred and amortized as the related premium is earned. The premium tax is in lieu of state franchise taxes and is not included in the provision for state taxes.

As of December 31, 2020, the Company had no unrecognized tax benefits, no unrecognized additional liabilities or reduction in deferred tax asset, and no uncertain tax positions. In addition, the Company had not accrued interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of federal income tax expense.

NOTE 17 – REPURCHASE OF COMMON STOCK – EFFECT ON STOCKHOLDERS’ EQUITY

On August 10, 2020, the Board authorized a share repurchase program (the “2020 Program”) for up to $5,000,000 of the currently outstanding shares of the Company’s common stock. The 2020 Program is effective immediately and replaces the Company’s existing share repurchase program that was adopted by the Board on December 19, 2008 (the “2008 Program”) to acquire from time to time up to an aggregate of 500,000 shares of the Company’s common stock. The purchases under the 2020 Program may be made from time to time in the open market, through block trades, 10b5-1 trading plans, privately negotiated transactions or otherwise and in accordance with applicable laws, rules and regulations. The timing and actual number of the shares repurchased under the 2020 Program will depend on a variety of factors including price, market conditions and corporate and regulatory requirements. The Company intends to fund the share repurchases under the 2020 Program from cash on hand. The 2020 Program does not commit the Company to repurchase shares of its common stock and it may be amended, suspended or discontinued at any time. The Company repurchased its shares under the 2020 Program and 2008 Program in unsolicited transactions as follows:

	December 31		December 31
	2020		2019

2020 Program
Number of shares repurchased		857		—
Cost of shares repurchased
Allocated to retained earnings	$	4,071	$
Allocated to capital		422		—
Total cost of shares repurchased	$	4,493	$	—

2008 Program
Number of shares repurchased		978		383
Cost of shares repurchased
Allocated to retained earnings	$	5,760	$	2,108
Allocated to capital		480		188
Total cost of shares repurchased	$	6,240	$	2,296

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NOTE 18 – RELATED PARTY TRANSACTIONS

Wish Properties Inc., an office of Wish Sotheby’ International Reality, owned by Ernest A. Wish, a member of the Company’s Board of Directors, leased 4,189 square feet at the Calabasas building. The lease commenced on July 13, 2017 and had a six month term. Effective January 8, 2018, the lease was amended to extend its termination date until January 11, 2019, and to allow an option to extend the term of the lease for three additional twelve month terms commencing on January 11, 2019. The lease ended on February 11, 2019. The monthly lease payment was $8,378 through February 11, 2019. The Company believes the terms of the lease were at least as favorable to the Company as could have been obtained from other third parties.

Altonji Consulting, LLC, owned by Gerard Altonji, a member of the Company’s Board of Directors, was engaged to provide consulting services for a $20,000 fee of which $15,000 was paid during the year ended December 31, 2020.

NOTE 19 – LOSS PER SHARE

A reconciliation of the numerator and denominator used in the basic and diluted loss per share calculation is presented as follows:

	Year ended December 31
	2020			2019
Basic Loss Per Share
Net loss numerator	$	(21,491,113	)	$	(3,115,703	)

Weighted average shares outstanding denominator		5,305,829			5,306,879

Per share amount	$	(4.05	)	$	(0.59	)

Diluted Loss Per Share
Net loss numerator	$	(21,491,113	)	$	(3,115,703	)

Weighted average shares outstanding		5,305,829			5,306,879
Effect of diluted securities		—			—
Diluted shares outstanding denominator		5,305,829			5,306,879

Per share amount	$	(4.05	)	$	(0.59	)

As of December 31, 2020 and 2019, the Company had no common share equivalents that were excluded in the diluted loss per share calculation for years ended December 31, 2020 and 2019.

NOTE 20 – SUBSEQUENT EVENTS

The Company evaluated subsequent events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued. Except as disclosed below and elsewhere, no events have occurred subsequent to December 31, 2020 requiring disclosure or recording in the consolidated financial statements.

On February 12, 2021, the Company, through Crusader, completed the sale of the Company’s headquarters at 26050 Mureau Road, Calabasas, California 91302, for approximately $12,695,000 (the “Sale”) to Mureau Road, LLC (“Mureau Road”), a subsidiary of Alliant Capital, Ltd. (“Alliant”). Mureau Road and Alliant do not have any material relationship with the Company or its subsidiaries, other than through the Sale and the Lease (as defined below) transactions. The Company recognized a gain of $4,359,982 and incurred selling costs of $666,124 on the sale of the building.

On February 12, 2021, the Standard-Multi Tenant Office Lease – Net, dated January 28, 2021 (the “Lease”), by and between Crusader and Mureau Road became effective in connection with the completion of the Sale. The Company has agreed to a one-year lease with Alliant for the second floor of the Property with an initial base rent of approximately $52,637 per month, where the Company will continue to operate its corporate headquarters.

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NOTE 21 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized unaudited quarterly financial data for each of the calendar years 2020 and 2019 is as follows:

	Comparable Period by Quarter Ended
	March 31			June 30			September 30			December 31
Calendar Year 2020
Total revenues	$	8,005,181		$	7,976,227		$	8,259,686		$	8,319,017
Loss before taxes	$	(1,145,498	)	$	(384,562	)	$	(14,345,916	)	$	(2,067,539	)
Net loss	$	(1,043,826	)	$	(434,814	)	$	(17,940,488	)	$	(2,071,985	)
Loss per share: Basic	$	(0.20	)	$	(0.08	)	$	(3.38	)	$	(0.39	)
Diluted	$	(0.20	)	$	(0.08	)	$	(3.38	)	$	(0.39	)

Calendar Year 2019
Total revenues	$	7,135,474		$	7,795,098		$	8,258,966		$	8,183,276
Income (loss) before taxes	$	(811,732	)	$	(342,670	)	$	330,726		$	(2,426,214	)
Net income (loss)	$	(671,074	)	$	(276,677	)	$	212,467		$	(2,380,419	)
Income (loss) per share: Basic	$	(0.13	)	$	(0.05	)	$	0.04		$	(0.45	)
Diluted	$	(0.13	)	$	(0.05	)	$	0.04		$	(0.45	)

NOTE 22 – SUPPLEMENTARY INFORMATION ON LOSS AND ALAE DEVELOPMENT (UNAUDITED)

The following table presents cumulative incurred losses and ALAE, net of reinsurance, for years ended December 31:

Accident
Year		2011 (1)		2012 (1)		2013 (1)		2014 (1)		2015 (1)		2016 (1)		2017 (1)		2018 (1)		2019 (1)		2020

	2011		18,120,563		17,900,250		17,605,460		17,014,895		17,879,595		18,224,634		19,187,240		19,094,732		19,156,281		19,150,281
	2012				18,511,598		19,532,022		18,895,666		18,344,175		18,050,131		17,914,837		18,235,335		18,355,031		18,327,346
	2013						19,570,946		20,118,343		20,323,841		21,742,580		22,798,398		22,397,394		22,859,132		22,802,931
	2014								16,884,731		15,394,995		14,930,960		17,640,211		18,034,749		17,898,306		18,048,285
	2015										20,452,199		20,840,034		22,471,512		21,707,615		23,006,844		24,495,614
	2016												21,646,663		22,908,016		24,126,775		25,677,378		26,337,621
	2017														21,914,736		23,453,130		23,876,588		25,091,934
	2018																19,048,233		18,099,500		20,670,880
	2019																		17,349,941		19,182,851
	2020																				24,302,958

(1) The information for the years 2011 through 2019 is presented as unaudited required supplementary information.

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The following table presents cumulative paid losses and ALAE, net of reinsurance, for years ended December 31:

Accident
Year		2011 (1)		2012 (1)		2013 (1)		2014 (1)		2015 (1)		2016 (1)		2017 (1)		2018 (1)		2019 (1)		2020

	2011		4,719,943		8,608,287		11,212,490		14,251,525		16,115,802		17,422,583		19,027,232		19,087,866		19,133,302		19,150,278
	2012				6,719,982		11,673,621		13,411,125		15,369,629		16,734,967		17,265,513		17,638,646		18,001,581		18,020,565
	2013						7,594,731		10,656,777		14,319,057		19,067,334		21,415,490		21,875,978		22,364,215		22,802,275
	2014								3,826,263		6,082,893		9,173,947		14,556,687		16,843,128		17,487,722		17,806,537
	2015										6,263,796		11,151,955		14,978,639		17,700,688		20,148,880		21,502,400
	2016												7,435,120		12,009,273		15,916,432		21,438,785		23,326,143
	2017														6,405,641		11,503,228		15,289,400		18,869,369
	2018																4,959,689		9,254,754		12,129,118
	2019																		4,292,275		7,603,418
	2020																				6,004,292

(1) The information for the years 2011 through 2019 is presented as unaudited required supplementary information.

The following table presents average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2020:

Years	1		2		3		4		5		6		7		8		9		10

	26.6	%	18.8	%	14.9	%	15.8	%	8.3	%	3.3	%	1.9	%	0.7	%	0.4	%	0.4	%

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives; and, therefore, management was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission rules, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies that may be identified during this process.

Management’s Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control – Integrated Framework (2013).” Based upon its assessment, the Company’s management believes that as of December 31, 2020, the Company’s internal control over financial reporting is effective based on these criteria.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information in response to Item 10 is incorporated by reference from the Company’s definitive proxy statement to be used in connection with the Company’s Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.

Item 11. Executive Compensation.

Information in response to Item 11 is incorporated by reference from the Company’s definitive proxy statement to be used in connection with the Company’s Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters.

Information in response to Item 12 is incorporated by reference from the Company’s definitive proxy statement to be used in connection with the Company’s Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information in response to Item 13 is incorporated by reference from the Company’s definitive proxy statement to be used in connection with the Company’s Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.

Item 14. Principal Accountant Fees and Services.

Information in response to Item 14 is incorporated by reference from the Company’s definitive proxy statement to be used in connection with the Company’s Annual Meeting of Shareholders pursuant to Instruction G(3) of Form 10-K.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements, Schedules and Exhibits:

1. Financial statements:

The consolidated financial statements for the fiscal year ended December 31, 2020, are contained herein as listed in the Index to Consolidated Financial Statements on Page 56.

2. Financial schedules:

Schedule II - Condensed Financial Information of Registrant

Schedule III - Supplemental Insurance Information

Schedules other than those listed above are omitted, since they are not applicable, not required, or the information required being set forth is included in the consolidated financial statements or notes.

3. Exhibits:

3.1	Articles of Incorporation of Registrant, as amended. (Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1984.)
3.2	Second Amended and Restated Bylaws, as amended, of Registrant. (Incorporated herein by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed on July 16, 2019.)
3.3	Amendment No. 1 to Second Amended and Restated Bylaws effective December 9, 2019. (Incorporated herein by reference to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on December 11, 2019.)
3.4	Amendment No. 2 to Second Amended and Restated Bylaws effective January 10, 2020. (Incorporated herein by reference to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on January 14, 2020.)
10.1	The 2011 Incentive Stock Option Plan of Unico American Corporation. (Incorporated by reference to Annex A to Registrant’s Proxy Statement for the Annual Meeting of Shareholders held on May 26, 2011.)#
10.2	Job offer to Michael Budnitsky dated August 12, 2014. (Incorporated herein by reference to Exhibit 10.1 of Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.)#
10.3	Form of Indemnification Agreement. (Incorporated herein by reference to Exhibit 10.23 to the Registrant’s Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-K for the fiscal year ended December, 31, 2017, filed on April 27, 2018.)#
10.4	Letter Agreement, dated August 10, 2020, from Unico American Corporation to Cary L. Cheldin (Incorporated herein by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on August 12, 2020).
10.5	Standard Multi-Tenant Office Lease – Net, dated January 28, 2021, by and among Crusader Insurance Company and Mureau Road, LLC.
10.6	Rescission Agreement to the Quota Share Reinsurance Agreement dated April 1, 2020, by and among Crusader Insurance Company and United Specialty Insurance Company.
10.7	Rescission Agreement to the General Agency Agreement dated April 1, 2020, by and among Unifax Insurance Systems, Inc. and United Specialty Insurance Company.
10.8*	Quota Share Reinsurance Agreement, effective April 1, 2020, by and between Crusader Insurance Company and United Specialty Insurance Company.
10.9*	Surplus Line Broker Agreement, effective April 1, 2020, by and between Unifax Insurance Systems, Inc. and United Specialty Insurance Company.
10.10*	Claims Administration Agreement, effective as of April 1, 2020, by and among U.S. Risk Managers, Inc., a subsidiary of the Registrant, and United Specialty Insurance Company.
10.11	Reinsurance trust agreement entered into by and among Crusader Insurance Company and United Specialty Insurance Company held by Comerica Bank & Trust, National Association Trustee, effective April 1, 2020. (Incorporated herein by reference to Exhibit 10.3 of Registrant’s Current Report on Form 10-Q filed on May 15, 2020).
21	Subsidiaries of Registrant. (Incorporated herein by reference to Exhibit 22 to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1984.)
31.1	Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following information from the Annual Report on Form 10-K for the fiscal year ended December 31, 2020, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Cash Flows; (v) Consolidated Statements of Changes in Stockholder’s Equity; and (vi) the Notes to Consolidated Financial Statements.**

# Indicates management contract or compensatory plan or arrangement.

* Certain confidential information has been excluded from this exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.

** XBRL information is furnished and deemed not filed as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act and otherwise is not subject to liability under these sections.

Item 16. Form 10-K Summary

Not applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

UNICO AMERICAN CORPORATION

By: /s/ Michael Budnitsky

Michael Budnitsky

President and Chief

Executive Officer

Date: March 31, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the dates indicated by the following persons on behalf of the Registrant and in the capacities and on the dates indicated, including a majority of the Board of Directors of the Registrant.

Signature	Title	Date

/s/ Michael Budnitsky Michael Budnitsky	Chief Executive Officer, President, Treasurer, Chief Financial Officer, Secretary (Principal Executive Officer, Principal Accounting Officer and Principal Financial Officer)	March 31, 2021


/s/ Gerard J. Altonji	Director	March 31, 2021
Gerard J. Altonji

/s/ Erwin Cheldin Erwin Cheldin	Director	March 31, 2021
/s/ John B. Keefe, Sr.	Director	March 31, 2021
John B. Keefe, Sr.
/s/ Joycelyn M. Ray	Director	March 31, 2021
Joycelyn M. Ray
/s/ Steven L. Shea	Director	March 31, 2021
Steven L. Shea

/s/ Jeffrey M. Tuder	Director	March 31, 2021
Jeffrey M. Tuder

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SCHEDULE II

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS – PARENT COMPANY ONLY

AS OF DECEMBER 31

	2020		2019

ASSETS
Cash		48,098		253,890
Receivables due from subsidiaries		1,510,438		1,750,869
Investments in subsidiaries		31,530,860		51,463,601
Property and equipment, net		2,037,522		1,688,810
Other assets		257,471		153,576
Total Assets	$	35,384,389	$	55,310,746

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES

Accrued expenses and other liabilities	$	351,429	$	230,421
Total Liabilities	$	351,429	$	230,421

Commitments and contingencies

STOCKHOLDERS’ EQUITY

Common stock	$	3,771,767	$	3,772,669
Accumulated other comprehensive gain		2,637,347		1,182,867
Retained earnings		28,623,846		50,124,789
Total Stockholders’ Equity	$	35,032,960	$	55,080,325

Total Liabilities and Stockholders’ Equity	$	35,384,389	$	55,310,746

See accompanying notes to condensed financial information.

See accompanying report of independent registered accounting firm.

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SCHEDULE II (continued)

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF OPERATIONS – PARENT COMPANY ONLY

FOR THE YEARS ENDED DECEMBER 31

	2020			2019

REVENUES

Net investment income	$	65,882		$	120,193
Other income		7,088			10,818
Total Revenues		72,970			131,011

EXPENSES

General and administrative expenses		176,862			87,600
(Loss) Income before equity in net income of subsidiaries		(103,892	)		43,411
Equity in net loss of subsidiaries		(21,387,221	)		(3,159,114	)
Net Loss	$	(21,491,113	)	$	(3,115,703	)

See accompanying notes to condensed financial information.

See accompanying report of independent registered accounting firm.

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SCHEDULE II (continued)

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF COMPREHENSIVE LOSS – PARENT COMPANY ONLY

FOR THE YEARS ENDED DECEMBER 31

	2020			2019

Net loss	$	(21,491,113	)	$	(3,115,703	)
Other changes in comprehensive income (loss) :
Changes in unrealized gains on securities classified as available-for-sale arising during the period, net of income tax		1,454,481			2,282,902
Comprehensive Loss	$	(20,036,632	)	$	(832,801	)

See accompanying notes to condensed financial information.

See accompanying report of independent registered accounting firm.

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SCHEDULE II (continued)

UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY

FOR THE YEARS ENDED DECEMBER 31

	2020			2019

Cash flows from operating activities:
Net loss	$	(21,491,113	)	$	(3,115,703	)
Adjustments to reconcile net loss to net cash from operations:
Undistributed equity in net loss of subsidiaries		21,387,221			3,159,114
Depreciation and amortization, gross of asset retirement		468,370			294,039
Accrued expenses and other liabilities		121,008			(1,365	)
Other assets		(103,895	)		127,081
Net Cash Provided by Operating Activities		381,591			463,166

Cash flows from investing activities:
Purchases of property and equipment, gross of asset retirement		(817,082	)		(1,218,385	)
Dividends received from subsidiaries		4,000,000			2,000,000
Net change in payables and receivables from subsidiaries		(3,759,568	)		(1,334,836	)
Net Cash Used by Investing Activities		(576,650	)		(553,221	)

Cash flows from financing activities:
Repurchase of common stock		(10,733	)		(2,296	)
Net Cash Used by Financing Activities		(10,733	)		(2,296	)

Net decrease in cash		(205,792	)		(92,351	)
Cash at beginning of year		253,890			346,241
Cash at End of Year	$	48,098		$	253,890

See accompanying notes to condensed financial information.

See accompanying report of independent registered accounting firm.

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UNICO AMERICAN CORPORATION

AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TO CONDENSED FINANCIAL INFORMATION

The accompanying condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.

Dividends

Unico received cash dividends from Crusader of $4,000,000 and $2,000,000 in the years ended December 31, 2020 and 2019, respectively.

Federal Income Taxes

The Company and its wholly owned subsidiaries file consolidated federal and combined California income tax returns. Pursuant to a tax allocation agreement, Crusader and AAC are allocated taxes, or tax credits in the case of losses, at current corporate rates based on their own taxable income or loss. The payable to subsidiaries includes their income tax receivable or liability included in the consolidated return.

Reimbursement of Expenses

Unico was reimbursed certain expenses by its subsidiaries. These expenses included depreciation and amortization of $468,370 and $294,038 for the years ended December 31, 2020 and 2019, respectively.

Profit Sharing Plan

The Unico American Corporation Profit Sharing Plan (“Plan”) covers Company’s employees who are at least 21 years of age and have met certain service and eligibility requirements. Unico American Corporation is the Plan sponsor and the Plan administrator. Fidelity Management Trust Company is the Plan trustee. The Plan is intended to be a qualified retirement plan under the Internal Revenue Code. As required by the Plan, on an annual basis, the Company must contribute 3% of participants’ eligible compensation to the account of each participant. In addition, pursuant to the terms of the Plan, the Company may contribute to participants an amount determined by the Board of Directors. Under the Plan, participants have the option to elect to make 401(k) and Roth 401(k) deferral contributions which are not matched by the Company. Participants must be employed by the Company on the last day of the Plan year to be eligible for a contribution. Participants are eligible to request a distribution of their vested account balance upon death, retirement, minimum required distributions and termination of employment.

Commitments and Contingencies

The Company establishes reserves for lawsuits, regulatory actions, and other contingencies for which the Company is able to estimate its potential exposure and believes a loss is probable. For loss contingencies believed to be reasonably possible, the Company discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made.

See accompanying report of independent registered accounting firm.

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SCHEDULE III

UNICO AMERICAN CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION

			Future
			Benefits,								Benefits,		Amortization
	Deferred		Losses,								Claims,		of Deferred
	Policy		and Loss						Net		Losses and		Policy		Other		Net
		Acquisition		Adjustment		Unearned		Premium		Investment		Settlement		Acquisition		Operating		Written
		Cost		Expenses		Premium		Revenue		Income		Expenses		Costs		Costs		Premium

Year ended December 31, 2020	$	3,503,248	$	74,893,509	$	18,188,298	$	28,168,168	$	1,988,243	$	34,642,920	$	4,898,807	$	10,961,899	$	28,564,082
Year ended December 31, 2019	$	3,619,594	$	55,066,480	$	17,810,337	$	26,737,468	$	2,097,942	$	22,576,127	$	4,960,846	$	7,085,731	$	28,650,820

See accompanying report of independent registered accounting firm.

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EXHIBIT 10.5

STANDARD MULTITENANT OFFICE LEASE NET

1. Basic Provisions (“Basic Provisions”).

1.1 Parties. This Lease (“Lease”), dated for reference purposes only __________, is made by and between Mureau Road, LLC, a California LLC (“Lessor”) and Crusader Insurance Company (“Lessee”), (collectively the “Parties”, or individually a “Party”).

1.2 (a) Premises: That certain portion of the Project (as defined below), commonly known as (street address, suite, city, state): 26050 Mureau Road, 2nd Floor and a portion of the 1st Floor (see Addendum Paragraph 50), Calabasas, CA 91302 (“Premises”). The Premises are located in the County of Los Angeles, and consist of approximately 25,317 rentable square feet and approximately 22,230 useable square feet. In addition to Lessee’s rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, the exterior walls, the area above the dropped ceilings, or the utility raceways of the building containing the Premises (“Building”) or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the “Project.” The Project consists of approximately 46,899 rentable square feet. (See also Paragraph 2)

1.2 (b) Parking: 84 unreserved and 0 reserved vehicle parking spaces at a monthly cost of $0.00 per unreserved space and $0.00 per reserved space. (See Paragraph 2.6)

1.3 Term: ____ years ____ months (“Original Term”) commencing ___________ (“Commencement Date”) and ending January 31, 2022 (“Expiration Date”). (See also Paragraph 3 and 52)

1.4 Intentionally Omitted.

1.5 Base Rent: $56,963.25 per month (“Base Rent”), payable on the 1^st day of each month commencing March 1, 2021 . (See also Paragraph 4)

☐ If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. See Paragraph ____.

1.6 Lessee’s Share of Operating Expenses: Fifty-four percent (54%) (“Lessee’s Share”). In the event that that size of the Premises and/or the Project are modified during the term of this Lease, Lessor shall recalculate Lessee’s Share to reflect such modification.

1.7 Base Rent and Other Monies Paid Upon Execution:

(a) Base Rent: ________ for the period __________________.

(b) Operating Expenses: The current estimate for the period ____ is _____.

(c)

Security Deposit: $56,963.25 (“Security Deposit”). (See also Paragraph 5)

(d) Parking: ____ for the period _____.

(e) Other: ______ for _____.

(f) Total Due Upon Execution of this Lease: __________.

1.8 Agreed Use: General office use . (See also Paragraph 6)

1.9 Insuring Party. Lessor is the “Insuring Party”. (See also Paragraph 8)

1.10 Real Estate Brokers. (See also Paragraph 15 and 25)

1.11 Guarantor. The obligations of the Lessee under this Lease shall be guaranteed by N/A (“Guarantor”). (See also Paragraph 37)

1.12 Business Hours for the Building: 8:00 a.m. to 6:00 p.m., Mondays through Fridays (except Building Holidays) and 8:00 a.m. to 1:00 p.m. on Saturdays (except Building Holidays). “Building Holidays” shall mean the dates of observation of New Year’s Day, President’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and ______. Tenant shall have 24/7 access to the Building and the Premises.

1.13 Lessor Supplied Services. Notwithstanding the provisions of Paragraph 11.1, Lessor is NOT obligated to provide the following within the Premises:

☐ Janitorial Services

☐ Electricity

☐ Other (specify): _____

1.14 Attachments. Attached hereto are the following, all of which constitute a part of this Lease:

☒ an Addendum consisting of Paragraphs 50 through 55;

☐ a plot plan depicting the Premises;

☒ a current set of the Rules and Regulations;

☐ a Work Letter;

☐ a janitorial schedule;

☒ other (specify): Exhibit A (Floor Plans and Calculations).

2. Premises.

2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. While the approximate square footage of the Premises may have been used in the marketing of the Premises for purposes of comparison, the Base Rent stated herein is NOT tied to square footage and is not subject to adjustment should the actual size be determined to be different. NOTE: Lessee is advised to verify the actual size prior to executing this Lease.

2.2 Condition. Lessor shall deliver the Premises to Lessee in “As-Is” condition on the Commencement Date (“Start Date), with the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (“HVAC”).

2.3 Compliance. Building codes, applicable laws, covenants or restrictions of record, regulations, and ordinances (“Applicable Requirements”). NOTE: Lessee is responsible for determining whether or not the zoning and other Applicable Requirements are appropriate for Lessee’s intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Premises (“Capital Expenditure”), Lessor and Lessee shall allocate the cost of such work as follows:

(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof.

(b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor shall pay for such Capital Expenditure and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease or any extension thereof, on the date that on which the Base Rent is due, an amount equal to 1/144th of the portion of such costs reasonably attributable to the Premises. Lessee shall pay Interest on the balance but may prepay its obligation at any time.

(c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall either: (i) immediately cease such changed use or intensity of use and/or take such other steps as may be necessary to eliminate the requirement for such Capital Expenditure, or (ii) complete such Capital Expenditure at its own expense. Lessee shall not have any right to terminate this Lease.

2.4 Acknowledgements. Lessee acknowledges that: (a) it has been given an opportunity to inspect and measure the Premises, (b) Lessee has been advised by Lessor and/or Brokers to satisfy itself with respect to the size and condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee’s intended use, (c) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, (d) it is not relying on any representation as to the size of the Premises made by Brokers or Lessor, (e) the square footage of the Premises was not material to Lessee’s decision to lease the Premises and pay the Rent stated herein, and (f) neither Lessor, Lessor’s agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee’s ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor’s sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

2.5 Lessee as Prior Owner/Occupant. Prior to the Start Date, Lessee was the owner or occupant of the Premises.

2.6 Vehicle Parking. So long as Lessee is not in default, and subject to the Rules and Regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to rent and use the number of parking spaces specified in Paragraph 1.2(b) at the rental rate applicable from time to time for monthly parking as set by Lessor and/or its licensee.

(a) If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

2.7 Common Areas Definition. The term “Common Areas” is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Premises that are provided and designated by the Lessor from time to time for the general nonexclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including, but not limited to, common entrances, lobbies, corridors, stairwells, public restrooms, elevators, parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas.

2.8 Common Areas Lessee’s Rights. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the nonexclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor’s designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

2.9 Common Areas Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to adopt, modify, amend and enforce reasonable rules and regulations (“Rules and Regulations”) for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. The Lessee agrees to abide by and conform to all such Rules and Regulations, and shall use its best efforts to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the noncompliance with said Rules and Regulations by other tenants of the Project, but shall, upon the request of Lessee, use commercially reasonable efforts to enforce the Rules and Regulations against other tenants of the Project to the extent that the failure to so enforce materially adversely affects Lessee.

2.10 Common Areas Changes. Lessor shall have the right, in Lessor’s sole discretion, from time to time but provided that Lessee’s use of and access to the Premises shall not be materially adversely affected:

(a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways;

(b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available;

(d) To add additional buildings and improvements to the Common Areas;

(e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and

(f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate.

3. Term.

3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

3.2 Intentionally Omitted.

3.3 Delay In Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement
Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or change the Expiration Date. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 60 days after the Commencement Date, as the same may be extended under the terms of any Work Letter executed by the Parties, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee’s right to cancel shall terminate. If possession of the Premises is not delivered within 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

3.4 Lessee Compliance. Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.6). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

4. Rent.

4.1 Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent (“Rent”).

4.2 Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee’s Share of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions:

(a) “Operating Expenses” include all costs relating to the following:

(i) The cost of janitorial services;

(ii) The cost of electricity services not separately metered;

(b) Intentionally Omitted;

(d) Lessee’s Share of Operating Expenses is payable monthly on the same day as the Base Rent is due hereunder. The amount of such payments shall be based on Lessor’s estimate of the Operating Expenses. Within 60 days after written request (but not more than once each year) Lessor shall deliver to Lessee a reasonably detailed statement showing Lessee’s Share of the actual Operating Expenses for the preceding year. If Lessee’s payments during such year exceed Lessee’s Share, Lessor shall credit the amount of such overpayment against Lessee’s future payments. If Lessee’s payments during such year were less than Lessee’s Share, Lessee shall pay to Lessor the amount of the deficiency within 10 days after delivery by Lessor to Lessee of the statement.

(e) Operating Expenses shall not include any expenses paid by any tenant directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds.

4.3 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. All monetary amounts shall be rounded to the nearest whole dollar. In the event that any invoice prepared by Lessor is inaccurate such inaccuracy shall not constitute a waiver and Lessee shall be obligated to pay the amount set forth in this Lease. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge and Lessor, at its option, may require all future Rent be paid by cashier’s check. Payments will be applied first to accrued late charges and attorney’s fees, second to accrued interest, then to Base Rent and Operating Expenses, and any remaining amount to any other outstanding charges or costs.

5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount already due Lessor, for Rents which will be due in the future, and/or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor’s reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 90 days after the expiration or termination of this Lease, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. Lessor shall upon written request provide Lessee with an accounting showing how that portion of the Security Deposit that was not returned was applied. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. THE SECURITY DEPOSIT SHALL NOT BE USED BY LESSEE IN LIEU OF PAYMENT OF THE LAST MONTH’S RENT.

6. Use.

6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Other than guide, signal and seeing eye dogs, Lessee shall not keep or allow in the Premises any pets, animals, birds, fish, or replies. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements of the Building, will not adversely affect the mechanical, electrical, HVAC, and other systems of the Building, and/or will not affect the exterior appearance of the Building. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use.

6.2 Hazardous Substances.

(a) Reportable Uses Require Consent. The term “Hazardous Substance” as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, byproducts or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use such as ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

(c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or its agents, employees or contractors.

(d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or its agents, employees or contractors (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project not caused or contributed to by Lessee). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

(e) Lessor Indemnification. Except as otherwise provided in Paragraph 8.7, Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee’s occupancy or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor’s obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

(f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee’s occupancy, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities.

(g) Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor’s rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor’s desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor’s notice of termination.

6.3 Lessee’s Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendation of Lessor’s engineers and/or consultants which relate in any manner to the Premises, without regard to whether said Applicable Requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor’s written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. Likewise, Lessee shall immediately give written notice to Lessor of: (i) any water damage to the Premises and any suspected seepage, pooling, dampness or other condition conducive to the production of mold; or (ii) any mustiness or other odors that might indicate the presence of mold in the Premises.

6.4 Inspection; Compliance. Lessor and Lessor’s “Lender” (as defined in Paragraph 30) and consultants authorized by Lessor shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, after reasonable notice, for the purpose of inspecting and/or testing the condition of the Premises and/or for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see Paragraph 9.1) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of written request therefor. Lessee acknowledges that any failure on its part to allow such inspections or testing will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, should the Lessee fail to allow such inspections and/or testing in a timely fashion the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for the remainder to the Lease. The Parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to allow such inspection and/or testing. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such failure nor prevent the exercise of any of the other rights and remedies granted hereunder.

7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations.

7.1 Lessee’s Obligations. Notwithstanding Lessor’s obligation to keep the Premises in good condition and repair, Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any improvements within the Premises.

7.2 Lessor’s Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Operating Expenses), 6 (Use), 7.1 (Lessee’s Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the Premises, the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, fire alarm and/or smoke detection systems, fire hydrants, and the Common Areas.

7.3 Utility Installations; Trade Fixtures; Alterations.

(a) Definitions. The term “Utility Installations” refers to all floor and window coverings, air lines, vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, and plumbing in or on the Premises. The term “Trade Fixtures” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. “Lessee Owned Alterations and/or Utility Installations” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

(b) Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent. Lessee may, however, make nonstructural Alterations or Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof, ceilings, floors or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, do not trigger the requirement for additional modifications and/or improvements to the Premises resulting from Applicable Requirements, such as compliance with Title 24, and the cumulative cost thereof during this Lease as extended does not exceed $2000. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as built plans and specifications. For work which costs an amount in excess of one month’s Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting an additional Security Deposit with Lessor.

(c) Liens; Bonds. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days’ notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and costs.

7.4 Ownership; Removal; Surrender; and Restoration.

(a) Ownership. Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

(b) Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations installed by Lessee after the Commencement Date be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.

(c) Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or its agents, employees or contractors (except Hazardous Substances which were deposited via underground migration from areas outside of the Project) to the level specified in Applicable Requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any personal property of Lessee not removed on or before the Expiration Date or any earlier termination date shall be deemed to have been abandoned by Lessee and may be disposed of or retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

8. Insurance; Indemnity.

8.1 Intentionally Omitted.

8.2 Liability Insurance.

(a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000. Lessee shall add Lessor as an additional insured by means of an endorsement at least as broad as the Insurance Service Organization’s “Additional Insured Managers or Lessors of Premises” Endorsement. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “insured contract” for the performance of Lessee’s indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an endorsement on its liability policy(ies) which provides that its insurance shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

(b) Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

8.3 Property Insurance Building, Improvements and Rental Value.

(a) Building and Improvements. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground lessor, and to any Lender insuring loss or damage to the Building and/or Project. The amount of such insurance shall be equal to the full insurable replacement cost of the Building and/or Project, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee not by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $5,000 per occurrence.

(b) Rental Value. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“Rental Value insurance”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period.

(c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

(d) Lessee’s Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease.

8.4 Lessee’s Property; Business Interruption Insurance; Worker’s Compensation Insurance.

(a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations.

(b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

(c) Worker’s Compensation Insurance. Lessee shall obtain and maintain Worker’s Compensation Insurance in such amount as may be required by Applicable Requirements. Such policy shall include a ‘Waiver of Subrogation’ endorsement. Lessee shall provide Lessor with a copy of such endorsement along with the certificate of insurance or copy of the policy required by Paragraph 8.5.

(d) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee’s property, business operations or obligations under this Lease.

8.5 Insurance Policies. Insurance required herein shall be by companies maintaining during the policy term a “General Policyholders Rating” of at least A-, VII, as set forth in the most current issue of “Best’s Insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates with copies of the required endorsements evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 10 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or Lessor may increase his liability insurance coverage and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

8.7 Indemnity. Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, a Breach of the Lease by Lessee and/or the use and/or occupancy of the Premises and/or Project by Lessee and/or by Lessee’s employees, contractors or invitees. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.

8.8 Exemption of Lessor and its Agents from Liability. Except for injury or damage arising from the gross negligence or willful misconduct of Lessor or its agents, neither Lessor nor its agents shall be liable under any circumstances for: (i) injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places, (ii) any damages arising from any act or neglect of any other tenant of Lessor or from the failure of Lessor or its agents to enforce the provisions of any other lease in the Project, or (iii) injury to Lessee’s business or for any loss of income or profit therefrom. Instead, it is intended that Lessee’s sole recourse in the event of such damages or injury be to file a claim on the insurance policy(ies) that Lessee is required to maintain pursuant to the provisions of Paragraph 8.

8.9 Failure to Provide Insurance. Lessee acknowledges that any failure on its part to obtain or maintain the insurance required herein will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not maintain the required insurance and/or does not provide Lessor with the required binders or certificates evidencing the existence of the required insurance, the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to maintain the required insurance. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to maintain such insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to maintain the insurance specified in this Lease.

9. Damage or Destruction.

9.1 Definitions.

(a) “Premises Partial Damage” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month’s Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(b) “Premises Total Destruction” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month’s Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(c) “Insured Loss” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

(d) “Replacement Cost” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

(e) “Hazardous Substance Condition” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance, in, on, or under the Premises which requires restoration.

9.2 Partial Damage Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which is $5,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

9.3 Partial Damage Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense (subject to reimbursement pursuant to Paragraph 4.2), in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, except as provided in Paragraph 8.6.

9.5 Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

9.6 Abatement of Rent; Lessee’s Remedies.

(a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

(b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

9.7 Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or is not then required to be, used by Lessor.

10. Real Property Taxes.

10.1 Definitions. As used herein, the term “Real Property Taxes” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor’s right to other income therefrom, and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address. “Real Property Taxes” shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project, (ii) a change in the improvements thereon, and/or (iii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to this Lease.

10.2 Payment of Taxes. Except as otherwise provided in Paragraph 10.3, Lessor shall pay the Real Property Taxes applicable to the Project.

10.3 Additional Improvements. Operating Expenses shall not include Real Property Taxes specified in the tax assessor’s records and work sheets as being caused by additional improvements placed upon the Project by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at the time Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee’s request or by reason of any alterations or improvements to the Premises made by Lessor subsequent to the execution of this Lease by the Parties.

10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available. Lessor’s reasonable determination thereof, in good faith, shall be conclusive.

10.5 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee’s property.

11. Utilities and Services.

11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air conditioning, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use in connection with an office, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. Lessor shall also provide janitorial services to the Premises and Common Areas 5 times per week, excluding Building Holidays, or pursuant to the attached janitorial schedule, if any. Lessor shall not, however, be required to provide janitorial services to kitchens or storage areas included within the Premises.

11.2 Services Exclusive to Lessee. Notwithstanding the provision of Paragraph 11.1, Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If a service is deleted by Paragraph 1.13 and such service is not separately metered to the Premises, Lessee shall pay at Lessor’s option, either Lessee’s Share or a reasonable proportion to be determined by Lessor of all charges for such jointly metered service.

11.3 Hours of Service. Said services and utilities shall be provided during times set forth in Paragraph 1.12. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof.

11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security and trash services, over standard office usage for the Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee’s expense supplemental equipment and/or separate metering applicable to Lessee’s excess usage or loading.

11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any Utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or in cooperation with governmental request or directions.

11.6 Within fifteen days of Lessor’s written request, Lessee agrees to deliver to Lessor such information, documents and/or authorization as Lessor needs in order for Lessor to comply with new or existing Applicable Requirements relating to commercial building energy usage, ratings, and/or the reporting thereof.

12. Assignment and Subletting.

12.1 Lessor’s Consent Required.

(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “assign or assignment”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessor’s prior written consent.

(b) Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose.

(c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buyout or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. “Net Worth of Lessee” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

(d) An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice per Paragraph 13.1(d), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and nonfixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

(e) Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.

(f) Lessor may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is requested.

(g) Notwithstanding the foregoing, allowing a de minimis portion of the Premises, i.e. 20 square feet or less, to be used by a third party vendor in connection with the installation of a vending machine or payphone shall not constitute a subletting.

12.2 Terms and Conditions Applicable to Assignment and Subletting.

(a) Regardless of Lessor’s consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

(b) Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

(c) Lessor’s consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

(d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor.

(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500 as consideration for Lessor’s considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36)

(f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment, entering into such sublease, or entering into possession of the Premises or any portion thereof, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

(g) Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor exceeds Lessee’s then outstanding obligations any such excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

(b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

(d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

(e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

13. Default; Breach; Remedies.

13.1 Default; Breach. A “Default” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A “Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

(a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

(b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee. THE ACCEPTANCE BY LESSOR OF A PARTIAL PAYMENT OF RENT OR SECURITY DEPOSIT SHALL NOT CONSTITUTE A WAIVER OF ANY OF LESSOR’S RIGHTS, INCLUDING LESSOR’S RIGHT TO RECOVER POSSESSION OF THE PREMISES.

(c) The failure of Lessee to allow Lessor and/or its agents access to the Premises or the commission of waste, act or acts constituting public or private nuisance, and/or an illegal activity on the Premises by Lessee, where such actions continue for a period of 3 business days following written notice to Lessee. In the event that Lessee commits waste, a nuisance or an illegal activity a second time then, the Lessor may elect to treat such conduct as a noncurable Breach rather than a Default.

(d) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate or financial statements, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41, (viii) material safety data sheets (MSDS), or (ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

(e) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

(f) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph (f) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

(g) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

(h) If the performance of Lessee’s obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without liming Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

(a) Terminate Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover any damages to which Lessor is otherwise entitled. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

(b) Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

(c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, the cost of tenant improvements for Lessee paid for or performed by Lessor, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions,” shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance.

13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due shall bear interest from the 31st day after it was due. The interest (“Interest”) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

13.6 Breach by Lessor.

(a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

(b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent the actual and reasonable cost to perform such cure, provided, however, that such offset shall not exceed an amount equal to the greater of one month’s Base Rent or the Security Deposit, reserving Lessee’s right to seek reimbursement from Lessor for any such expense in excess of such offset. Lessee shall document the cost of said cure and supply said documentation to Lessor.

14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “Condemnation”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the rentable floor area of the Premises, or more than 25% of Lessee’s Reserved Parking Spaces, if any, are taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation paid by the condemnor for Lessee’s relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

15. Brokerage Fees.

15.1 Intentionally Omitted.

15.2 Intentionally Omitted.

15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker, agent or finder (other than the Brokers and Agents, if any) in connection with this Lease, and that no one other than said named Brokers and Agents is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

16. Estoppel Certificates.

(a) Each Party (as “Responding Party”) shall within 10 days after written notice from the other Party (the “Requesting Party”) execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current “Estoppel Certificate” form published by AIR CRE, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

(b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. In addition, Lessee acknowledges that any failure on its part to provide such an Estoppel Certificate will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, should the Lessee fail to execute and/or deliver a requested Estoppel Certificate in a timely fashion the monthly Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for remainder of the Lease. The Parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to provide the Estoppel Certificate. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to provide the Estoppel Certificate nor prevent the exercise of any of the other rights and remedies granted hereunder.

(c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall within 10 days after written notice from Lessor deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

17. Definition of Lessor. The term “Lessor” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

19. Days. Unless otherwise specifically indicated to the contrary, the word “days” as used in this Lease shall mean and refer to calendar days.

20. Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, or its partners, members, directors, officers or shareholders, and Lessee shall look to the Project, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor’s partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party.

23. Notices.

23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, or by email, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 72 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices delivered by hand, or transmitted by facsimile transmission or by email shall be deemed delivered upon actual receipt. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

23.3 Options. Notwithstanding the foregoing, in order to exercise any Options (see Paragraph 39), the Notice must be sent by Certified Mail (return receipt requested), Express Mail (signature required), courier (signature required) or some other methodology that provides a receipt establishing the date the notice was received by the Lessor.

24. Waivers.

(a) No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent.

(b) The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

(c) THE PARTIES AGREE THAT THE TERMS OF THIS LEASE SHALL GOVERN WITH REGARD TO ALL MATTERS RELATED THERETO AND HEREBY WAIVE THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE TO THE EXTENT THAT SUCH STATUTE IS INCONSISTENT WITH THIS LEASE.

25. Disclosures Regarding The Nature of a Real Estate Agency Relationship.

(a) When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

(i) Lessor’s Agent. A Lessor’s agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

(ii) Lessee’s Agent. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

(iii) Agent Representing Both Lessor and Lessee. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee. (b) Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not, without the express permission of the respective Party, disclose to the other Party confidential information, including, but not limited to, facts relating to either Lessee’s or Lessor’s financial position, motivations, bargaining position, or other personal information that may impact rent, including Lessor’s willingness to accept a rent less than the listing rent or Lessee’s willingness to pay rent greater than the rent offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional. Both Lessor and Lessee should strongly consider obtaining tax advice from a competent professional because the federal and state tax consequences of a transaction can be complex and subject to change.

(b) Brokers have no responsibility with respect to any default or breach hereof by either Party. The Parties agree that no lawsuit or other legal proceeding involving any breach of duty, error or omission relating to this Lease may be brought against Broker more than one year after the Start Date and that the liability (including court costs and attorneys’ fees), of any Broker with respect to any such lawsuit and/or legal proceeding shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

(c) Lessor and Lessee agree to identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential.

26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Holdover Base Rent shall be calculated on a monthly basis. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. Signatures to this Lease accomplished by means of electronic signature or similar technology shall be legal and binding.

30. Subordination; Attornment; Non-Disturbance.

30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “Security Device”), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as “Lender”) shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

30.2 Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of the new owner, this Lease will automatically become a new lease between Lessee and such new owner, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior lessor.

30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a “Non-Disturbance Agreement”) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall, if requested by Lessee, use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any preexisting Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.

30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31. Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, “Prevailing Party” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

32. Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee’s use of the Premises. All such activities shall be without abatement of rent or liability to Lessee. In addition, Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee’s property or business in connection therewith.

33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

34. Signs. Lessor may place on the Premises ordinary “For Sale” signs at any time and ordinary “For Lease” signs during the last 6 months of the term hereof. Lessor may not place any sign on the exterior of the Building that covers any of the windows of the Premises. Except for ordinary “For Sublease” signs which may be placed only on the Premises, Lessee shall not place any sign upon the Project without Lessor’s prior written consent. All signs must comply with all Applicable Requirements.

35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

36. Consents. All requests for consent shall be in writing. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

37. Guarantor.

37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by AIR CRE.

37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

39. Options. If Lessee is granted any option, as defined below, then the following provisions shall apply.

39.1 Definition. “Option” shall mean: (a) the right to extend or reduce the term of or renew this Lease or to extend or reduce the term of or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase, the right of first offer to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

39.2 Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

39.4 Effect of Default on Options.

(a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

(c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease.

40. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. In the event, however, that Lessor should elect to provide security services, then the cost thereof shall be an Operating Expense.

41. Reservations.

(a) Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, (iii) to create and/or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessor may also: change the name, address or title of the Building or Project upon at least 90 days prior written notice; provide and install, at Lessee’s expense, Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; grant to any lessee the exclusive right to conduct any business as long as such exclusive right does not conflict with any rights expressly given herein; and to place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the Building or the Project or on pole signs in the Common Areas. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights. The obstruction of Lessee’s view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor.

(b) Lessor also reserves the right to move Lessee to other space of comparable size in the Building or Project. Lessor must provide at least 45 days prior written notice of such move, and the new space must contain improvements of comparable quality to those contained within the Premises. Lessor shall pay the reasonable out of pocket costs that Lessee incurs with regard to such relocation, including the expenses of moving and necessary stationary revision costs. In no event, however, shall Lessor be required to pay an amount in excess of two months Base Rent. Lessee may not be relocated more than once during the term of this Lease.

(c) Lessee shall not: (i) use a representation (photographic or otherwise) of the Building or Project or their name(s) in connection with Lessee’s business; or (ii) suffer or permit anyone, except in emergency, to go upon the roof of the Building.

42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. A Party who does not initiate suit for the recovery of sums paid “under protest” within 6 months shall be deemed to have waived its right to protest such payment.

43. Authority; Multiple Parties; Execution.

(a) If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authority.

(b) If this Lease is executed by more than one person or entity as “Lessee”, each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document.

(c) This Lease may be executed by the Parties in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

44. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

45. Offer. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

46. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable nonmonetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

47. Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

48. Arbitration of Disputes. An Addendum requiring the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease ☐ is ☒ is not attached to this Lease.

49. Accessibility; Americans with Disabilities Act. (a) The Premises:

☒ have not undergone an inspection by a Certified Access Specialist (CASp). Note: A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or Potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The Parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction related accessibility standards within the premises.

☐ have undergone an inspection by a Certified Access Specialist (CASp) and it was determined that the Premises met all applicable construction related accessibility standards pursuant to California Civil Code §55.51 et seq. Lessee acknowledges that it received a copy of the inspection report at least 48 hours prior to executing this Lease and agrees to keep such report confidential except as necessary to complete repairs and corrections of violations of construction related accessibility standards.

In the event that the Premises have been issued an inspection report by a CASp the Lessor shall provide a copy of the disability access inspection certificate to Lessee within 7 days of the execution of this Lease.

(b) Since compliance with the Americans with Disabilities Act (ADA) and other state and local accessibility statutes are dependent upon Lessee’s specific use of the Premises, Lessor makes no warranty or representation as to whether or not the Premises comply with ADA or any similar legislation. In the event that Lessee’s use of the Premises requires modifications or additions to the Premises in order to be in compliance with ADA or other accessibility statutes, Lessee agrees to make any such necessary modifications and/or additions at Lessee’s expense.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY AIR CRE OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING AND SIZE OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED.

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

Executed at:				Executed at:
On:				On:
By:		LESSOR: Mureau Road, LLC, a California LLC		By:	LESSEE: Crusader Insurance Company

By:	/s/ Shawn Horwitz			By:	/s/ Michael Budnitsky
Name Printed			Shawn Horwitz	Name Printed:		Michael Budnitsky
Title:			Manager	Title:		Treasurer, CFO & Secretary
Phone:				Phone:
Fax:				Fax:
Email:				Email:

By:				By:
Name Printed				Name Printed:
Title:				Title:
Phone:				Phone:
Fax:				Fax:
Email:				Email:
Address:				Address:
Federal ID No.:				Federal ID No.:

ADDENDUM TO STANDARD MULTI-TENANT OFFICE LEASE
Dated February 2, 2021
Lessor: Mureau Road, LLC, a California LLC
Lessee: Crusader Insurance Company
Property Address: 26050 Mureau Road, Calabasas, California.

Paragraph 50 — The Premises consists of the following spaces: Approximately 24,088 Rentable Square Feet (21,203 Usable Square Feet) on the Second Floor of the Building, and approximately 1,229 Rentable Square Feet (1,027 Usable Square Feet) on the First Floor of the Building (aka: “Suite F” & “Lessee’s Computer Server Rooms”), for a total of approximately 25,317 Rentable Square Feet (approximately 22,230 Usable Square Feet) (see Exhibit A (6 pages) from Heney Dong & Associates - Revised July 14, 2020).

Paragraph 51 — Notwithstanding anything to the contrary, the following areas on the First (1^st) Floor of the Building are NOT part of the common areas and may NOT be used unless approved by Lessor in writing: 1) Reception Desk, 2) Multi-Purpose Meeting Rooms, 3) Gym and Locker Room, 4) Kitchen and Patio Area, 5) Private Suites A, B, C, D and E (see Exhibit A) and 6) Utility Closets and Electrical Rooms; provided, however, that Lessee shall at all times have the right to access and use that portion of the Premises located on the First (1^st) Floor, as set forth in Paragraph 50 above.

Paragraph 52 — Notwithstanding anything to the contrary, the Lease Commencement Date shall be the earlier of: 1) February 12, 2021, or 2) The Close of Escrow Date between Buyer (Mureau Road, LLC) and Seller (Crusader Insurance Company). In the event the Close of Escrow Date is earlier than February 12, 2021, the daily rental rate shall be $2,034.40, which will be paid through escrow at closing.

Paragraph 53 — During the Lease term and starting on the Commencement Date, Lessee shall have the exclusive right to use all furniture, fixtures and equipment that was transferred from Lessee (as Seller) to Lessor (as Buyer) at the Close of Escrow (the “FF&E”). Lessee shall have no obligation to remove such FF&E from Premises prior to, on or subsequent to the expiration or earlier termination of the Lease.

Paragraph 54 — During the Lease term, in connection with their use of the Premises, Lessee and Lessee’s staff, employees, vendors, and all other parties related to and providing services to Lessee, shall, at no material cost to Lessee, follow all Centers for Disease Control Guidelines for

Paragraph 55 — Utilities and Janitorial: Lessee shall be responsible for 50% of the Building’s janitorial charges and 60% of the Building’s interior and exterior electricity charges. Such charges shall be in place of, and not in addition to, any amounts due from Lessee as “Lessee’s Share of Operating Expenses” as set forth in the Lease.

LESSOR (Mureau Road, LLC)			LESSEE (Crusader Insurance Company)
By:	/s/ Shawn Horwitz		By:	/s/ Michael Budnitsky
Name Printed:		Shawn Horwitz	Name Printed:			Michael Budnitsky
Its:	Manager		Its:		Treasurer, CFO & Secretary
Date:			Date:

RULES AND REGULATIONS

Dated February 2, 2021

Lessor: Mureau Road, LLC, a California LLC

Lessee: Crusader Insurance Company

Property Address: 26050 Mureau Road, Calabasas, California.

1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways.

2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety and reputation of the Project and its occupants.

3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Project.

4. Lessee shall not keep animals or birds within the Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same.

5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose.

6. Lessee shall not alter any lock or install new or additional locks or bolts.

7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein.

8. Lessee shall not deface the walls, partitions or other surfaces of the Premises or Project.

9. Lessee shall not suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Project.

10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor’s knowledge and consent, such consent not to be unreasonably withheld, conditioned, or delayed, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Project arising from any such activity.

11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor in its reasonable discretion.

12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and Building Holidays, and on other days between the hours of 6:00 P.M. and 8:00 A.M. of the following day. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry. Notwithstanding, Lessee shall have access to the Building and Premises 24 hours a day and 7 days a week.

13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost.

14. No awnings shall be installed or used by Lessee.

15. No Lessee, employee or invitee shall go upon the roof of the Building.

16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas.

17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor.

18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor’s written consent.

19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation.

20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency.

21. Lessor reserves the right to waive any one of these rules or regulations, and/or as to any particular lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such lessee.

22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required.

23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Project and its occupants. Lessee agrees to abide by these and such rules and regulations.

EXHIBIT 10.6

RESCISSION AGREEMENT TO THE

QUOTA SHARE REINSURANCE AGREEMENT
BY AND AMONG

UNITED SPECIALTY INSURANCE COMPANY

AND

CRUSADER INSURANCE COMPANY

AND

UNIFAX INSURANCE SYSTEMS, INC.

THIS RESCISSION AGREEMENT TO THE QUOTA SHARE REINSURANCE AGREEMENT (“Agreement”) dated April 1, 2020, is made and entered into by and among UNITED SPECIALTY INSURANCE COMPANY ("United Specialty"), CRUSADER INSURANCE COMPANY ("Crusader"), and UNIFAX INSURANCE SYSTEMS, INC. ("Unifax"). Crusader, United Specialty and Unifax are collectively the “Parties.”

RECITALS

WHEREAS, Crusader, United Specialty and Unifax are Parties to a certain Quota Share Reinsurance Agreement (“Reinsurance Agreement”) effective April 1, 2020. Pursuant to the Reinsurance Agreement, Crusader agrees to reinsurer 100% of commercial business policies underwritten by United Specialty which are produced by Unifax as the general agent of United Specialty.

WHEREAS, the parties now desire to unwind and rescind the transactions referenced in the Reinsurance Agreement.

NOW, THEREFORE, in consideration of the recitals and mutual covenants of the Parties, each of the Parties agrees as follows:

Rescission. The Parties hereby rescind the Reinsurance Agreement effective as of April 1, 2020.

Effect of Rescission. The Parties agree that the rescission of the Reinsurance Agreement is and shall be absolute, unconditional and without reservation of any rights, duties, privileges or obligations of any Party under the Reinsurance Agreement. The Parties further agree that by this Agreement, the Reinsurance Agreement shall be deemed and construed never to have existed. No Policies were deemed issued, and no premium was deemed written, collected or reported pursuant to the Reinsurance Agreement.

Miscellaneous.

(a)

Assignment. This Agreement shall be binding upon the Parties hereto, together with their respective successors. None of the Parties hereto may assign any of their rights or obligations under this Agreement.

(b)

Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(c)

Entire Agreement. This Agreement is the entire agreement between the parties and supersedes any and all previous agreements, written or oral, and amendments thereto with respect to the subject matter hereof.

(d)

Governing Law. This Agreement has been made and entered into in the State of Texas and the Agreement shall be subject to and construed under the laws of the State of Texas.

(e)

Notification to the Department. Crusader may notify the California Department of Insurance of the Rescission promptly after the execution of this Agreement.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized representatives have executed this Agreement as of the date first above written.

CRUSADER INSURANCE COMPANY

BY: /s/ Ronald A. Closser

ITS: President/CEO

DATE:11/21/2020

UNIFAX INSURANCE SYSTEMS, INC.

BY: /s/ Ronald A. Closser

ITS: President/CEO

DATE:11/21/2020

UNITED SPECIALTY INSURANCE COMPANY

BY: /s/ David Cleff

ITS: EVP

DATE:11/24/2020

EXHIBIT 10.7

RESCISSION AGREEMENT TO THE

GENERAL AGENCY AGREEMENT
BY AND AMONG

UNITED SPECIALTY INSURANCE COMPANY

AND

CRUSADER INSURANCE COMPANY

AND

UNIFAX INSURANCE SYSTEMS, INC.

THIS RESCISSION AGREEMENT TO THE GENERAL AGENCY AGREEMENT (“Agreement”) dated April 1, 2020, is made and entered into by and among UNITED SPECIALTY INSURANCE COMPANY ("United Specialty"), CRUSADER INSURANCE COMPANY ("Crusader"), and UNIFAX INSURANCE SYSTEMS, INC. ("Unifax"). Crusader, United Specialty and Unifax are collectively the “Parties.”

RECITALS

WHEREAS, Crusader, United Specialty and Unifax are Parties to a certain General Agency Agreement (“General Agency Agreement”) effective April 1, 2020. Pursuant to the General Agency Agreement, United Specialty appoints Unifax as the general agent of United Specialty related to commercial business underwritten by United Specialty and reinsured by Crusader.

WHEREAS, the parties now desire to unwind and rescind the transactions referenced in the General Agency Agreement.

NOW, THEREFORE, in consideration of the recitals and mutual covenants of the Parties, each of the Parties agrees as follows:

Rescission. The Parties hereby rescind the General Agency Agreement effective as of April 1, 2020.

Effect of Rescission. The Parties agree that the rescission of the General Agency Agreement is and shall be absolute, unconditional and without reservation of any rights, duties, privileges or obligations of any Party under the General Agency Agreement. The Parties further agree that by this Agreement, the General Agency Agreement shall be deemed and construed never to have existed. No Policies were deemed issued, and no premium was deemed written, collected or reported pursuant to the General Agency Agreement.

Miscellaneous.

(a)

(b)

Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(c)

(d)

Governing Law. This Agreement has been made and entered into in the State of Texas and the Agreement shall be subject to and construed under the laws of the State of Texas.

(e)

Notification to the Department. Crusader may notify the California Department of Insurance of the Rescission promptly after the execution of this Agreement.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized representatives have executed this Agreement as of the date first above written.

CRUSADER INSURANCE COMPANY

BY: /s/ Ronald A. Closser

ITS: President/CEO

DATE:11/21/2020

UNIFAX INSURANCE SYSTEMS, INC.

BY: /s/ Ronald A. Closser

ITS: President/CEO

DATE:11/21/2020

UNITED SPECIALTY INSURANCE COMPANY

BY: /s/ David Cleff

ITS: EVP

DATE:11/24/2020

EXHIBIT 10.8

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.

[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

QUOTA SHARE REINSURANCE AGREEMENT

THIS QUOTA SHARE REINSURANCE AGREEMENT (this "Agreement") is effective April 1, 2020, by and between CRUSADER INSURANCE COMPANY, a property and casualty insurer domiciled in the State of California with principal offices in Calabasas, California ("Reinsurer") and UNITED SPECIALTY INSURANCE COMPANY, an insurer domiciled in the State of Delaware and surplus lines insurer in the State of California with principal offices in Bedford, Texas ("Company”). The Company and the Reinsurer are collectively referred to as the Parties and each individual is referred to as a Party or by the defined term ascribed to them.

RECITALS

A. The Reinsurer has requested the Company to issue policies of insurance on a surplus lines basis as more specifically identified in this Agreement, which policies will be ceded to and reinsured with Reinsurer on a 100% quota share basis as provided for in this Agreement.

B. The Company is willing to issue policies of insurance which are the subject of this Agreement as placed with it on a surplus line basis through a surplus line broker Unifax Insurance Systems, Inc. (“Broker”) and to cede its duties, obligations and liabilities to the Reinsurer provided that the Company shall have no obligations or liabilities, including no business, credit or insurance risk whatsoever (save the risk of the Reinsurer’s insolvency), to the policyholders of the business produced by the Broker and reinsured to the Reinsurer; provided further, that any such obligation, duty or liability shall be assumed by the Reinsurer and the Reinsurer shall indemnify the Company against any loss, claim, or liability that may arise from or be related to the insurance placed by the Broker with the Company and reinsured with the Reinsurer pursuant to this Agreement. The Company understands that it has ultimate responsibility for the duties and obligations of a surplus lines insurer as set forth in the California Regulatory Provisions, provided, that either the Broker or the Reinsurer shall perform those certain duties and obligations that are legally delegable and shall indemnify and hold harmless the Company for any resulting losses, including with respect to Section 1.12 of the Broker Agreement. The Reinsurer further agrees that it shall make directly to the applicable parties any payments, arising out of or relating in any way to its obligations and liabilities arising from this Agreement and/or the subject insurance business produced hereunder, so that the Company shall not be required to make any such payments and then seek reimbursement from the Reinsurer.

C. The Reinsurer is not permitted to adjust claims on behalf of the Company. The Company is appointing U.S. Risk Managers, Inc., a California corporation (“U.S. Risk”) which is a licensed claims adjuster in the state of California to adjust and settle claims on its behalf pursuant to the terms of the Claims Administration Agreement of even date herewith between the Company and U.S. Risk (the “Claims Administration Agreement”). The Reinsurer pursuant to the terms of this Agreement will fund the Loss Fund Account provided for in the Claims Administration Agreement on behalf of the Company.

D. It is understood and agreed that the sole consideration provided by the Company, in exchange for the fees as agreed to, is to permit the Policies (as hereinafter defined), which are reinsured 100% under this Agreement to be issued in the name of the Company.

E. This Agreement provides for the complete and absolute duty and obligation of the Reinsurer to indemnify and hold the Company harmless from and against the business, credit and insurance risks for the business written or offered or related to such business by or on behalf of the Company and reinsured pursuant to this Agreement.

NOW, THEREFORE, in consideration of the Recitals and of the mutual covenants contained in this Agreement and upon the terms and conditions set forth below, the Parties agree as follows:

Article I
BUSINESS REINSURED

1.01

Business Reinsured:Article I Effective as of the effective date of this Agreement, the Company obligates itself to cede to the Reinsurer, and the Reinsurer obligates itself to accept, 100% of the Company's gross liability under all policies, certificates, contracts, binders, agreements or other proposals or evidences of insurance, new and renewal policies, binders, and contracts of insurance (hereinafter called "Policies") issued by and on behalf of the Company, in its sole discretion, as Property, General Liability, Commercial Multi-Peril Property (burglary and theft; inland marine), and Commercial Multi-Peril Liability (burglary and theft, garage, fidelity, trucking long-haul, trucking short-haul) and miscellaneous coverages as endorsed during the term of this Agreement, by or through the Broker retained by the Company at the request of the Reinsurer.

1.02

Policy Limits: The maximum policy limits for Policies are as follows:

Lines of Business		Maximum Policy Limits
1.0	Property	$[***] total insurable value
17.0	General Liability	$[*] per occurrence $[*] in the aggregate
5.1	Commercial Multi-peril Property – burglary and theft, inland marine, trucking long haul physical damage, trucking short haul physical damage	$[***] total insurable value
5.2	Commercial Multi-peril Liability – burglary and theft, garage, fidelity, trucking, long-haul, trucking, short-haul	$[*] per occurrence $[*] in the aggregate

1.03

Territory: The territory for the Policies reinsured shall be all United States jurisdictions in which the Company has authority to issue the Policies on a surplus lines basis, provided, that this Agreement shall provide reinsurance for any Policies written outside of such authorized territory.

1.04

Policy Term: The maximum term of a Policy shall be [***].

1.05

Maximum Premium Volume: The maximum annual premium volume of the Policies shall be $[***].

Article II
ORIGINAL CONDITIONS

2.01

Cession: Effective as of the Effective Date of this Agreement, the Company obligates itself to cede to the Reinsurer, and the Reinsurer obligates itself to accept, all of the Company's gross liability under all Policies issued by and on behalf of the Company by the Broker.

2.02

Business Ceded: Business ceded hereunder shall include every original policy, rewrite, renewal or extension (whether before or after the termination of this Agreement) required by applicable statute, or by rule or regulation of any policy of insurance ceded hereunder by the Company to the Reinsurer.

2.03

Liability of the Reinsurer: The liability of the Reinsurer shall commence obligatorily and simultaneously with that of the Company as soon as the Company becomes liable, and the premium on account of such liability shall be credited to the Reinsurer from the original date of the Company's liability.

2.04

Follow the Fortunes: All reinsurance for which the Reinsurer shall be liable, by virtue of this Agreement, shall be subject, in all respects, to the same rates, terms, conditions, interpretations, waivers, the exact proportion of premiums paid to the Company without any deduction for brokerage, and to the same modifications, alterations and cancellations, as the respective insurance of the Company to which such reinsurance relates, the true intent of this Agreement being that the Reinsurer shall, in every case to which this Agreement applies and in the proportion specified herein, follow the fortunes of the Company.

2.05

No Privity of Contract: Nothing herein shall in any manner create any obligations, establish any rights or create any direct right of action against the Reinsurer in favor of any third party, or other person not party to this Agreement; or create any privity of contract between the policyholders and the Reinsurer.

Article III
EXCLUSIONS

3.01

Exclusions: None.

Article

IV
COMMENCEMENT, TERMINATION, TERMS AND CONDITIONS

4.01

Effective Date: The effective date of this Agreement is at 12:01 a.m. Central Time, on April 1, 2020 (the “Effective Date”). This Agreement shall remain continuously in force until terminated according to the provisions set forth herein.

4.02

Termination: This Agreement may be terminated as follows:

(a) By either Party at any time, by providing at least ninety (90) days written notice to the other Party, such notice to be sent by certified mail, return receipt requested, postage prepaid;

(b) Immediately by mutual consent of the Company and the Reinsurer;

(c) Immediately upon written notice by the Reinsurer or the Company in the event of the cancellation or non-renewal of the surplus lines broker license of the Broker by the California Department of Insurance;

(d) By the Reinsurer after thirty (30) days written notice to the Broker and Company of the failure by the Broker to pay to the Reinsurer all payments of premiums due hereunder, provided, however, that in the event such payment is received by the Reinsurer prior to the date of cancellation stated in the Reinsurer's written notice this Agreement shall not be so terminated and said written notice shall be of no further force or effect. If the Reinsurer receives such late premium within a ten (10) day period following receipt of such notice, the Reinsurer shall inform the Company and the Broker of such receipt as soon as the premium is received and the termination of the Agreement for reason of default shall be rescinded;

(e) Immediately, upon written notice by the Company, if the Reinsurer or the Broker is found to be insolvent by a State Insurance Department or court of competent jurisdiction, or is placed in supervision, conservation, rehabilitation, or liquidation, or has a receiver or supervisor appointed.

(f) Immediately by the Reinsurer upon written notice to the Company, if the Company is found to be insolvent by a State Insurance Department or court of competent jurisdiction, or is placed in supervision, conservation, rehabilitation or liquidation, or has a receiver or supervisor appointed;

(f) By the Company immediately and automatically without prior written notice should the Delaware Department of Insurance or other regulatory agency of competent jurisdiction, require cancellation or disallow credit for the reinsurance ceded to Reinsurer pursuant to this Agreement;

(g) After thirty (30) days written notice by any party in the event that the Company or the Reinsurer mergers with or is acquired by or control of is acquired by any other company or corporation or changes a majority of its officers or board of directors during the term of this Agreement;

(h) As provided in Section 21.02 of this Agreement;

(i) Immediately by the Company if after the Effective Date of this Agreement: (i) the Reinsurer is required to secure its obligations under this Agreement pursuant to Article XX of this Agreement; or (ii) the Reinsurer is required to increase the amount of collateral posted pursuant to Article XX of this Agreement; or (iii) the Reinsurer fails to secure its obligations as required under this Agreement;

(j) Automatically and immediately, without notice upon cancellation or termination of the Broker Agreement between the Broker and the Company effective on the Effective Date hereof.

4.03

Reinsurance Coverage after Termination: When this Agreement terminates for any reason, reinsurance hereunder shall continue to apply to the business in force at the time and date of termination until expiration or cancellation of such business. It is understood that any Policies with effective dates prior to the termination date but issued after the termination date are covered under this Agreement. Additionally, the reinsurance hereunder shall continue to apply as to Policies, which must be issued or renewed, as a matter of state law or regulation or because a producing agent has not been timely canceled, until the expiration dates on said Policies.

4.04

Obligations upon Termination: Upon termination of this Agreement, the Reinsurer shall not be relieved of or released from any obligation created by or under this Agreement in relation to payment, expenses, reports, accounting or handling, which relate to insurance business reinsured under this Agreement.

(a) The Parties hereto expressly covenant and agree that they will cooperate with each other in the handling of all such run-off insurance business until all Policies have expired either by cancellation or by terms of such Policies and all outstanding losses and loss adjustment expenses have been settled. While by law and regulation, the Company recognizes its primary obligations to its policyholders, the Reinsurer recognizes that to the extent possible there shall be no cost to or involvement by the Company in servicing this run-off.

(b) All costs and expenses associated with the handling of such run-off business following the cancellation or termination of this Agreement shall be borne solely by the Reinsurer.

4.05

Assessments: In the event this Agreement is terminated, the Reinsurer shall remain liable to and shall, immediately upon request, reimburse the Company for any assessment made upon the Company. The Company shall likewise remain liable for, and account to the Reinsurer for any recovery of such assessment, or any credit allowed to it against its premium tax, applicable to the risks reinsured hereunder.

4.06

Termination on Run-off Basis: This Agreement provides for termination on a run-off basis. The relevant provisions of the Agreement shall apply to the business being run-off and shall survive the termination of this Agreement.

4.07

Termination on Cut-off Basis: At the option of the Company, this Agreement may be terminated on a cut-off basis. If the Company so elects, (i) the Reinsurer shall pay to the Company (or its designee) an amount equal to the sum of the ceded outstanding unearned premium as of the date of termination, and (ii) the Reinsurer shall incur no liability for losses occurring subsequent to the date of termination.

4.08

Responsibility for Notices: Upon termination of this Agreement, the Reinsurer shall on behalf of the Company cause the Broker to take those actions necessary, including, but not limited to, sending statutorily prescribed non-renewal notices to insureds in a timely manner to effectuate the intent that there be no renewals or new policies (but for those required by applicable law or regulation) after the termination of this Agreement.

Article

V
LOSS AND LOSS ADJUSTMENT EXPENSE

5.01

Liability for Losses and Loss Adjustment Expenses:

(a) All loss settlements made by the Company or U.S. Risk on behalf of the Company pursuant to the Claims Administration Agreement or pursuant to the terms of this Agreement, whether under strict policy conditions or by way of compromise, shall be unconditionally binding upon the Reinsurer in proportion to its participation, and the Reinsurer shall benefit proportionately in all salvage and recoveries.

(b) The Reinsurer shall assume and be liable for and pay on behalf of the Company, 100% of all losses incurred in connection with the risks covered by this Agreement, including, but not limited to, judgments (including interest thereon) and settlements in connection therewith.

(c) The Reinsurer shall also be liable for 100% of and pay on behalf of the Company all costs, expenses, and fees (including, but not limited to, attorney's fees) incurred by the Company in connection with the investigation or settlement or contesting the validity of claims or losses covered under this Agreement (this shall include but, of course, is not limited to, costs, expenses and fees resulting from a declaratory judgment or injunctive action brought by an insured or other person).

(d) The payment of such losses by the Reinsurer shall be made through U.S. Risk on behalf of the Company by making payments to the Loss Fund established by the U.S. Risk on behalf of the Company under the Claims Administration Agreement.

5.02

Monthly Accounting: The Reinsurer's 100% share of losses, expense and loss recovery shall be carried into the monthly accounting for which provision is hereinafter made.

5.03

Loss Settlements: All loss settlements, made on behalf of the Company by U.S. Risk, whether under strict policy conditions or by the way of compromise, shall be unconditionally binding upon the Reinsurer. However, should the Company be ordered or instructed by an applicable 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 shall be bound by and shall follow the order or instructions of such regulatory agency as though Reinsurer were the object of such order or instruction. The Reinsurer will exercise the authority granted hereunder in good faith and toward the end of paying any and all valid claims.

5.04

Records: All records pertaining to claims arising under insurance policies issued on behalf of the Company through or by the Broker subject to this Agreement shall be deemed to be jointly owned records of the Company and the Reinsurer, and shall be made available to the Company or the Reinsurer or their respective representatives or any duly appointed examiner for any state within the United States; and these records shall be kept in the State of California or such other jurisdiction as may be required by applicable state law or regulation. Notwithstanding the foregoing, the Reinsurer is authorized to maintain duplicate working files of all such records outside the State of California. The Company and the Reinsurer each agree that it will not destroy any such records in its possession without the prior written approval of the other party except that the Company shall not be required to retain files longer than required by the guidelines set forth by any applicable state department of insurance.

5.05

Claim Register:

(a) The Company shall cause U.S. Risk to, establish a separate claim register or method of recording claims arising under the Policies covered by this Agreement so that all claims may be segregated and identified separate and apart from other records of the Reinsurer, the Broker or U.S. Risk, with such claims register to identify each claim on an individual case basis both as to identify the insured(s) and the claimant, the reserve for loss and adjusting expense.

(b) Such claim register shall be kept in a manner whereby the Company can, at any time, determine the status of any claim arising under Policies covered by this Agreement. Such records shall reflect the amount of reserves established for the individual claim and the date when such reserve was established, and if closed, whether such claim was closed with or without payment, and if with payment, the amount paid thereon.

Article VI
REPORTS AND REMITTANCES

6.01

Reports: In lieu of the Company furnishing the Reinsurer with bordereaux showing the particulars of all reinsurances ceded hereunder, the Reinsurer shall furnish or cause to be furnished to the Company, within thirty (30) days after the close of each of the respective periods indicated below (on forms agreeable to the Parties), with monthly, quarterly and annual reports showing the following statistical data in respect to the business reinsured hereunder:

(a) Monthly, with the data segregated by major classes.

(i) Ceded premiums written.

(ii) Ceded unearned premiums.

(iii) Ceded losses paid.

(iv) Ceded adjustment expenses paid during this month.

(v) Losses outstanding.

(vi) Ceding fee due the Company.

(vii) Commission due the Broker.

(b) Annually, with the data segregated by major classes.

(i)

Annual summaries of net premiums written, net losses paid, net adjusting expenses paid during the year in such form so as to enable the Company to record such data in its annual convention statement. Such information is to be furnished not later than December 15th of the year being reported. In force and unearned premium segregated as to advance premiums, premiums running twelve (12) months or less from inception date of policy, and premiums running more than twelve (12) months from inception date of policy in such form as to enable the Company to record such data in its convention annual statement.

(ii)

Annual summaries of net premiums written by geographical location in such form as to enable the Company to record such premiums in its annual report to the applicable Catastrophe Property Insurance Association.

Statistical or other data as may be requested from time to time by regulatory authorities.

6.02

Additional Reports: In order to facilitate the handling of the business reinsured under this Agreement, the Reinsurer agrees to furnish the Company with any additional reports necessary to provide the information needed by the Company to prepare its monthly, quarterly and annual statements to regulatory authorities.

Article VII
ERRORS AND OMISSIONS

7.01

Errors and Omissions: The Company shall not be prejudiced in any way by any omission through clerical error, accident or oversight to cede to the Reinsurer any reinsurance rightly falling under the terms of this Agreement, or by erroneous cancellation, either partial or total, or any cession, or by omission to report, or by erroneously reporting any losses, or by any other error or omission, but any such error or omission shall be corrected immediately upon discovery.

7.02

Hold Harmless: Should the Company suffer any loss whatsoever arising out of, relating to or in connection with this Agreement, the Reinsurer shall assume loss for its own account and save and hold the Company harmless therefor.

Article VIII
PREMIUM AND COMMISSION

8.01

Premium to Reinsurer: In consideration of the acceptance by the Reinsurer of one hundred percent (100%) of the Company's liability on insurance business reinsured hereunder, the Reinsurer is entitled to one hundred percent (100%) of the Net Premiums (as hereinafter defined) received by the Broker or the Reinsurer on Policies reinsured less (i) the ceding fee allowed the Company of [***] of Net Premiums and Net Policy Fees, which shall be at least the Minimum Fee, plus all applicable assessments and state premium taxes or state surplus lines taxes, as applicable, (ii) the commission paid to the Broker and (iii) premium taxes paid by the policyholder on Policies subject to reinsurance hereunder. Notwithstanding anything else contained herein to the contrary, regardless of the amount of Net Premiums, the minimum ceding fee (the “Minimum Fee”) due the Company shall be (i) [***] for the first twenty-four month period after the effective date of the Agreement, plus the aforementioned assessments and state premium taxes and (ii) [***] for each twelve-month period thereafter during which the Agreement is in effect, plus the aforementioned assessments and state premium taxes. This Minimum Fee shall not be affected by the amounts of Net Premiums written in other twelve-month or twenty-four month, as applicable, and shall not be reduced by reason of payments in excess of the minimum in other periods. Upon termination of this Agreement, the Minimum Fee shall be prorated to the effective date of such termination unless there are Policies issued after the termination of this Agreement. In such cases, the Minimum Fee shall continue past the termination of this Agreement until such time as no further Policies are issued. The Minimum Fee for each period shall be paid within sixty (60) days of the end of each period. For these purposes, a policy's entire premium shall be applied to the period in which the policy is written. Should the Broker fail to pay any taxes (including premium taxes), ceding fees, bureau fees, penalties, assessments, or refunds of any unearned commissions and unearned premiums related to any premium financing, due pursuant to the business reinsured hereunder, the Reinsurer shall make such filings and/or payments within 60 days following the end of the month and pursuant to Article XIV.

8.02

Net Premium: "Net Premiums" shall mean the gross premiums charged on all original and renewal Policies written on behalf of the Company, less return premiums (excluding policy fees). Such amounts as provided in Section 5.09 of the Agency Agreement (as hereinafter defined) shall be paid to the Reinsurer or received from the Reinsurer by the Broker on behalf of the Company. “Net Policy Fees” shall mean gross policy fees, if any, charged on all original and renewal Policies written on behalf of the Company, less return policy fees.

8.03

Remittance: The Reinsurer will receive from the Broker on behalf of the Company the net written premiums collected (being defined as premiums received and/or due the Broker from the insured in a given month less return premiums), less the Broker’s commission. Should such balance be a negative amount, the Reinsurer and the Company will receive a report from the Broker of such amount and the Reinsurer shall pay the Broker on behalf of the Company such balance as soon as possible after the end of the month, after receipt and verification of the amount due as reported by the Broker.

Article IX
ACCESS TO RECORDS

9.01

Access to Records: The Reinsurer or its duly appointed representatives shall have free access at any and all reasonable times to such books and records of the Company, its departmental or branch offices, as shall reflect premium and loss transactions of the Company and/or the business produced hereunder, for the purpose of obtaining any and all information concerning this Agreement or the subject matter thereof. Likewise, the Company or its duly appointed representatives shall have free access at any and all reasonable times to such books and records of the Reinsurer, its departmental or branch offices as shall reflect premium and loss transactions of the Company and/or the business produced hereunder, for the purpose of obtaining any and all information concerning this Agreement or the subject matter hereof.

Article X
ARBITRATION

10.01

Arbitration: As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising between the Company and the Reinsurer with respect to this Agreement, or with respect to these Parties' obligations hereunder, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration.

10.02

Choice of Arbiter: One arbiter (an "Arbiter") shall be chosen by the Company and one Arbiter shall be chosen by the Reinsurer and an umpire (an "Umpire") shall be chosen by the Arbiters, all of whom shall be active or retired disinterested executive officers of property and casualty insurance or reinsurance companies.

10.03

Selection of Umpire: In the event that a party fails to choose an Arbiter within thirty (30) days following a written request by either party to the other to name an Arbiter, the party who has chosen its Arbiter may choose the unchosen Arbiter. Thereafter, the Arbiters shall choose an Umpire before entering upon arbitration. If the Arbiters fail to agree upon the selection for the Umpire within thirty (30) days following their appointment, each Arbiter shall name three nominees, of whom the other shall decline two, and the decision shall be made by drawing lots.

10.04

Venue and Binding Decision: Each party shall present its case to the Arbiters and Umpire within a reasonable amount of time after selection of the Umpire, unless the period is extended by the Arbiters and the Umpire in writing and/or at a hearing in Dallas, Texas. The Arbiters and Umpire shall consider this Agreement as an honorable engagement, as well as a legal obligation, and they are relieved of all judicial formalities and may abstain from following the strict rules of law regarding entering of evidence. The decision in writing by a majority of the Arbiters and Umpire when filed with the Parties shall be final and binding on the parties. Judgment upon the final decision of the Arbiters and Umpire may be entered in any court of competent jurisdiction.

10.05

Entire Dispute Subject to Arbitration: In the event of a dispute between the Company and the Reinsurer concerning this Agreement, the entire dispute between the Company and the Reinsurer shall be subject to arbitration as provided in this Article X.

10.06

Cost of Arbitration: The costs of the arbitration, including the fees of the arbitrators and the umpire, shall be borne equally unless the Arbiters and Umpire shall decide otherwise.

10.07

Governing Law: This Agreement shall be interpreted under the laws of Texas and the arbitration shall be governed and conducted according to the Texas General Arbitration Act.

Article

XI
ASSESSMENTS, ASSIGNMENTS, FINES AND PENALTIES

11.01

Assessments: The Reinsurer hereby assumes liability for any and all assessments and assignments imposed as a result of Policies reinsured hereunder (whether before or after the termination of this Agreement). The Reinsurer shall immediately reimburse the Company for any assessments made against the Company pursuant to those laws and regulations creating obligatory funds (including, but not limited to, insurance guaranty and insolvency funds), pools, joint underwriting associations, FAIR plans and similar plans. Amounts owed by the Reinsurer under this Section shall be payable directly by the Reinsurer to the Company. The Reinsurer shall be entitled to receive from the Company on or prior to June 30 of each year thereafter (or such date on which such premium taxes are paid) a sum equal to the premium tax credit that is allowed to the Company with respect to such assessments. The premium tax credit allowed the Reinsurer hereunder is to be on a pro-rata and first-in, first-out basis. The Company shall promptly return to the Reinsurer any amount of assessment refunded to or credited to the Company.

11.02

Fines and Penalties: The Reinsurer shall also pay promptly and directly to the Company any fines, penalties and/or any other charge incurred by the Company as respects the business reinsured hereunder arising out of the actions or inactions of the Broker unless such fines, penalties and/or any other charge was a direct result of any willful misconduct on the part of the Company, which has been finally determined by a court of competent jurisdiction after the exhaustion of all appeals.

11.03

Assigned Risks: This Agreement shall apply to risks assigned to the Company under any applicable assigned risk plan of the Delaware Department of Insurance or other regulatory agency of competent jurisdiction if, in the reasonable judgment of the Company, such risks were assigned to the Company because of the business reinsured hereunder. Any cost or expense arising out of or related to the administration of the assigned risks shall be paid by the Reinsurer under this Agreement.

Article XII
INSOLVENCY

12.01

Insolvency of Company: In the event of insolvency of the Company, this reinsurance shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claims.

12.02

Notice of Claims to Reinsurer: It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within thirty (30) days after such claim is filed in the insolvency, conservation or liquidated proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claims and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

12.03

Apportionment of Expense: Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company.

12.04

Reinsurance Payable by Reinsurer: It is further understood and agreed that, in the event of the insolvency of the Company, the reinsurance under this Agreement shall be payable directly by the Reinsurer to the Company or to its liquidator, receiver or statutory successor, except (i) as provided by applicable law, (ii) where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company and (iii) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligation of the Company to such payees.

Article XIII
ALTERNATE PAYEE

13.01

Substitution of Insurer: As respects subject business assumed as reinsurance under this Agreement, it is agreed that if the Company has a conservator, liquidator or receiver appointed for it, or becomes the subject of any conservation, liquidation or insolvency proceeding, and the Broker exercises its option to require the Company to permit all its liabilities under the Policies reinsured hereunder to be assumed by another licensed insurer as is permitted pursuant to the Agency Agreement, such assuming insurer shall be substituted for the Company as payee of any reinsurance recoverable hereunder in respect of losses under Policies subject hereto, and the Reinsurer, shall make payment thereof directly to the substituted insurer. In the event of assumption, the Company shall, however, be entitled to any ceding fees and other sums owing hereunder with respect to Policies originally issued on its behalf.

13.02

Application of Agreement Provisions: In the event that an assuming insurer is substituted for the Company under Section 13.01, all the other provisions of this Agreement shall apply to the substituted insurer in the same manner as if said insurer were substituted for the Company as the reinsured party hereunder, and to the extent this Agreement reinsures such substituted insurer, coverage hereunder shall be excluded as respects the Company.

Article XIV
HOLD HARMLESS PROVISIONS

14.01

Hold Harmless: Notwithstanding anything else contained herein to the contrary, as respects all matters related to this Agreement, in addition to those specific provisions insulating the Company from specific risks hereunder, the Reinsurer hereby covenants and agrees to reimburse and hold the Company harmless from and against every claim, demand, liability, loss, damage, cost, charge, attorneys' fees, expense, suit, order, judgment and adjudication of whatever kind or character regarding (i) this Agreement and/or (ii) the business reinsured hereunder (including, but not limited to, underwriting loss, credit loss, and/or run-off expense and/or all legal fees and expenses incurred by the Company in asserting its rights under this Agreement) whether or not such claim, demand, loss, damage, cost, charge, attorneys' fees, expense, suit, order, judgment or liability is within the terms of Policies written and reinsured hereunder and/or (iii) any other agreement related to this transaction, including but not limited to the Broker Agreement and the Claims Administration Agreement. The Reinsurer's obligation hereto relates to, but is not limited to the following: all liability for agents' balances; ceding fees (including the Minimum Fee), bureau fees, policy fees, return premiums and commissions (all whether produced by the Broker or a sub producers); premium taxes, deceptive trade practice liability; premiums, policy fees or other charges (whether collected or not); costs, liability, damages, fees and/or expenses incurred by the Company due to a lawsuit between the Reinsurer and/or the Broker (any dispute involving the Company and the Reinsurer is subject to arbitration); the Broker Agreement and all actions or inactions by Broker relating to the business reinsured hereunder; any agreement with a premium finance company; or claims administrator (including the Claims Administration Agreement with U.S. Risk); any damage, liability, claim, expense, penalty, cost or fees (including attorneys’ fees and expenses) of whatever kind or character caused directly or indirectly by any action of or failure to act, by any retail producer related to the business hereunder; any liability, damage, charge cost, fine or penalty the Company may incur as a result of any examination of the Broker; and/or all fees and/or commissions owing to the Broker under this and the aforementioned related agreements.

14.02

Liability for Premiums: The Company shall not be liable to the Reinsurer for premiums unless the Company itself has actually received those premiums and wrongfully not remitted them to the Reinsurer. The Reinsurer may not offset any balances on account of losses, loss adjustment expenses or any other amounts due except as to premiums actually received by the Company itself (as distinct from premiums not collected, or premiums collected by the Broker, or premium placed in the premium trust account pursuant to the Agency Agreement) which have wrongfully not been transmitted to the Reinsurer.

14.03

Retention of New Broker: If for any reason the Broker fails or is unable to administer the policies reinsured hereunder (whether the Agreement is still in effect or the business is being run-off), (i) the Reinsurer shall retain a party (acceptable and approved by the Company) to administer the business and the Reinsurer shall be responsible for 100% of the cost of said administration and (ii) the Broker will fully cooperate with the Company (or its designated representative) in providing access to such of the Broker’s personnel, computer systems or other assets or procedures as the Company may deem necessary to provide for an orderly transition of the administration of the Policies reinsured hereunder. If return premiums or other funds need to be returned to premium finance companies, policyholders or sub-agents, the Reinsurer shall pay these amounts if the successor or administrator does not.

14.04

Coverage for Risks Bound but Not Within Terms of Agreement: In the event the Reinsurer, or any agent appointed pursuant to this Agreement or the Broker Agreement, binds the Company for insurance coverage on insurance risks which are in excess of the policy limits set forth in Article I, and/or are not within the terms of business specified in Article I, and/or are not within the territory specified in Article I, and/or are excluded under Article III (if any), and/or are not within the limitations set forth in the Broker Agreement and/or any underwriting guidelines; whether intentional or not, the Reinsurer will do such things and take such actions as may be necessary to reduce the Company's exposure to such risks and to hold the Company harmless against any liability or loss which may be incurred by the Company in excess hereof. Any such insurance coverage on insurance risks bound contrary to the limitations which are in excess of the policy limits set forth in Article I, and/or are not within the classes of business specified in Article I, and/or are not within the territory specified in Article I, and/or are excluded under Article III (if any), whether intentional or not, shall be 100% reinsured and subject to this Agreement.

14.05

Advance Payments: In furtherance of the protections afforded to the Company under this Agreement, the Reinsurer expressly acknowledges that certain circumstances may come to exist with respect to the Policies reinsured hereunder that require adjustment to the timing of Reinsurer remittances. If, in the sole discretion of the Company, an advance payment or payments of the Reinsurer’s obligations under this Agreement is necessary to avoid irreparable harm to the Company (as, for example, in the circumstance where the funds available in the loss fund account are insufficient to provide for timely payment of claims), the Reinsurer shall make such payment or payments promptly upon the Reinsurer’s receipt of the Company’s good faith estimate or calculation of the necessity thereof. The Reinsurer agrees to wire transfer, within five (5) business days of receipt of a written request from U.S. Risk on behalf of the Company, or as soon as reasonably practicable, but always within any applicable state requirements, to the loss fund account the funds necessary to make all then outstanding claims payments.

14.06

Costs of Defense of Claims: When a claim is asserted or action commenced, including class actions regardless of whether the class has been certified, relating in any way to the Policies produced under this Agreement, the Reinsurer shall assume the defense and associated costs and expenses thereof. The Company may elect, however, at its sole discretion, on a case-by-case basis, to engage counsel directly on its own behalf, and the expenses and costs related to such defense shall be passed on to and paid by the Reinsurer or caused to be paid by Reinsurer within 60 days written notice from the Company. In such cases where the claim or action relates to business written by more than one agent of the Company, costs and expenses shall be proportioned among applicable agents at the Company’s sole discretion. Should the Broker cause to fail to remit any amounts due to Company under this Section 14.06, then the Reinsurer shall pay such amounts within 60 days written notice from the Company.

14.07

Recovery: The Reinsurer shall not sue, or seek arbitration, against the Company any monies which the Broker owes unless the Company has actually received those monies and has wrongfully not remitted them to the Reinsurer; and the Reinsurer shall indemnify the Company for any damages, liabilities and expenses incurred by reason of the Broker's acts or failure to act. The Reinsurer shall not seek to recover from, or offset against, the Company any sums, whether premiums or other monies, which the Broker was unable or unwilling to remit to the Company or the Reinsurer.

Article

XV
LOSS IN EXCESS OF POLICY LIMITS/EXTRA CONTRACTUAL OBLIGATIONS

15.01

Losses in Excess of Policy Limits and Extra Contractual Obligations: In the event the Company pays or is held liable to pay an amount of loss in excess of its policy limit, but otherwise within the terms of its policy (hereinafter called "loss in excess of policy limits") or any punitive, exemplary, compensatory or consequential damages (hereinafter called "extra contractual obligations") because of alleged or actual bad faith or negligence on its part in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its policyholder, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action, or in otherwise handling a claim under a policy subject to this Agreement, 100% of the loss in excess of policy limits and/or 100% of the extra contractual obligations shall be added to the Company's loss, if any, under the Policy involved, and the sum thereof shall be reinsured 100% under this Agreement.

15.02

Date of Occurrence: An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the Policy.

15.03

Losses Not Covered: Notwithstanding anything stated herein, this Agreement shall not apply to any loss incurred by the Company as a result of any fraudulent and/or criminal act which has been finally determined by a court of competent jurisdiction, after the exhaustion of all appeals, by any officer or director of the Company acting individually or collectively or in collusion with any individual, corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

Article XVI
REGULATORY MATTERS

16.01

Premiums in Course of Collection: It is the Parties' understanding that any premiums which are overdue from the Broker to the Company may be deemed non-admitted assets. In confirmation of the liabilities assumed by the Reinsurer under this Agreement, the Reinsurer hereby assumes 100% of all liability and responsibility for all premiums in the course of collection.

16.02

No Adverse Impact: The Reinsurer shall agree, at no cost to the Company, to take those actions (including, but not limited to, modifications in how funds are handled and how accounts are cleared, settled and the manner in which incurred losses are accounted for) and agree to those arrangements necessary to ensure that the Company suffers no adverse impact because of this reinsurance program and is in compliance with any applicable laws of a state insurance department, insofar as this reinsurance program is concerned.

Article XVII
SURPLUS LINES BROKER AGREEMENT

17.01

Broker: The Company has entered into a Surplus Lines Broker Agreement with the Broker effective as of the Effective Date hereof (“Broker Agreement”) which provides for the Broker to appoint producing agents. The Reinsurer shall hold the Company harmless from and indemnify it for any damage, liability, claim, expense, cost or fees (including attorneys’ fees and expenses) of whatever kind or character caused directly or indirectly by any action of or failure to act, by and such producing agent, in accordance with Article XIV hereunder.

17.02

Monitoring: Nothing in this Agreement shall be construed as requiring the Company to monitor the business reinsured hereunder for the benefit of the Reinsurer.

Article

XVIII
REINSURER OR BROKER SALE OR TRANSFER

18.01

Change of Control: The Reinsurer agrees to give the Company, 90 days advance written notice of any sale or transfer of such party's business, or such party's consolidation with a successor firm, in order that the Company may, in its sole discretion:

(a)

Assign this Agreement to the successor; or

(b)

Enter into a new reinsurance agreement with the successor; or

(c)

Terminate this Agreement as provided in Section 4.02(g) of this Agreement.

Article XIX
MISCELLANEOUS

19.01

Governing Law: This Agreement has been made and entered into in the State of Texas and the Agreement shall be subject to and construed under the laws of the State of Texas. This Agreement shall be deemed performable at the Company's administrative office in Bedford, Texas, and it is agreed that the venue of any controversy arising out of this Agreement, or any breach thereof, shall be in Tarrant County, Texas.

19.02

Notices: All notices required to be given hereunder shall be deemed to have been duly given by personally delivering such notice in writing or by mailing it, Certified Mail, return receipt requested, with postage prepaid. Any Party may change the address to which notices and other communications hereunder are to be sent to such Party by giving the other Party prior written notice thereof in accordance with this provision.

19.03

Successors: This Agreement shall be binding upon the Parties hereto, together with their respective successors. None of the Parties hereto may assign any of their rights or obligations under this Agreement.

19.04

Counterparts: This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

19.05

Entire Agreement: This Agreement is the entire agreement between the parties and supersedes any and all previous agreements, written or oral, and amendments thereto with respect to the subject matter hereof.

19.06

Modifications: This Agreement may only be modified or changed by a written amendment to this Agreement executed by all Parties hereto.

19.07

Waiver: A waiver by the Company or Reinsurer of any breach or default by the other party under this Agreement shall not constitute a continuing waiver or a waiver by the Company or the Reinsurer of any subsequent act in breach or of default hereunder.

19.08

Headings: Headings used in this Agreement are for reference purposes only and shall not be deemed a part of this Agreement.

19.09

Severability: The Parties hereto intend all provisions of this Agreement to be enforced to the fullest extent permitted. Accordingly, should a court of competent jurisdiction or arbitration panel determine that the scope of any provision is too broad to be enforced as written, the Parties intend that the court or arbitration panel should reform the provision to such narrower scope as it determines to be enforceable under present or future law; such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision were never a part hereof; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance.

19.10

Exclusivity: This Agreement is not exclusive and the Company reserves the right to appoint or contract with other reinsurers, agents and/or managing agents in the territory covered by this Agreement.

19.11

Advertising: The Reinsurer shall not insert any advertisement respecting the Company or the business to be written under this Agreement in any publication or issue any circular or paper referring to the Company or such business without first obtaining the written consent of the Company. The Reinsurer shall establish and maintain records of any such advertising as required by applicable statutes and regulations.

19.12

Policy Cancellations: Policy cancellations at the Company's request will be made strictly subject to requirements imposed by the Company's underwriting rules and practices or the Reinsurer's underwriting rules and practices, as approved by the Company, and in compliance with applicable statutes and regulations and the applicable provisions contained in this Agreement and the pertinent policy. Such cancellation authority shall be exercised only for causes inherent in the particular risk and shall not be construed as authority to make general or indiscriminate cancellations or replacement of the Policies with those of another Company, except upon specific written instructions from the Company. When directed by the Company, the Reinsurer will cancel any and all Policies produced by it for any reason the Company deems necessary.

19.13

Compliance with Laws: This Agreement shall be interpreted in conformance with applicable Texas law and regulation. If it is found or ordered by a court or regulatory body that a term or provision of this Agreement does not conform to such law or regulation then this Agreement shall be deemed to be amended and modified in accordance with such law. However, where this Agreement is found not to comply with applicable law or regulation, the Company may in its sole discretion terminate this Agreement immediately and without prior notice.

19.14

Approval of Rates: The Reinsurer understands and agrees that no business shall be produced, until a written approval of the applicable rate rules and forms is received from the regulatory authority of competent jurisdiction, if applicable or required by statute.

19.15

Jurisdiction: It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement.

Article

XX
LOSS AND UNEARNED PREMIUM RESERVE FUNDING

20.01

Security: Within 10 business days of the effective date of this Agreement, the Reinsurer will secure [***] of its obligations under this Agreement (“Obligations Under the Reinsurance Agreement”), which include but are not limited to [***] of the obligations for unearned premiums reserves, if any, and reserves for losses incurred but not reported and losses reported but unpaid, via a security fund or trust agreement or letter of credit to be obtained by the Reinsurer in favor of the Company, which shall be in all respects acceptable to the Company and allow the Company to receive credit for the reinsurance hereunder from the Department of Insurance or applicable regulator of the state of domicile of the Company.

(a)

At a minimum, the security fund or trust or letter of credit must:

(i)

comply with the applicable laws and regulations; and

(ii)

be issued by or held with a Qualified United States Financial Institution acceptable to the Company (as defined by the applicable statute and regulation).

(b)

The Company may draw the full amount of the security fund or trust or letter of credit to satisfy, in whole or in part the obligations of the Reinsurer hereunder or, if:

(i)

The Reinsurer fails to comply with the provisions of this Agreement; or

(ii)

the issuer of the security fund or trust or letter of credit gives the Company notice of cancellation or non-renewal of the security fund or letter of credit.

20.02

Amount of Security: Within 10 business days of the effective date of this Agreement, and within 10 business days prior to the end of each calendar quarter thereafter, the Company shall provide the Reinsurer with a good faith estimate of the expected sum of [***] of the Company’s ceded Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter (the “Estimate”). The Reinsurer shall, within 2 business days of first receiving the Estimate, and within 2 business days prior to the commencement of such forthcoming calendar quarter thereafter, fund/obtain a security fund or letter of credit in an amount equivalent to [***] of the Estimate. Additionally, each time thereafter that: (i) the Reinsurer’s A.M. Best rating or outlook is at any time reduced; or (ii) the Reinsurer’s A.M. Best rating or outlook is at any time removed or withdrawn such that the Reinsurer is not rated or unrated by A.M. Best; or (iii) the Reinsurer’s capital and policyholder surplus (or its equivalent) reduces ten percent (10%) or more during any rolling twelve (12) month period measured quarterly; or (iv) the Reinsurer fails to maintain its CAT XOL reinsurance with coverage up to [***] dollars [***] with a [***] retention and its multiline XOL reinsurance with coverage up to [***] with a [***] retention, each provided by the Reinsurer’s reinsurers existing as of the effective date of this Agreement, provided that the Reinsurer may add reinsurers with a minimum surplus of at least [***] and an “A” rating by A.M. Best, the components of the Estimate shall increase by [***]% (i.e. the first time the Estimate shall increase to [***] of the Company’s ceded outstanding Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter, the second time the Estimate shall increase to [***] of the Company’s ceded outstanding Unearned Premium and Loss Reserves as of the end of the forthcoming calendar quarter, etc.).

20.03

Increases in Security: If at any time, based upon the monthly reporting provided to Company under this Agreement, it shall be determined by the Company or Reinsurer that the amount of the security fund or letter of credit may not be equivalent to the greater of: (i) [***] of Company’s ceded Unearned Premium and Loss Reserves; (ii) [***] of Company’s ceded Unearned Premium and Loss Reserves as of the end of the current calendar quarter (the “Revised Estimate”); or (iii) the amounts required under Section 20.02 of this Agreement, then upon written notice from Company, the Reinsurer shall immediately increase the amount of the security fund or letter of credit to an amount equivalent to the greater of (i), (ii) or (iii) and the Company shall at all times be in possession of a security fund or letter of credit equivalent to the greater of (i), (ii) or (iii) as of the end of the current calendar quarter.

20.04

Reductions to Security: Should the amount of the security fund or letter of credit at the end of any calendar quarter be greater than the amount required in this Article XX, the Reinsurer shall be entitled to reduce the amount of the security fund or letter of credit to an amount not less than the amount required in this Article XX. The Qualified United States Financial Institution shall permit such reduction upon receipt by it of the Company’s written statement that Reinsurer is entitled to such reduction, which written statement shall not be unreasonably withheld by Company.

20.05

Unearned Premium: For the purpose of this Article XX, Unearned Premiums means, as of any given date, the aggregate premium attributable to the unexpired coverage period of all insurance policies produced under the Agreement, as determined in accordance with generally accepted statutory accounting principles consistently applied. For this purpose, premium shall be the written premium charged on the insurance policy for the period such policy is in force irrespective of the subsequent billing and collection of such premium.

20.06

Loss Reserves: For the purpose of this Article XX, Loss Reserves means, as of any given date, the reserve attributable to losses incurred but not reported and losses reported but not paid with respect to the insurance policies produced under this Agreement, and shall include provision for both allocated and unallocated loss adjustment expense, in each instance as determined in accordance with generally accepted accounting principles consistently applied.

20.07

Actuarial Opinion: The Reinsurer hereby agrees that the actuarial opinion of the Company’s internal actuary shall be controlling, in its sole discretion, as to the timing and determination of the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the Agency Agreement for the purposes of posting collateral hereunder. However, the Reinsurer shall have the right to have the Company engage on a semi-annual basis, at the expense of the Reinsurer an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the Agency Agreement. If the Reinsurer requests hereunder the actuarial opinion of MILLIMAN USA’s Dallas office, the Reinsurer hereby agrees to post the collateral required hereunder in accordance with the actuarial analysis of the Company’s internal actuary until an analysis is completed by MILLIMAN USA’s Dallas office. At such time, the Reinsurer shall post the collateral required hereunder in accordance with the actuarial analysis of MILLIMAN USA’s Dallas office. If MILLIMAN USA’s Dallas office is unable to perform the actuarial analysis, the analysis of the Company’s internal actuary shall be controlling for the purpose of determining the ultimate loss ratio and loss adjustment expense ratio picks required for posting collateral under the Agreements. If subsequent to the receipt of the applicable independent actuarial opinion, the Company determines in its sole discretion that there has been a significant change in the loss reserves as compared to the applicable independent actuarial opinion, the Company’s internal actuary shall again be controlling, in its sole discretion, as to the timing and determination of the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the Agency Agreement until the Company again engages, at the expense of the Reinsurer, an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the Agency Agreement. Additionally, if the actuarial opinion of the Company’s internal actuary is not available, for any reason, the Company shall engage semi-annually, at the expense of the Reinsurer, an independent actuarial opinion, performed by MILLIMAN USA’s Dallas office, attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced under this Agreement and the Agency Agreement.

Article XXI
SAVINGS CLAUSE

21.01

Savings: If any law or regulation of any Federal, State or local government of the United States of America, or the ruling of officials having supervision over insurance companies, should prohibit or render illegal this Agreement, or any portion thereof, as to risks or properties located in the jurisdiction of such authority, either the Company or the Reinsurer may upon written notice to the other suspend or abrogate this Agreement insofar as it relates to risks or properties located within such jurisdiction to such extent as may be necessary to comply with such law, regulations or ruling. Such illegality shall in no way affect any other portion thereof; provided, however, that the Reinsurer or the Company may terminate or suspend this Agreement insofar as it relates to the business to which such law or regulation may apply.

21.02

Interpretation of Applicable Law: This Agreement shall be interpreted in accordance with the laws of the State of Texas. All provisions of this Agreement are intended to be enforced to the fullest extent permitted. Accordingly, should a court of competent jurisdiction or arbitration panel determine that the scope of any provision is too broad to be enforced as written, the Parties intend that the court or arbitration panel should reform the provision to such narrower scope as it determines to be enforceable under present or future law; such provision shall be fully severable; this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision were never a part hereof; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance; provided, however, that where this Agreement is so found not to comply with applicable law or regulation, the Company may in it sole discretion terminate this Agreement immediately without prior notice.

[THE REMAINDER OF THE PAGE IS LEFT INTENTIONALLY BLANK.

SIGNATURES APPEAR ON THE FOLLOWING PAGE.]

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized representatives have executed this Agreement as of the date first above written.

UNITED SPECIALTY INSURANCE COMPANY

BY: /s/ David Cleff

ITS: EVP

DATE:11/24/2020

CRUSADER INSURANCE COMPANY

BY: /s/ Ronald A. Closser

ITS: President/CEO

DATE:11/21/2020

TABLE OF CONTENTS

Page

Article I BUSINESS REINSURED 2

1.01 Business Reinsured: 2

1.02 Policy Limits: 2

1.03 Territory: 2

1.04 Policy Term: 2

1.05 Maximum Premium Volume: 2

Article II ORIGINAL CONDITIONS 3

2.01 Cession: 3

2.02 Business Ceded: 3

2.03 Liability of the Reinsurer: 3

2.04 Follow the Fortunes: 3

2.05 No Privity of Contract: 3

Article III EXCLUSIONS 3

3.01 Exclusions: 3

Article IV COMMENCEMENT, TERMINATION, TERMS AND CONDITIONS 3

4.01 Effective Date: 3

4.02 Termination: 3

4.03 Reinsurance Coverage after Termination: 4

4.04 Obligations upon Termination: 5

4.05 Assessments: 5

4.06 Termination on Run-off Basis: 5

4.07 Termination on Cut-off Basis: 5

4.08 Responsibility for Notices: 5

Article V LOSS AND LOSS ADJUSTMENT EXPENSE 5

5.01 Liability for Losses and Loss Adjustment Expenses: 5

5.02 Monthly Accounting: 6

5.03 Loss Settlements: 6

5.04 Records: 6

5.05 Claim Register: 6

Article VI REPORTS AND REMITTANCES 7

6.01 Reports: 7

6.02 Additional Reports: 7

Article VII ERRORS AND OMISSIONS 7

7.01 Errors and Omissions: 8

7.02 Hold Harmless: 8

Article VIII PREMIUM AND COMMISSION 8

8.01 Premium to Reinsurer: 8

8.02 Net Premium: 8

Article IX ACCESS TO RECORDS 8

9.01 Access to Records: 9

Article X ARBITRATION 9

10.01 Arbitration: 9

10.02 Choice of Arbiter: 9

10.03 Selection of Umpire: 9

10.04 Venue and Binding Decision: 9

10.05 Entire Dispute Subject to Arbitration: 9

10.06 Cost of Arbitration: 9

10.07 Governing Law: 10

Article XI ASSESSMENTS, ASSIGNMENTS, FINES AND PENALTIES 10

11.01 Assessments: 10

11.02 Fines and Penalties: 10

11.03 Assigned Risks: 10

Article XII INSOLVENCY 10

12.01 Insolvency of Company: 10

12.02 Notice of Claims to Reinsurer: 10

12.03 Apportionment of Expense: 11

12.04 Reinsurance Payable by Reinsurer: 11

Article XIII ALTERNATE PAYEE 11

13.01 Substitution of Insurer: 11

13.02 Application of Agreement Provisions: 11

Article XIV HOLD HARMLESS PROVISIONS 11

14.01 Hold Harmless: 11

14.02 Liability for Premiums: 12

14.03 Retention of New Broker: 12

14.04 Coverage for Risks Bound but Not Within Terms of Agreement: 12

14.05 Advance Payments: 13

14.06 Costs of Defense of Claims: 13

14.07 Recovery: 13

Article XV LOSS IN EXCESS OF POLICY LIMITS/EXTRA CONTRACTUAL OBLIGATIONS 13

15.01 Losses in Excess of Policy Limits and Extra Contractual Obligations: 13

15.02 Date of Occurrence: 14

15.03 Losses Not Covered: 14

Article XVI REGULATORY MATTERS 14

16.01 Premiums in Course of Collection: 14

16.02 No Adverse Impact: 14

Article XVII SURPLUS LINES BROKER AGREEMENT 14

17.01 Broker: 14

Article XVIII REINSURER OR BROKER SALE OR TRANSFER 14

18.01 Change of Control: 14

Article XIX MISCELLANEOUS 14

19.01 Governing Law: 15

19.02 Notices: 15

19.03 Successors: 15

19.04 Counterparts: 15

19.05 Entire Agreement: 15

19.06 Modifications: 15

19.07 Waiver: 15

19.08 Headings: 15

19.09 Severability: 15

19.10 Exclusivity: 15

19.11 Advertising: 15

19.12 Policy Cancellations: 16

19.13 Compliance with Laws: 16

19.14 Approval of Rates: 16

19.15 Jurisdiction: 16

Article XX LOSS AND UNEARNED PREMIUM RESERVE FUNDING 16

20.01 Security: 16

20.02 Amount of Security: 17

20.03 Increases in Security: 17

20.04 Reductions to Security: 18

20.05 Unearned Premium: 18

20.06 Loss Reserves: 18

20.07 Actuarial Opinion: 18

Article XXI SAVINGS CLAUSE 19

21.01 Savings: 19

21.02 Interpretation of Applicable Law: 19

QUOTA SHARE REINSURANCE AGREEMENT

AMONG

UNITED SPECIALTY INSURANCE COMPANY

AND

CRUSADER INSURANCE COMPANY

EFFECTIVE April 1, 2020

EXHIBIT 10.9

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.

[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

SURPLUS LINE BROKER AGREEMENT

THIS Surplus Lines Broker Agreement (the “Agreement") dated as of April 1, 2020, and effective as of April 1, 2020 (“Effective Date”), is made by and between UNITED SPECIALTY INSURANCE COMPANY, an insurer domiciled in Delaware with principal offices in Bedford, Texas ("Company") and UNIFAX INSURANCE SYSTEMS, INC., a California corporation with principal offices in Calabasas, California and which is licensed as a surplus lines broker in California and other states ("Broker").

RECITALS

A. The Company is an approved surplus lines insurer in the State of California and is an eligible surplus line insurer in the other states and District of Columbia.

B. The Broker is licensed as a surplus lines broker in the states of Arizona, California, Oregon and Washington and may place business with a surplus line insurer for home state residents of those states where they are licensed.

C. The Company desires to appoint the Broker as a broker of the Company on the terms and conditions specified in this Agreement and the Broker desires to be appointed as a broker of the Company to perform all functions necessary for the production, service, and management of the business placed hereunder. Concurrently with this Agreement, the Company is entering into a Quota Share Reinsurance Agreement (the “Reinsurance Agreement”) effective the Effective Date with Crusader Insurance Company (the “Reinsurer”), and the contractual assumption by the Reinsurer in the Reinsurance Agreement of the risks of the polices placed pursuant to this Agreement is a condition precedent to the Company's entering into this Agreement with the Broker.

D. Pursuant to this Agreement, the Broker is authorized to act as a surplus lines broker for and on behalf of the Company and as the agent of the Company for purposes of administering the business produced by the Broker, insured by the Company and reinsured with the Reinsurer, pursuant to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the recitals and for other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties agree as follows:

ARTICLE I
AUTHORIZATION, AUTHORITY AND DUTIES

1.01 Authorization: The Company hereby authorizes the Broker to act as its broker and agent for the purpose of producing and administering the business specified in Section 1.03 of this Agreement, which is the subject of the Reinsurance Agreement, in accordance with Article I of this Agreement and the other terms set forth in this Agreement.

1.02 Maximum Premium: The maximum amount of premiums that Broker may place with the Company during any calendar year is [***]. The maximum amount of premiums that Broker may place with the Company during any calendar year is referred to as the “Maximum Premium Volume” in this Agreement. Maximum Premium Volume is determined on a direct written premium basis.

1.03 Classes of Business: The classes of business and statutory line which Broker can place with the Company are:

(a) Property

(b) General Liability

(c) Commercial multi-peril property (including burglary, theft, inland marine and truckers’ long haul physical damage and truckers’ short haul physical damage)

(d) Commercial multi-peril liability:

(1) Commercial multi-peril liability (including burglary, theft, garage and fidelity, trucking, long-haul and trucking short-haul), provided, that the Broker may not place any commercial multi-peril liability for contractors with the Company.

1.04 Policy Limits: The maximum policy limits for which the Broker may place with the Company are:

Lines of Business		Maximum Policy Limits
1.0	Property	$[***] total insurable value
17.0	General Liability	$[*] per occurrence $[*] in the aggregate
5.1	Commercial Multi-peril Property – burglary and theft, inland marine, trucking long haul physical damage, trucking short haul physical damage	$[***] total insurable value
5.2	Commercial Multi-peril Liability – burglary and theft, garage, fidelity, trucking, long-haul, trucking, short-haul	$[*] per occurrence $[*] in the aggregate

The Broker shall not bind the Company to amounts in excess of those stated above. At the Company’s request, the Broker in accordance with applicable law, and policy terms, shall cancel or not renew any risk bound which is not in conformance with this Agreement.

1.05 Eligible Jurisdictions: The Broker may place business for any home state insured in any state or jurisdiction within the United States in which the Company is eligible to issue surplus lines insurance except Broker may not place business for any home state insured in New York.

1.06 Authority: The Company grants to the Broker the following authority and the Broker agrees to the duties specified:

(a) To solicit, receive and after underwriting review, accept applications for insurance for such classes of insurance as specified in this Agreement.

(b) To obtain at the expense of the Broker underwriting information as may be necessary or desirable to underwrite the risks to be placed with the Company, which information be obtained from consumer and insurance reporting agencies and other appropriate sources for each risk to be insured by the Company.

(c) To issue, renew and countersign policies of insurance (“Policies”), certificates, endorsements and binders which the Company may from time to time authorize to be issued, delivered renewed or countersigned on behalf of the Company for risks placed with the Company by the Broker.

(d) To issue notices of cancellation for non-payment of premium, notices of cancellation or notices of non-renewal for other reasons as may be permitted under the Policies or as otherwise permitted under applicable.

(e) To collect premiums on business placed with the Company and to maintain an accounting of all such premiums.

(f) To deduct from the premiums collected applicable commissions and expenses.

(g) To remit to U.S. Risk Managers, Inc. (“US Risk”), the designated claims administrator of the Company, an amount equal to [***]% of the earned premium of the Policies, provided, however, that the fees payable to US Risk shall be paid for the Broker from its aggregate commission.

(h) To incur at the sole expense of the Broker, all expenses and costs, including but not limited to salaries, bonuses, rentals, transportation, facilities, fees of soliciting insurance producers, postage, advertising, exchange, license fees of the surplus lines broker or its personnel, or any other expense whatsoever of the Broker, and the Company shall not be responsible for any such expenses and costs.

(i) To prepare monthly reports to the Company and the Reinsurer of Policies issued, premiums received, Policies received and such other reports as the Company or the Reinsurer may request, as further set forth in this Agreement.

(j) Notwithstanding anything contained in this Agreement, the Broker shall not have any authority to settle claims on Policies whether disputed or undisputed; provided, however, the Broker may accept notifications or reports of losses or claims from a policyholder or from the agent or broker, or a third-party claimant and shall forward those notifications or reports of losses to the Reinsurer on behalf of the Company or to US Risk as the claims administrator of the Company. The Broker shall not negotiate, decline, accept, pay, or otherwise commit the Company or the Reinsurer to any liability in connection with any claim or loss submitted or received for any Policy.

1.07 Compliance: All activities of the Broker pursuant to this Agreement shall be in strict compliance with the terms of this Agreement 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.

1.08 No Independent Authority: The Broker understands and agrees that it has no power or authority granted to it by the Company independent of this Agreement. Notwithstanding the foregoing, the authority granted to Broker pursuant to this Agreement shall cease immediately upon termination, for any reason, of this Agreement, except that the authority granted to the Broker may continue after termination for such period with regard to run-off and other matters as set forth herein, including until all Policies have expired and all claims have been extinguished, subject to Article VII hereof.

1.09 Power to Accept or Bind Risk: The Broker shall not have the power to accept or bind risk other than as set forth in this Agreement or as may be subsequently authorized in writing by the Company.

1.10 No Participation in Syndicates: The Broker may not commit the Company to participation in insurance or reinsurance syndicates. The Company hereby authorizes the Broker to collect payments for losses and loss adjustment expenses from a reinsurer. The Broker shall send a report to the Company concerning such transactions promptly.

1.11 Licenses in Other States: The Broker acknowledges and agrees that, with respect to any state in which business is permitted to be written by the Company on a surplus lines basis, Broker will not place an insurance on a home state insured of such state and this Agreement shall not become effective until the Broker is licensed in such home state as a non-resident surplus line broker.

1.12 Surplus Lines Obligations: It is understood and agreed by each of the parties that they understand and acknowledge that surplus lines brokers and surplus lines insurers have certain duties and obligations under the California Insurance Code and the regulations promulgated thereunder and that each party is responsible for compliance with those provisions of the California Insurance Code and the regulations promulgated thereunder applicable to such party.

1.13 Limitations on Authority: The authority and limitations of the Broker to issue Policies are as follows:

(a) The Maximum Annual Premium shall be as provided in Section 1.02 of this Agreement. The Maximum Annual Premium Volume may be changed by agreement of the Company and the Broker pursuant to an amendment to this Agreement;

(b) the basis of the rates charged are as provided in the Company's rate manuals, rate brochures and rate schedules which Broker agrees to follow, and the Broker shall not decrease rates or increase discounts without the prior approval of the Company;

(c) the only classes of business the Broker is authorized to produce and handle under this Agreement are the classes of business specified in Section 1.03 of this Agreement, and the Broker may not bind or cede reinsurance or retrocession on behalf of the Company;

(d) the maximum limits of liability for Policies produced pursuant to this Agreement are set forth in Section 1.03 of this Agreement;

(e) the Broker may issue Policies only to home state insured residents in the states in which business is permitted to be produced under this Agreement;

(f) the Broker shall only cancel policies as set forth in the policy form for the policies produced hereunder or as otherwise permitted by applicable law;

(g) the maximum term for any policy issued hereunder shall be [***];

(h) the Broker 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, date of policy issuance and name or names of insureds and to maintain policy inventories;

(i) the Broker shall follow the underwriting guidelines as adopted by the Company for the classes of insurance to be placed under this Agreement;

(j) the Broker acknowledges that, with respect to any state in which business is permitted to be written under this Agreement, this Agreement shall not become effective until the Broker is duly licensed with the applicable Department of Insurance if required by applicable law; and

(k) the Broker understands and agrees that no business shall be produced, until a written approval of the applicable rate rules and forms is received from the regulatory authority of competent jurisdiction, if applicable or required by statute.

1.14 Retention of Retail Producers : Subject to Section 4.01, the Broker may retain retail producers to market and solicit policies and to perform fieldwork and aid in the underwriting of the business that is the subject of this Agreement. The Broker shall have the sole financial responsibility for the payment of any commissions or other compensation or remuneration to retail producers concerning this business. The Broker further agrees to be responsible for any required registration or appointing, as required by the appropriate regulatory body, and the payment of any penalty assessed to the Company for any violation by the Broker or any retail producer or broker retained by the Broker pursuant to the provisions of Article IV hereof of any license or appointment provision of the Delaware Insurance Code or other applicable state statutes, and the rules and regulations promulgated thereunder, if applicable.

1.15 Taxes and Fees: The Broker shall remit to the applicable agency any surplus line premium tax, stamping fees and other fees relating to the business placed with the Company under this Agreement.

1.16 Filings and Reports: The Broker shall make such filings and reports as may be required with the applicable surplus lines associations or governmental agencies of the business placed with the Company pursuant to this Agreement, including without limitation such reports as are required by the California Department of Insurance (the “California Department”) and the Surplus Lines Association of California.

1.17 Coverage for Risks Bound but Not Within Terms of Agreement: In the event Broker binds the Company for insurance coverage on insurance risks which are in excess of the policy limits set forth in this Article I, and/or are not within the terms of business specified in this Article I, and/or are not within the territory specified in this Article I, whether intentional or not, the Broker will do such things and take such actions as may be necessary to reduce the Company's exposure to such risks and to hold the Company harmless against any liability or loss which may be incurred by the Company in excess hereof. At the Company's request, the Broker in accordance with applicable law, and policy terms, shall cancel or not renew any risk bound which is not in conformance with this Agreement. Any such insurance coverage on insurance risks bound contrary to the limitations which are in excess of the policy limits set forth in this Article I, and/or are not within the classes of business specified in this Article I, and/or are not within the territory specified in Article I, whether intentional or not, shall be subject to this Agreement.

ARTICLE II
PREMIUMS

2.01 Collection of Premium: All premiums shall be handled by the Broker. The Broker shall:

(a) Collect premiums on business placed with the Company and maintain an accounting of all such premiums and business written.

(b) Place all premiums collected in a premium trust account for the benefit of the Company and the Reinsurer, which funds collected shall be held by the Broker in a fiduciary capacity. Such premiums are the property of the Company and the Reinsurer according to their respective interests, less such commissions and fees as are due the Broker as specified herein. The only disbursements from such account shall be the payment of return premiums, commission due the Broker as authorized herein, and remittance of premiums to the Reinsurer and Company. The Broker shall not make personal use of any funds in the premium trust account.

(d) Remit to the Reinsurer on behalf of the Company the net written premiums collected (being defined as premiums received and/or due the Broker from the insured in a given month less return premiums), less the Broker’s commission as set forth in Section 3.01. Should such balance be a negative amount, the Broker shall report such amount to the Reinsurer and the Reinsurer will pay the Broker such balance as soon as possible after the end of the month, after receipt and verification of the amount due as reported by the Broker.

2.02 Premium Data: The Broker shall furnish to the Company and the Reinsurer all necessary premium 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 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.

2.03 No Waiver of Trust Relation: The keeping of an account with the Broker 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 Broker.

2.04 Broker Liable for Payment of Premium: The Broker shall be liable for the payment of all premiums upon all Policies placed with the Company by the Broker.

2.05 Remittance of Funds: The Broker shall remit to the Reinsurer, or Company as applicable, any funds of or due to the Company under this Agreement within thirty (30) days from the end of the month in which premium is recorded. Should any dispute arise between the Company, the Reinsurer and/or the Broker regarding payment of premium, the Broker shall remit immediately all money and property, without deductions for commissions, to the premium trust account with full reservation of any and all rights reserved by the parties.

2.06 Funds Held as Fiduciary: The Broker shall hold all funds of or due the Company in a fiduciary capacity.

2.07 Funds Held as Fiduciary: The Broker shall hold all funds of or due Reinsurer in a fiduciary capacity.

ARTICLE III
COMPENSATION TO THE BROKER

3.01 Compensation and Deductions: As full and complete compensation for Policies placed by the Broker on behalf of the Company, the Broker shall be allowed a commission of [***]% of the premiums written for the Policies issued. The Broker shall deduct its commission from the premiums remitted to the Company and the Reinsurer on behalf of the Company; provided, that the deduction of such commissions from premiums should not be taken as a waiver by the Company of its exclusive ownership rights of premiums as provided herein.

(a) The Broker shall pay the Company directly a fee within thirty (30) days following the end of each month, [***] of Net Premiums and Net Policy Fees, plus the amount of assessments and state premium taxes.

(b) The Broker shall remit directly to Company on a monthly basis [***]% of written premium for bureau fees related to statistical reporting, and boards and bureaus participation (“Bureau Fees”). Should the actual amount of Bureau Fees be greater than the amount remitted to the Company on a monthly basis, the Broker shall remit such additional Bureau Fees within thirty (30) days of receiving notice in writing from the Company of such additional Bureau Fees. In addition to the Bureau Fees, should the Company be charged any fines or penalties for incomplete, inaccurate, or delinquent reporting, the Broker shall pay such fines or penalties immediately upon written notice. The Bureau Fees are in addition to other fees and expenses expressly enumerated herein.

(c) Notwithstanding anything else contained herein to the contrary, regardless of the amount of Net Premiums, the minimum fee due the Company shall be (i) $[***] for the first twenty-four month period after the Effective Date of this Agreement, plus the aforementioned assessments and state premium taxes and (ii) $[***] for each twelve-month period thereafter during which the Agreement is in effect, plus the aforementioned assessments and state premium taxes. "Net Premiums" shall mean the gross premiums charged on all original and renewal Policies written on behalf of the Company, less return premiums (excluding policy fees). “Net Policy Fees” shall mean gross policy fees, if any, charged on all original and renewal Policies written on behalf of the Company, less return policy fees.

(d) This minimum fee shall not be affected by the amounts of Net Premiums written in other twelve-month or twenty-four month, as applicable, and shall not be reduced by reason of payments in excess of the minimum in other periods.

(e) Upon termination of this Agreement, the minimum fee shall be prorated to the effective date of such termination unless there are Policies issued after the termination of this Agreement. In such cases, the minimum fee shall continue past the termination of this Agreement until such time as no further Policies are issued. The minimum fee for each period shall be paid within sixty (60) days of the end of each period. For these purposes, a policy's entire premium shall be applied to the period in which the policy is written. During the term of this Agreement, the Broker shall be allowed to pay the fee payable to the Company under this Section 3.01 on the basis of premiums written; provided, however, that the Broker shall remain liable for the full amount of the fee (i.e., based on premiums written) as specified above.

(f) The Broker shall allow and pay within thirty (30) days of the end of each month to the Company an amount equal to the state premium tax on the Net Premiums and Net Policy Fees for Policies issued for the past month. Should any additional premium tax be assessed at any time on the Net Premiums and Net Policy Fees, Broker shall pay the Company such additional premium tax within thirty (30) days of being informed by the Company of such additional premium tax. The Parties acknowledge that at the effective date of this Agreement, the applicable Departments of Insurance (or other state agency responsible for collecting premium taxes) may require the payment of estimated premium taxes in advance on a semi-annual basis. The Broker shall, therefore, pay to the Company within five days prior to the due date of any such estimated premium tax payment, the amount that would be due based upon the business produced hereunder. The Broker shall also be responsible for the filing and payment of any and all other applicable taxes including, but not limited to, federal excise taxes. All such filings shall be made in the name of the party chosen by the Company.

(g) The Broker shall not seek to recover from the Company, any commissions due and no funds are due the Broker from the Company.

(h) It is expressly agreed that the commission allowed the Broker includes provision for premium taxes, bureau fees and ceding fees. The Broker shall pay all surplus lines taxes and surplus line stamping fees payable for Policies subject to reinsurance under the Reinsurance Agreement, and the Broker shall pay to the Company any premium taxes, if applicable, and ceding fees payable for Policies subject to reinsurance under the Reinsurance Agreement.

3.02 No Liability of Company for Amounts owed by Reinsurer: The Company shall not be liable for or responsible for any commissions or other monies payable by the Reinsurer to the Broker or by the Broker to the Reinsurer, including any commission payable under this Article III. The Broker shall not sue or seek arbitration against the Company for any actions by, or debts owing from, the Reinsurer.

3.03 Return of Commission: In the event the Company, the Reinsurer, or the Broker on behalf of the Company, during the continuance of this Agreement or after its termination, refunds premiums under any Policy by reasons of cancellation or otherwise, the Broker agrees immediately to return to the Company or the Reinsurer, as applicable, the commission previously received by it on the portion of the premium refunded. The Broker shall not be required to return, as commission or return commission, monies greater than the total commission paid or otherwise payable to the Broker.

ARTICLE IV
PRODUCERS

4.01 Responsibility for Compliance: The Broker shall comply with, and shall be responsible to ensure the compliance by, all such producers retained by the Broker pursuant to Section 1.14 of this Agreement with the terms of this Agreement and all other written rules and regulations of the Company, and treat as confidential and use only in the interest of the Company all instructions, information and materials received from the Company.

4.02 Responsibility for Performance: The Broker shall be solely responsible for the performances of any producers under all of the terms and provisions hereof, including, but not limited to, the collections of premiums and refunds of premiums.

4.03 Responsibility for Commission Payments: It is also specified that the Broker shall be responsible for all commissions payable to any producers. The Broker and any producing agent shall not seek to hold the Company or Reinsurer liable through litigation, arbitration or otherwise for commissions payable to such producers.

4.04 No Service on Board of Directors: The Broker shall not permit its producers or subproducers to serve on its Board of Directors.

4.05 No Employment of Company Employee: The Broker shall not employ an individual who is employed with the Company.

4.06 Notification: The Broker shall be solely responsible for notifying such agents of this Agreement and of any termination hereof, and the Broker shall be responsible for the consequences of any failure to provide such notification.

4.07 Termination: The Company, in its sole discretion with or without cause, and without prior written notice, may terminate the appointment of any producing agent.

ARTICLE V
ADDITIONAL DUTIES OF BROKER

5.01 Compliance with Laws: The Broker shall, at all times during the period of this Agreement, comply with all applicable laws and all orders, policy decisions or other requirements of the California, Texas and Delaware Departments of Insurance or other applicable insurance department, and in addition shall also comply with all United States economic trade and sanction laws and regulations, as administered by the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury.

5.02 Books and Records: All books, records, accounts, documents and correspondence of the Broker and any producing agent pertaining to the Company's and Reinsurer's business shall, at all times, be open to examination by any authorized representative of the Company or Reinsurer. The Broker shall make copies of records available upon request by the Company or Reinsurer, whether such request is before or after termination of this Agreement or the Reinsurance Agreement. The Broker must maintain separate records of business, including, but not limited to, underwriting files for each insurer for whom it acts as a Broker. Such records must be maintained for five (5) years or until the completion of a financial examination by the insurance department of the state in which the Company is domiciled, whichever is longer. The Broker acknowledges and agrees that records relating to the business produced by the Broker on behalf of the Company are deemed to be records of the Company and such records or copies thereof shall be provided to the Company upon request. The Broker agrees that it will not destroy any such records in its possession without the prior written approval of the Company. The Company or its duly appointed representatives shall have free access at any and all reasonable times to such books and records of the Broker, its departmental or branch offices as shall reflect premium and loss transactions of the Company and/or the business produced hereunder, for the purpose of obtaining any and all information concerning this Agreement or the subject matter hereof.

5.03 Statistical Information: The Broker shall maintain adequate accounting procedures and systems, at no cost or expense to the Company, and shall provide statistics in a timely manner for all reporting requirements under this Agreement or as shall be required from time to time by the regulatory authorities of the States of California, Delaware or Texas or any other applicable governmental agency or authority. Such statistical information shall be provided to the Company by the Broker at the Broker's sole cost and expense.

5.04 Reports: The Broker shall forward to the Company, no later than the 30th day following the month being accounted for, a report in detail of all policies of insurance written or placed, or liability increased or decreased, or policies continued or renewed or canceled by or through the Broker during the month being accounted for, which shall include all premiums due thereon whether collected or not. Such report shall show the net amount due to the Company and Reinsurer on all such business on the lines of business authorized to be written by the Broker and commissions. Such report shall also include, to the extent not already included, both insurance and reinsurance transactions, including:

(a) statement of written, earned and unearned premiums;

(b) statement of any losses or claims received by the Broker, which such losses and claims shall be forwarded to US Risk as the claims administrator of the Company;

The report shall be received by or confirmed to the Company no later than thirty (30) days from the close of the month for which business is reported. The Company shall maintain such account reports on file for at least five (5) years and shall make the account reports available to the Insurance Commissioner of the state of Delaware (the “Delaware Department”) or any other state insurance department upon request.

5.05 Request for Copies of Policies: The Broker shall account for and furnish to the Company, upon request with reasonable notice, complete copies of all policies issued, copies of all spoiled, voided or otherwise unissued policies.

5.06 Title to Books and Records: The title of all undelivered policies, books, supplies, or other property related to the reinsured business is in the Company, and these shall be delivered to the Company by the Broker immediately upon the termination of this Agreement. The Broker agrees to surrender peaceably the same without compelling the Company to resort to any legal proceedings whatsoever. Upon request of the Company, prior to or after the termination of this Agreement, the Broker shall provide to the Company, at the Broker’s sole cost and expense, electronic copies of any and all data related to the reinsured business in a format reasonably specified by the Company. Further, the Broker shall ensure any vendor or other third party acknowledges and agrees the Company, at no expense to the Company, shall have use of any systems, data, information, reports, files or statistics prior to or after the termination of this Agreement in support of or relating to this Agreement as requested by the Company.

5.07 Advertising: The Broker shall not insert any advertisement respecting the Company in any publication or issue any circular or paper referring to the Company without first obtaining the written consent of the Company. The Broker shall comply with all statutes and regulations pertaining to advertising, and establish and maintain records of any such advertising as required by the applicable laws of the states in which it is doing business.

5.08 Copies of Policies: The Broker shall maintain on behalf of the Company and Reinsurer complete copies of all policies issued hereunder. Any or all policies required to be maintained by Broker pursuant to this Section 5.08 may be maintained in electronic data storage form accessible by computer and if so stored in this fashion, no physical copy of such items need be maintained..

5.09 Renewals, Extensions or New Policies Required by Law: The Broker shall be solely responsible for procuring any renewal, extension, or new policy of insurance that may be required by any state or rule or regulation of any state insurance department with respect to policies originally written directly for the Company. The Broker shall indemnify the Company and hold it harmless from any loss, damage, cost, claim or expense whatsoever that the Company may incur, or for which it may become liable, as a result of the said Broker's failure, refusal or neglect to fulfill said responsibility.

5.10 Obligations to Successors and Assigns: The Broker agrees that its duties and obligations under this Agreement shall be due and owing also to the successors and assigns of the Company or the Reinsurer, as applicable.

5.11 Examination of Broker: The Company shall conduct or cause to be conducted a semi-annual examination of the Broker in accordance with the Company’s examination guidelines. Furthermore, if the Company's aggregate premium volume increases by thirty (30) percent in any thirty (30) day period, the Company, or the Reinsurer on behalf of the Company, at the expense of the Broker, shall examine or cause to be examined within ninety (90) days the Broker if it writes more than twenty (20) percent of the Company's volume and has also experienced a twenty (20) percent increase in premium volume during that same thirty (30) day period.

The examinations required under the preceding paragraph shall adequately provide the Delaware Department with the information outlined in (a) through (e) below, shall be made available to the Commissioner for review, shall remain on file with the Company for a minimum of three (3) years and shall, at a minimum, contain information concerning the following:

(a) timeliness of claims payments (i.e., lag time between date claim is reported and date claim is paid);

(b) timeliness of premium reporting and collection by the Broker;

(d) reconciliation of policy inventory.

5.12 Return of Unearned Premium : The Broker shall return any unearned premium due insureds or other persons on the business which is the subject of this Agreement.

5.13 Licenses: The Broker shall be duly licensed as required under applicable law to perform its duties hereunder.

5.14 Data Calls: Should any state insurance department make a request to the Company for any data required to comply with a statistical data call, the Broker shall be solely responsible to provide the Company with such data. Should the request from such state insurance department require the Company to contract the services of an outside source, such as an actuarial firm, to compile the data required, the Broker shall be responsible for its proportionate share of the total cost for services rendered.

5.15 Per Policy Fees: The Broker, when placing business under this Agreement, may not charge a per-policy fee in excess of any fees allowed by the applicable insurance regulatory authority.

5.16 Financial Examination: The Broker shall provide Company, at the Broker's expense, an independent financial examination in a form acceptable to the applicable state departments of insurance, or other regulatory body, if required.

5.17 Independent Actuarial Opinion5.18 : If required by the applicable insurance regulatory authority, the Broker shall provide annually to the Company, at the Broker’s expense, an independent actuarial opinion attesting to the adequacy of loss reserves established for losses incurred and outstanding on business produced hereunder if the Broker establishes total loss reserves including IBNR.

5.19 Statistical Reporting: The Broker acknowledges receipt of the Company’s Statistical Reporting Policy and Procedure Manual, if applicable, and will act in accordance therewith. The Broker will act, at its sole cost and expense, on behalf of the Company to produce, prepare, and file statistical information with the designated statistical reporting bureau, if applicable. The Broker will also furnish the Company, and other parties as designated by the Company, with monthly, quarterly and annual reports showing statistical data in respect of the business written as required.

5.20 Audited Financial Statements: Upon request of the Company, the Broker shall provide an audited balance sheet of the Broker as at the end of each such fiscal year and the related audited statements of income and of cash flows for such fiscal year in accordance with United States generally accepted accounting principles (“GAAP”) setting forth in each case in comparative form the figures for the previous fiscal year, reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit, by an independent certified public accounting firm satisfactory to the Company (the “Annual Financial Statements”).

In the event that the Broker does not have the audited balance sheet described above, it shall prepare or cause to be prepared for each of its fiscal quarters an unaudited balance sheet of the Broker as at the end of each such fiscal quarter and the related unaudited statements of income and of cash flows for such fiscal year in accordance with GAAP setting forth in each case in comparative form the figures for the fiscal quarter (the “Quarterly Financial Statements”).

No later than thirty (30) days after they are prepared and issued, the Broker shall deliver to the Company a copy of the Broker’s Annual Financial Statements. No later than ten (10) days after they are prepared, the Broker shall deliver to the Company a copy of the Broker’s Quarterly Financial Statements.

5.21 Assigned Risks: This Agreement shall apply to risks assigned to the Company under any assigned risk plan if, in the reasonable judgment of the Company, such risks were assigned to the Company because of the business written hereunder. Should it be determined, in the Company’s sole discretion, that the Broker, or any agent with whom assigned risks are also allocated under a specific assigned risk plan with the Broker, is unwilling or unable to fulfill policyholder obligations under such assigned risk plan, the Company may elect alternative means to fulfill the policyholder obligations under the assigned risk plan.

5.22 SIU5.23 :

(a) If the Broker produces business in California on behalf of the Company, the Broker must adhere to any applicable rules and regulations outlined in California Code of Regulations, Subchapter 9 Insurance Fraud, Article 2 Special Investigative Unit Regulations, in its entirety, and the applicable provisions of the California Insurance Fraud Prevention Act, in addition to the terms and duties set forth in this Agreement. The Broker, the Broker’s personnel, and the Broker’s contracted third party entity(ies), if applicable, must comply with all applicable state or federal anti-fraud requirements, statutes, and regulations. The Broker will require its personnel, and any contracted third party entity(ies), with responsibilities for business under this Agreement, including without limitation, claims handlers, underwriters, policy handlers, call center staff within the claims or policy function, legal staff and other employee classifications that perform similar duties (collectively “Integral Personnel”), to refer suspected fraud to the Company’s designated Special Investigative Unit (“SIU”) as part of their regular duties. Anti-fraud activities performed on behalf of the Company, including processing, investigating, or litigation pertaining to the payment or denial of a claim or application for adjudication of a claim, or an application for insurance, are to be conducted with oversight by the Company’s designated SIU. In the event the Broker maintains any type of SIU facility, all anti-fraud activities related to applications, policies, and claims underwritten, bound, or executed on behalf of the Company will be conducted with oversight by, and referred to, the Company’s designated SIU.

(b) If applicable, the Broker shall comply with all Company requests for anti-fraud related reporting and information as statutorily required. Monthly reports of anti-fraud related data shall include, but not be limited to, the number of California closed claims, the number of California SIU referrals to the Company’s designated SIU, the number of newly hired employees, and the number of Integral Personnel handling the Company’s policies and claims. If the Broker produces business in California on behalf of the Company, the Broker will require all Integral Personnel to successfully complete anti-fraud in-service training that complies with the California Insurance Fraud Prevention Act (California Insurance Code Sections 1871 et seq.) and the regulations promulgated thereunder by December 31st of each year, or other date as may be necessitated by California requirements or reasonably required by the Company. The Broker will provide California-compliant documentation of the completion of such training, in a manner designated by the Company, and by the date specified by the Company. The Broker and its Integral Personnel are expressly prohibited from reporting suspected fraud to any Department of Insurance or other regulatory entity. All suspected fraud is to be referred to the Company’s designated SIU. The Company, directly and through the Company’s designated SIU, shall have the authority to exercise oversight over all aspects of anti-fraud compliance related to the business under this Agreement or activities performed on behalf of the Company. The Broker shall remain responsible for implementation of compliant anti-fraud processes and procedures. The Broker will fully cooperate with the Company’s SIU compliance audits and will ensure that all corrective action plans are implemented on a timely basis.

ARTICLE VI
PREMIUM FINANCING

6.01 Receipt of Notices by Broker: With respect to Policies covered under the provisions of this Agreement, if any premiums are financed, the Broker shall receive and accept on behalf of the Company all notices required by statute, contract or otherwise to be given to the Company, including, without limitation, notices of the existence of premium finance agreements or of cancellation of policies the premiums of which are financed ("financed policies").

6.02 Receipt of Notices by Entitles Other than Broker: No producer, subproducer or any other agent shall be entitled to receive or accept any notice on behalf of the Company, and the Broker shall be responsible for and will indemnify and hold the Company harmless from and against any and all liabilities, losses, claims, damages and expenses incurred by reason of or arising out of any action taken or inaction suffered as a result of receipt of any notice by any person, firm or entity other than the Broker or the Company.

6.03 Return of Unearned Commission: Notwithstanding any other term or provision of this Agreement, the Broker agrees to return and pay over to any premium finance company (whether affiliated with the Company or not) which has sent notice of cancellation of a financed policy to the Broker, on behalf of the Company, within thirty (30) days of receipt of such notice of cancellation, any and all unearned commissions as of the date of cancellation, together with any and all unearned premiums due any premium finance company.

6.04 Rights to Unearned Commission and Survival: The Broker agrees to and does hereby relinquish any and all rights to any unearned commissions for any such financed policy as of the date of cancellation. The obligation of the Broker to refund unearned commissions and unearned premiums on a canceled financed policy shall survive the termination or cancellation of this Agreement for so long as any policy written under the terms of this Agreement remains in force.

ARTICLE VII
TERM AND TERMINATION

7.01 Term and Termination: The effective date of this Agency Agreement is 12:01 a.m., Central Time, on April 1, 2020, and shall remain continuously in force unless canceled as follows:

(a) This Agreement may be canceled by any party at any time by giving at least ninety (90) days prior written notice to the other party. Notice shall be provided by registered mail, return receipt requested, and notice shall be deemed to have been provided on the date of mailing.

(b) Immediately by mutual consent of the Company and the Broker.

(c) At any time, by the Company, without prior notice in the event of the Broker declaring bankruptcy or being declared or found bankrupt or insolvent, or being the subject of a cease and desist order, corrective order, or being placed in, or subject to, a proceeding of supervision, conservation, rehabilitation or liquidation.

(d) Immediately upon written notice by the Company in the event of the cancellation or non-renewal of the Broker's license by the California Department of Insurance.

(e) Immediately upon written notice by the Broker in the event any action against the Company is commenced by Delaware Department or any other applicable state insurance department pursuant to rehabilitation or liquidation. The Company agrees to furnish notice of such action immediately to the Broker.

(f) If the Broker shall default in making remittance for net premiums then this Agreement shall be terminated.

(g) If the Broker shall defraud or attempt to defraud the Company; or any policyholder, then the Company may at its sole discretion cancel this contract by giving the Broker written notice of cancellation served personally or by mail, which shall be effective immediately.

(h) As provided in Section 9.11 of this Agreement.

(i) Automatically and immediately, without notice upon cancellation or termination of the Reinsurance Agreement.

(j) After thirty (30) days written notice by any party in the event that the Company or the Broker mergers with or is acquired by or control of is acquired by any other company or corporation or changes a majority of its officers or board of directors during the term of this Agreement.

7.02 Automatic Renewal: This Agreement shall automatically become renewed from year to year upon the renewal of the license or certificate of authority granted to the Company by the Delaware Department of Insurance, provided this Agreement shall not be otherwise canceled.

7.03 Renegotiation: This Agreement shall be subject to renegotiation by the parties every three years from the effective date of the Agreement.

7.04 Renewals Required by Law: It is expressly agreed and understood that nothing in this Article VI authorizes the Broker to write any new business under this Agreement should the Reinsurance Agreement terminate or this Agreement terminate earlier, except the business that is required to be renewed or issued because of applicable law or regulation, as provided in Section 4.03 of the Reinsurance Agreement.

7.05 No Liability Due to Termination: The Company shall have no liability to the Broker by virtue of the Company's termination of this Agreement as set forth in this Article; it being expressly understood that partial consideration for the Company's grant of agency authority to the Broker is the Broker's promise that the Company shall not be responsible for any damages which might arise by virtue of any termination of this Agreement.

7.06 Expirations: In the event of termination of this Agreement, after the Broker having promptly accounted for and paid over premiums for which it may be liable, the Broker's records, use and control of expirations shall remain the property of the Broker and left in its undisputed possession.

7.07 Obligation Post Termination: Upon termination of this Agreement, the Broker shall not be relieved of or released from any obligation created by or under this Agreement in relation to payment, expenses, reports, accounting or handling, which relate to insurance business reinsured under this Agreement. In the event that this Agreement is terminated, the Broker, for no additional fee, shall, and shall have the authority (unless revoked by the Company at its sole discretion in which case the Reinsurer shall appoint a successor at no cost to the Company) as provided in this Agreement to, continue to perform all of its duties under this Agreement on the remaining policies during the run-off period. The Broker's duties during the run-off period shall include handling and servicing of all policies through their natural expiration, together with any policy renewals required to be made by the provisions of applicable law, whether or not the effective date of such renewal is subsequent to the effective date of cancellation of this Agreement. Further, upon termination of this Agreement, the Broker shall not be relieved of or released from any obligation created by or under this Agreement in relation to payment, expenses, reports, accounting or handling, which relate to the outstanding insurance business under this Agreement existing on the date of such termination. The Broker recognizes that to the extent possible there shall be no cost to or involvement by the Company in servicing this run-off. The Company, the Broker and the Reinsurer will cooperate in handling all such business until the business has expired either by cancellation or by the terms of the policies and all outstanding losses and loss adjustment expenses have been settled.

7.08 Termination on Run-Off Basis: In the event of the termination of the Reinsurance Agreement, this agreement shall be terminated on a run-off basis, and the relevant provisions of this Agreement shall apply to business being run-off. It is also expressly agreed that the terms, conditions and obligations of the Articles II, IV and V, Sections 7.06, 7.07, 7.08 and 7.09, Articles VIII, Section 9.11 and Article X herein shall survive termination of this Agreement.

7.09 Suspension of Authority: The Company may suspend the authority of the Broker during the pendency of any dispute regarding any event of default by the Broker.

ARTICLE VIII
HOLD HARMLESS AND INDEMNIFICATION

8.01 Hold Harmless and Indemnification: The Broker agrees to and does hereby indemnify and hold the Company harmless from and against any and all actions, causes of actions, suits, arbitrations, or proceedings of any kind, liabilities, losses, claims, damages, costs, or expenses (including attorneys' fees and expenses), incurred by the Company by reason of, arising out of, or relating in any way to this Agreement or any action taken or inaction by the Broker in breach of the terms of this Agreement, United States economic trade and sanction laws and regulations as administered by OFAC, or the terms of the Reinsurance Agreement, or which is not in full compliance therewith.

ARTICLE IX
MISCELLANEOUS

9.01 Governing Law: This Agreement has been made and entered into in the State of Texas and shall be governed by and construed in accordance with the laws of the State of Texas.

9.02 Exclusivity: This Agreement is not exclusive and the Company reserves the right to appoint other surplus line brokers in the territory covered by this Agreement and the Broker reserves the right to act as Broker or agent of other insurers or reinsurers.

9.03 Successors: This Agreement shall be binding upon the parties hereto, together with their respective successors.

9.04 Independent Contractor: The Company shall have no right of control over the Broker as to time, means or manner of the Broker's conduct within the terms of the Agreement and the authority herein granted and nothing herein is intended or shall be deemed to constitute the Broker an employee or servant of the Company. The Broker shall at all times be an independent contractor.

9.05 Venue: This Agreement shall be deemed performable at the Company's administrative office in Bedford, Texas, and it is agreed that the venue of any controversy arising out of this Agreement, or for the breach thereof, shall be in Tarrant County, Texas.

9.06 Assignment: No party shall assign any of its rights or obligations under this Agreement. No verbal modification will be recognized by any party hereto and this Agreement cannot be modified by any subsequent practices or course of dealing by the parties inconsistent herewith. If the Company or the Broker shall fail to take advantage of a breach, if any, by another party of the terms, conditions, covenants, or any of them herein contained, such failure shall not be deemed to constitute, or be construed as, a waiver of any rights on the part of the Broker or Company to thereafter enforce any of the said terms, conditions or covenants.

9.07 Amendments: This Agreement may be amended, modified or supplemented only by a written instrument executed by all parties hereto. All such amendments or changes shall specify the effective date of such amendments or changes.

9.08 Entire Agreement: This Agreement supersedes any and all provisions, terms and/or conditions of any other agreements, whether oral or written, by between and among the parties with respect to the subject matter hereof.

9.09 Change of Control: The Broker shall notify the Company in writing within thirty (30) days when there is a change in the ownership of 10% or more of the outstanding stock in the Broker or when there is any change in the Broker's principal officers or directors.

9.10 No Offset: The Broker shall not offset balances due under this Agreement against balances due or owing under any other contract.

9.11 Compliance with Laws: This Agreement shall be interpreted in conformance with applicable Texas law and regulation. If it is found or ordered by a court or regulatory body that any provision or term of this Agreement does not conform to such law or regulation then this Agreement shall be deemed to be amended, and modified to be in accordance with such law. However, where this Agreement is found not to comply with applicable law or regulations, the Company may in its sole discretion terminate this Agreement immediately and without prior notice.

9.12 Counterparts: This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

9.13 Company Surplus Lines Obligations: The Company acknowledges that duties and obligations relating to surplus line insurers and nonadmitted insurers exist under the California Insurance Code and the regulations promulgated thereunder (“California Regulatory Provisions”) and acknowledges further that the duties of compliance delegated to the Broker under this Agreement shall not relieve the Company from any duty or obligation that it may have under the California Regulatory Provisions. The Company further acknowledges and agrees that nothing contained in this Agreement shall transfer to the Broker or the Reinsurer any such obligation of the Company that exists under the California Regulatory Provisions.

9.14 Surplus Lines Obligations: Broker acknowledge that duties and obligations relating to surplus line insurers and nonadmitted insurers exist under the California Regulatory Provisions and that those provisions applicable to the Company as a nonadmitted insurer and surplus line insurer shall not relieve the Company from any duty or obligation that it may have under the California Regulatory Provisions. The Broker further acknowledge and agree that nothing contained in this Agreement shall transfer to the Broker any such obligation of the Company that exists under the California Regulatory Provisions.

9.15 Delegation of Duties: As relates to this Agreement generally and Section 1.09(b), Section 9.13 and Section 9.14 specifically, the Company acknowledges that it has ultimate responsibility for the duties and obligations of a surplus lines insurer as set forth in the California Regulatory Provisions, provided, that the Broker shall perform those certain duties and obligations that are legally delegable and shall indemnify the Company for any resulting losses.

ARTICLE X
ARBITRATION

10.01 Arbitration: As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising between the Company, on the one hand, and the Broker, on the other hand, with respect to this Agreement or with respect to the Broker's and/or the Company's obligations hereunder, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration.

10.02 Choice of Arbiter: The Company shall choose one arbiter (an "Arbiter") and the Broker shall choose one Arbiter. An umpire (an "Umpire") shall be chosen by the two Arbiters, all of whom shall be active or retired disinterested executive officers of property and casualty insurance or reinsurance companies.

10.03 Selection of Umpire: Both the Broker and the Company shall choose an Arbiter within 30 days following a written request by one party to the other to name an Arbiter. In the event either the Company or the Broker fails to choose an Arbiter within this time period, the party who has chosen its Arbiter may choose the unchosen Arbiter. Thereafter, the Arbiters shall choose an Umpire before entering upon arbitration. If the Arbiters fail to agree upon the selection for the Umpire within 30 days following their appointment, each Arbiter shall name three nominees, of whom the other shall decline two and the decision shall be made by drawing lots.

10.04 Venue and Binding Decision: Each side shall present its case to the Arbiters and Umpire, in a hearing in Dallas, Texas. The Arbiters and Umpire shall consider this Agreement as an honorable engagement, as well as a legal obligation, and they are relieved of all judicial formalities and may abstain from following the strict rules of law regarding entering of evidence. The decision in writing by a majority of the Arbiters and Umpire when filed with the Company and the Broker shall be final and binding. Judgment upon the final decision of the Arbiters and Umpire may be entered in any court of competent jurisdiction.

10.05 Entire Dispute Subject to Arbitration: In the event of a dispute between the Company and the Broker concerning this Agreement and the Reinsurance Agreement between the Company and the Reinsurer, regardless of whether either party has claims against the Reinsurer, the entire dispute between the Company and the Broker shall be subject to arbitration as provided under this Article IX.

10.06 Cost of Arbitration: The costs of the arbitration, including the fees of the Arbiters and the Umpire, shall be borne equally by the sides unless the Arbiters and Umpire shall decide otherwise.

10.07 Governing Law: This Agreement shall be interpreted under the laws of Texas and the arbitration shall be governed by the Texas Arbitration Code.

ARTICLE XI
PRIVACY

11.01 Issuance of Privacy Policy: The Broker shall provide to each new policyholder, prior to or upon the issuance of any Policies written under this Agreement, and in accordance with applicable state and federal laws, an initial notice of the Company’s privacy policies and practices. Not less than annually thereafter, the Broker, upon the request of the Company, distribute a copy of the Company’s annual privacy notice, as may be amended from time to time, to each existing policyholder. In addition, the Broker shall, upon the request of the Company, distribute revised privacy notices and opt-out notices as applicable to each policyholder to reflect any revisions which may be made to the Company’s privacy policies and practices. In each case, the Company shall be responsible for providing the Broker with a copy of the form for its privacy policies and practices notice, which forms the Broker shall use to create and deliver the notices described herein, at the Broker’s sole cost and expense. These notices shall be created and delivered independent of any separate legal obligation the Broker may have to create and deliver its own such notices.

11.02 No Disclosure of Information: The Broker shall not disclose or use any nonpublic personal financial information or nonpublic personal health information related to any policyholder, or to any consumer or customer (as such terms are defined under applicable state and federal privacy laws), except as necessary to carry out its duties and obligations under this Agreement or as otherwise permitted under applicable state or federal law.

11.03 Development of Security Program: The Broker shall develop and implement, in accordance with applicable state and federal laws, a comprehensive written information security program designed to (i) ensure the security and confidentiality of nonpublic personal financial information and nonpublic personal health information related to any policyholder, or to any consumer or customer (as such terms are defined under applicable state and federal privacy laws), (ii) protect against any anticipated threats or hazards to the security or integrity of such information, and (iii) protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

[THE REMAINDER OF THE PAGE IS LEFT INTENTIONALLY BLANK.

SIGNATURES APPEAR ON THE FOLLOWING PAGE.]

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized representatives have executed this Agreement as of the date first above written.

UNITED SPECIALTY INSURANCE COMPANY

BY: /s/ David Cleff

ITS: EVP

DATE:11/24/2020

UNIFAX INSURANCE SYSTEMS, INC.

BY: /s/ Ronald A. Closser

ITS: President/CEO

DATE:11/21/2020

TABLE OF CONTENTS

Page

RECITALS	1
ARTICLE I AUTHORIZATION, AUTHORITY AND DUTIES	1
1.01 Authorization	1
1.02 Maximum Premium	1
1.03 Classes of Business	1
1.04 Policy Limits	2
1.05 Eligible Jurisdictions	2
1.06 Authority	2
1.07 Compliance	3
1.08 No Independent Authority	4
1.09 Power to Accept or Bind Risk	4
1.10 No Participation in Syndicates	4
1.11 Licenses in Other States	4
1.12 Surplus Lines Obligations	4
1.13 Limitations on Authority	4
1.14 Retention of Retail Producers	5
1.15 Taxes and Fees	5
1.16 Filings and Reports	5
ARTICLE II PREMIUMS	5
2.01 Collection of Premium	5
2.02 Premium Data	5
2.03 No Waiver of Trust Relation	5
2.04 Broker Liable for Payment of Premium	6
2.05 Remittance of Funds	6
2.06 Funds Held as Fiduciary	6
2.07 Funds Held as Fiduciary	6
ARTICLE III COMPENSATION TO THE BROKER	6
3.01 Compensation and Deductions	6
3.02 No Liability of Company for Amounts owed by Reinsurer	7
3.03 Return of Commission	7
ARTICLE IV PRODUCERS	7
4.01 Responsibility for Compliance	7
4.02 Responsibility for Performance	8
4.03 Responsibility for Commission Payments	8
4.04 No Service on Board of Directors	8
4.05 No Employment of Company Employee	8
ARTICLE V ADDITIONAL DUTIES OF BROKER	8
5.01 Compliance with Laws	8
5.02 Books and Records	8
5.03 Statistical Information	8
5.04 Reports	8
5.05 Request for Copies of Policies	9
5.06 Title to Books and Records	9
5.07 Advertising	9
5.08 Copies of Policies	9
5.09 Renewals, Extensions or New Policies Required by Law	9
5.10 Obligations to Successors and Assigns	10
5.11 Examination of Broker	10
5.12 Return of Unearned Premium	10
5.13 Licenses	10
5.14 Data Calls	10
5.15 Per Policy Fees	10
5.16 Financial Examination	10
5.17 Statistical Reporting	10
5.18 Audited Financial Statements	11
ARTICLE VI PREMIUM FINANCING	11
6.01 Receipt of Notices by Broker	11
6.02 Receipt of Notices by Entitles Other than Broker	11
6.03 Return of Unearned Commission	11
6.04 Rights to Unearned Commission and Survival	11
ARTICLE VII TERM AND TERMINATION	12
7.01 Term and Termination	12
7.02 Automatic Renewal	12
7.03 Renegotiation	12
7.04 Renewals Required by Law	12
7.05 No Liability Due to Termination	13
7.06 Expirations	13
7.07 Obligation Post Termination	13
7.08 Termination on Run-Off Basis	13
7.09 Suspension of Authority	13
ARTICLE VIII HOLD HARMLESS AND INDEMNIFICATION	13
8.01 Hold Harmless and Indemnification	13
ARTICLE IX MISCELLANEOUS	14
9.01 Governing Law	14
9.02 Exclusivity	14
9.03 Successors	14
9.04 Independent Contractor	14
9.05 Venue	14
9.06 Assignment	14
9.07 Amendments	14
9.08 Entire Agreement	14
9.09 Change of Control	14
9.10 No Offset	14
9.11 Compliance with Laws	14
9.12 Counterparts	15
9.13 Company Surplus Lines Obligations	15
9.14 Surplus Lines Obligations	15
9.15 Delegation of Duties	15
ARTICLE X ARBITRATION	15
10.01 Arbitration	15
10.02 Choice of Arbiter	15
10.03 Selection of Umpire	15
10.04 Venue and Binding Decision	16
10.05 Entire Dispute Subject to Arbitration	16
10.06 Cost of Arbitration	16
10.07 Governing Law	16
ARTICLE XI PRIVACY	16
11.01 Issuance of Privacy Policy	16
11.02 No Disclosure of Information	16
11.03 Development of Security Program	16

EXHIBIT 10.10

CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.

[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.

CLAIMS ADMINISTRATION AGREEMENT

THIS Claims Administration Agreement (the “Agreement") dated as of April 1, 2020, and effective as of April 1, 2020, is made by and between UNITED SPECIALTY INSURANCE COMPANY, an insurer domiciled in Delaware with principal offices in Bedford, Texas ("Company") and U.S. RISK MANAGERS, INC., a California corporation with principal offices in Calabasas, California that provides claims administration services ("US Risk"). Company and US Risk are collectively “Parties.”

RECITALS:

A. The Company is an approved surplus lines insurer in the State of California and is an eligible surplus lines insurer in the other states and District of Columbia.

B. US Risk is a claims administrator and a licensed claims adjuster in California.

C. The Company desires to retain US Risk to provide claims administration and related services for certain surplus lines business insured by the Company in California and other states to allow US Risk to provide specific services in connection with claims arising under surplus lines policies issued by Company on the terms and conditions specified in this Agreement.

NOW, THEREFORE, in consideration of the recitals and for other good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties agree as follows:

A. Services and Authority

(1) The Company hereby retains US Risk and grants it authority to manage and settle claims arising under surplus lines insurance policies issued by the Company in California and placed by the Broker (hereinafter referred to as "Claim(s)") as set forth in Exhibit A, as amended from time to time, which is attached and incorporated herein by reference.

(2) The maximum dollar amount of such authority per claim shall not exceed the greater of [***] of the Company’s policyholder surplus as of December 31 of the last completed calendar year or [***]. Claims settlements in excess of such authority require the prior approval of the Company.

(3) The authority granted US Risk shall include, generally, the processing, investigating, adjusting, compromising, defending, litigating, and supervising Claims, and pursuing and collecting salvage recoveries for Claims, according to generally accepted procedures normally followed in the insurance claims business and specifically according to the operations and procedures of US Risk. US Risk shall provide first notice of loss, and salvage and subrogation services.

(4) The Company grants to US Risk authority to appoint and supervise professional adjusters, appraisers, and attorneys, special investigators, and other professional employees and vendors to investigate, appraise, adjust, compromise, settle, defend, and litigate Claims. Such independent claims adjusters are not the agents of the Company and the Company shall be held harmless and indemnified by US Risk 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.

(5) Subject to the limitation of subparagraph A.(2), the Company grants to US Risk authority to settle and pay any Claim within the policy limits.

(6) The Company retains final authority to determine any disputes relating to claims settlement and setting of loss reserves.

B. Obligations of the Parties

(1) US Risk shall diligently manage and pursue the prompt, fair, and reasonable settlement and/or defense of all Claims in the Company's best interest.

(2) US Risk shall notify the Company and Crusader Insurance Company (“Reinsurer”) within five (5) business days of becoming known with respect to any loss or Claim that:

(a) involves a demand in excess of policy limits;

(b) alleges bad faith;

(c)

alleges a violation of any applicable unfair practices and unfair competition statutes;

(d)

results in legal action being instituted against US Risk, the Company, Reinsurer or Unifax Insurance Systems, Inc. (“Broker”);

(e)

is open for more than six months;

(f)

involves a coverage dispute.

(3) US Risk or its assigned independent adjustment firm shall comply with licensing requirements in each state in which it adjusts Claims.

(4) In the course of its duties, US Risk will:

(a) Operate in accordance with US Risk's procedures and make available to the Company copies of the procedures and any future revisions thereto;

(b) Conduct an investigation of each reported Claim within the time frames prescribed by applicable insurance regulations;

(d) Conduct necessary inspections and appraisals;

(e) Maintain files for each reported Claim, which shall be available for inspection, review, and copying by the Company, the Reinsurer or their respective duly authorized representatives;

(f) Perform reasonable and necessary administrative and clerical work in connection with reported Claims;

(g) Prepare checks requests, compromises, releases, agreements, and any other documents reasonably necessary to finalize Claims;

(h) Perform a continuous review of outstanding Claim reserves and adjust reserves to reflect exposure;

(i) Record promptly each loss and allocated loss adjustment expense paid, and all salvage sums recovered for each Claim;

(j) Diligently pursue and prosecute the Company's salvage rights relating to Claims subject to this Agreement. US Risk shall use all reasonable efforts to collect and prepare deposits of funds (net of collection expenses) arising from the enforcement of such rights into the Company's Loss Fund Account;

(k) Exercise reasonable care at all times in the performance of its duties hereunder;

(l) Timely record and respond to all Department of Insurance complaints with copies of correspondence to the Company;

(m) Upon reasonable request by the Company, US Risk shall provide pertinent claim information for submission to the Company's reinsurers.

(5) US Risk shall establish a separate claim register or method of recording Claims so that all Claims may be segregated and identified separate and apart from other records of US Risk, with such claims register to identify each Claim on an individual case basis both as to identify the insured(s) and the claimant, the reserve for loss and adjusting expense, the date when such reserve was established, and if closed, whether such Claim was closed with or without payment, and if with payment, the amount paid thereon.

(6) US Risk may subcontract with independent contractors to perform any obligations hereunder, which shall be subject to prior written approval of the Company upon request by the Reinsurer; provided, that photographers, appraisers and independent investigators or adjusters assigned to assess or assist in the assessment of an individual claim, shall not require such prior written approval.

(7) The Company shall have ultimate control and responsibility of the functions that it has delegated, and will monitor services annually for quality assurance.

(8) All books and records of the Company shall include all books and records developed or maintained under or related to this Agreement.

(9) The Company shall own and have custody of its general corporate accounts and records.

(10) The Company shall not be responsible for US Risk’s expenses and costs, including but not limited to salaries, bonuses, rentals, transportation, facilities, fees of soliciting insurance producers, postage, advertising, exchange, license fees of the surplus lines broker or its personnel, or any other expense whatsoever of US Risk.

(11) US Risk may not commit the Company to a claim settlement with a reinsurer other than the Reinsurer without the prior written approval of the Company. If such prior written approval is given, US Risk shall forward promptly a report to the Company concerning such transaction and/or payment.

(12) The Company may suspend or terminate the settlement authority of US Risk in its sole discretion.

C. Loss Fund

(1) US Risk shall establish an account for payment of Claims by US Risk pursuant to this Agreement (referred to as the “Loss Fund Account”). US Risk shall issue checks drawn on the Loss Fund Account for payment of Claims. US Risk is obligated to advance funds to pay Claims. US Risk is not obligated to advance funds for any obligation unrelated to those under this Agreement.

(2) US Risk agrees that all funds in the Loss Fund Account will be held in a fiduciary capacity for the benefit of the Company and the Reinsurer. US Risk shall deposit into the Loss Fund Account any and all funds received from Company or Reinsurer pursuant to this Agreement.

(3) The Loss Fund Account will be established as a zero balance account that will be automatically funded by the Reinsurer. In the event that, in US Risk’s reasonable opinion, the funds in the Loss Fund Account are not sufficient to make claim payments. US Risk shall promptly notify Company and Reinsurer in writing of any projected increase in funding needed to make claim payments. In the event of any actual or projected shortfall in the amount in the Loss Fund Account, US Risk shall promptly request the Reinsurer to make any transfers of funds as required within five (5) working days of receipt of a written request from US Risk on behalf of the Company, or as soon as practicable, but always within any applicable state requirements.

(4) No later than thirty (30) days following the end of the month during which the business is written, US Risk shall send monthly reports to Company and the Reinsurer for all loss and expense paid, loss adjustment expenses paid and expenses outstanding and losses incurred but not reported by US Risk in adjusting Claims under this Agreement in the month covered by the invoice, net of recoveries and excluding any Extraordinary Claims Payments, to enable the Company to record statistics required by statutes, regulation or upon call by authorities having competent jurisdiction. Such data shall be segregated by lines of insurance and location of risk.

(5) Extraordinary Claim Payment means any claims payment exceeding the authority granted in Section A(2) of this Agreement. US Risk shall notify Company and Reinsurer in advance, of any Extraordinary Claim Payment accompanied by the following information: policy number, Company claim number and payee.

(6) US Risk agrees that the funds contained in the Loss Fund Account shall not be commingled with any other type of funds, including, without limitation, any operating funds or capital of US Risk. In no event shall funds contained in the Loss Fund Account be used to pay any operating expenses or overhead of US Risk.

D. Claim Payments

For purposes of Claim-related settlements and expenses, US Risk shall issue Claims and expense payments from the Loss Fund Account and mail the checks directly to the payees in compliance with the fair claims practices laws.

E. Compensation

(1) US Risk shall be paid the fee listed in Exhibit B. The fee will be the exclusive compensation paid to US Risk under this Agreement for its services.

(2) Company shall cause the fee to be paid by Unifax Insurance Systems, Inc. (the “Broker”). US Risk shall not sue or seek arbitration against the Company for any failure by the Broker to remit the fee to US Risk.

(3) US Risk will not charge for postage and other incidentals and it will not charge an additional administrative or overhead fee.

F. Property of Company

(1) All forms and the Company supplies furnished to US Risk by the Company shall at all times remain the property of the Company. All such property and supplies shall be returned to an authorized representative of the Company promptly upon the Company's demand.

(2) All funds and invested assets of the Company are the exclusive property of the Company, held for the benefit of the Company, and subject to the control of the Company.

G. Inspection of Records

(1) US Risk shall maintain in good order, for the period required by law, complete records and accounts of all Claims, correspondence, and related documentation, either as hard copies, as image files, or as archived data files on fixed and movable media. All records and accounts relating in any way to Claims shall be open at all reasonable times for inspection and copying by authorized representatives of the Company and its reinsurers. US Risk shall account for and furnish to the Company, upon request with reasonable notice but no more than thirty (30) days from such request, complete copies of all claim files created with respect to all loss occurrences under any policy issued under this Agreement. US Risk will return closed claims to the Company for storage.

(2) The Company may conduct or cause to be conducted an examination of US Risk in accordance with the Company’s examination guidelines.

(3) The examinations required shall adequately provide the Delaware Department with the information outlined below, shall be made available to the Commissioner for review, shall remain on file with the Company for a minimum of three (3) years and shall, at a minimum, contain information concerning the following:

(a) claims procedures;

(b) timeliness of claims payments (i.e., lag time between date claim is reported and date claim is paid);

(c) compliance by the US Risk with claims handling guidelines and applicable law, including unfair claims practices laws and regulations.

H. Confidentiality

(1) For the purposes of this Agreement the following shall be treated as "Confidential Information":

(a) all information contained in the Records maintained by US Risk in connection with the services provided under this Agreement and statistical information derived therefrom; and

(b) all information coming into the possession of US Risk in the course of providing the services or executing the duties required under this Agreement; and

(d) all information subject to privacy and data protection statutes and regulations excluding any information which is in the public domain or comes into the public domain other than by breach of this clause.

(2) US Risk undertakes to keep private and confidential and not to disclose to any person or entity whomsoever all Confidential Information except:

(a) as required for the proper performance of this Agreement, provided, however, that US Risk shall take all reasonable steps to maintain the confidentiality of any information so disclosed;

(b) for enforcement of rights as may be required by law or by a court of competent jurisdiction;

(d) for the purposes of taking professional advice from persons under a like duty of confidentiality.

(3) US Risk shall, where practicable, consult with the Company before making any disclosure under paragraphs G.(2)(b) and G.(2)(c) above. It is understood and agreed that money damages will be insufficient to cover any breach of the confidentiality provisions of this Agreement, and the parties agree that any of them will be entitled to injunctive relief in the event of an actual or threatened breach of this clause.

(4) US Risk shall advise the Company immediately of any unauthorized access obtained to, or breaches allowing unauthorized access to, Confidential Information.

(5) The confidentiality provisions shall survive the termination of this Agreement.

I. Term of Agreement

(1) The effective date this Agreement is 12:01 a.m., Central Time, on April 1, 2020, and shall remain continuously in force unless canceled in accordance with Termination paragraph.

(2) This Agreement shall automatically renew from year to year upon the renewal of the license or certificate of authority granted to the Company by the Delaware Department of Insurance, provided this Agreement shall not be otherwise canceled. This Agreement shall be subject to renegotiation by the parties every three years from the effective date of the Agreement.

J. Termination

(1) This Agreement may be terminated for any reason by either party upon ninety (90) days' prior written notice to the other party. Notice shall be provided by registered mail, return receipt requested, and notice shall be deemed to have been provided on the date of mailing.

(2) Immediately by mutual consent of the Company and US Risk.

(3) At any time, by the Company, without prior notice in the event of US Risk declaring bankruptcy or being declared or found bankrupt or insolvent, or being the subject of a cease and desist order or corrective order.

(4) Immediately by US Risk in the event any action against the Company is commenced by Texas Department of Insurance or other applicable state insurance department pursuant to rehabilitation or liquidation. The Company agrees to furnish notice of such action immediately to the Broker.

(5) Automatically and immediately, without notice upon cancellation or termination of the Surplus Line Broker Agreement between the Company and the Broker, effective on the effective date hereof.

(6) Immediately upon written notice by the Company in the event of the cancellation or non-renewal of US Risk’s license by the California Department of Insurance.

(7) If US Risk shall defraud or attempt to defraud the Company; or any policyholder, then the Company may at its sole discretion cancel this contract by giving US Risk written notice of cancellation served personally or by mail, which shall be effective immediately.

(8) After thirty (30) days written notice by any party in the event that the Company or US Risk mergers with or is acquired by or control of is acquired by any other company or corporation or changes a majority of its officers or board of directors during the term of this Agreement.

(9) In the event this Agreement is terminated, US Risk will have the authority and obligation (unless revoked by the Company at its sole discretion) to continue to manage the Company's claims during the run-off period, the costs of which will be paid by the Reinsurer. .

K. Insurance

US Risk shall maintain errors and omissions insurance under a current and paid-up policy, issued by an insurer reasonably acceptable to the Company, which insurance shall have a policy limit of no less than [***] and a deductible no greater than [***] for the duration of US Risk's service under the Agreement.

L. Compliance with Legal Requirements

Each Party shall perform its duties hereunder in accordance with all applicable laws, statutes, and regulations, including, without limitation, the applicable state statutes and regulations governing unfair claims handling practices.

M. Notices

Any notice or other communication hereunder shall be in writing and shall be deemed fully made or given to any party hereto:

(1)

When hand delivered;

(2)

On the business day after it is delivered to a recognized overnight courier service for overnight delivery to such party at the address of such party stated below (or to such changed address as such party may have fixed by notice); or

(3)

Three (3) business days after it is mailed postage prepaid, by registered or certified mail, return receipt requested, addressed to the address of such party stated below (or to such changed address as such party may have fixed by notice):

To US Risk at:	To the Company at:
26050 Mureau Road	1900 L. Don Dodson Drive
Calabasas, CA 91302	Bedford, TX 76021
Attn: President	Attn: President

N. Governing Law: Jurisdiction

This Agreement and its validity, construction, and performance shall be governed in all respects by the laws of the State of Texas without giving effect to principles of conflicts of law. The parties consent and submit to the exclusive jurisdiction of any Texas or Federal Court sitting in the City or County of Dallas in any action or proceeding arising out of or relating to this Agreement or the enforcement thereof; and the parties consent to process in any such action or proceeding served by registered or certified mail, which service shall be sufficient to confer personal jurisdiction over the party so served.

O. Arbitration

(1) As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion arising between the Company and US Risk with respect to this Agreement or with respect to the US Risk’s and/or the Company's obligations, the Parties mutually agree that such dispute or difference of opinion shall be submitted to arbitration.

(2) The Company shall choose one arbiter (an "Arbiter") and US Risk shall choose one Arbiter. An umpire (an "Umpire") shall be chosen by the two Arbiters, all of whom shall be active or retired disinterested executive officers of property and casualty insurance or reinsurance companies.

(3) Both US Risk and the Company shall choose an Arbiter within 30 days following a written request by one party to the other to name an Arbiter. In the event either the Company or US Risk fails to choose an Arbiter within this time period, the party who has chosen its Arbiter may choose the unchosen Arbiter. Thereafter, the Arbiters shall choose an Umpire before entering upon arbitration. If the Arbiters fail to agree upon the selection for the Umpire within 30 days following their appointment, each Arbiter shall name three nominees, of whom the other shall decline two and the decision shall be made by drawing lots.

(4) Each side shall present its case to the Arbiters and Umpire, in a hearing in Dallas, Texas. The Arbiters and Umpire shall consider this Agreement as an honorable engagement, as well as a legal obligation, and they are relieved of all judicial formalities and may abstain from following the strict rules of law regarding entering of evidence. The decision in writing by a majority of the Arbiters and Umpire when filed with the Company and US Risk shall be final and binding. Judgment upon the final decision of the Arbiters and Umpire may be entered in any court of competent jurisdiction.

(5) The costs of the arbitration, including the fees of the Arbiters and the Umpire, shall be borne equally by the sides unless the Arbiters and Umpire shall decide otherwise.

(6) This Agreement shall be interpreted under the laws of Texas and the arbitration shall be governed by the Texas Arbitration Code.

P. Receivership

If the Company is placed in receivership or seized by the Commissioner (the "Commissioner") of the Texas Department of Insurance:

(1) All of the rights of the Company under this agreement extend to the receiver or the Commissioner.

(2) All books and records will immediately be made available to the receiver or the commissioner, and shall be turned over to the receiver or the commissioner immediately upon request.

(3) US Risk has no automatic right to terminate the agreement if the insurer is placed in receivership or seized by the commissioner.

(4) US Risk will continue to maintain any systems, programs or other infrastructure if the insurer is placed in receivership or seized by the Commissioner, and will make them available to the receiver or the Commissioner for as long as US Risk continues to receive timely payment for services rendered.

Q. Indemnification

(1) US Risk agrees to indemnify, defend, and hold Company harmless from and against any and all claims, demands, actions, proceedings, losses, damages, costs and expenses (including attorneys' fees), made or instituted against, or incurred by Company and arising out of or in connection with this Agreement and the performance hereunder by US Risk.

(2) Company agrees to indemnify, defend and hold US Risk harmless from and against any and all claims, demands, actions, proceedings, losses, damages, costs and expenses (including attorneys' fees), made or instituted against, or incurred by US Risk and arising out of or in connection with any negligence or willful misconduct on the part of the Company in breach of its obligations under this Agreement which has been finally determined by a court of competent jurisdiction, after the exhaustion of all appeals.

R. Independent Contractor

The Parties hereto agree that US Risk and its agents and employees, in the performance of this Agreement, shall act in an independent capacity and not as officers, employees, or agents of the Company.

S. Miscellaneous

(1) This Agreement sets forth the entire agreement and understanding of the parties with respect to the transactions contemplated hereby, and merges and supersedes all prior discussions, written or verbal, and agreements and understandings of every kind and nature, as to the subject matter hereof, and no party hereto shall be bound by any condition, definition, warranty, or representation relating to such subject matter other than as expressly provided for in this Agreement or subsequent writing signed by the party hereto which is to be bound thereby. This Agreement may not be terminated, modified, or amended, nor may any provision hereof be waived, except by a writing signed by the party to be charged.

(2) The headings used in this Agreement are inserted for convenience of reference only and shall not in any way affect the meaning or interpretation of this Agreement.

(3) This Agreement shall be binding upon and shall inure to the benefit of the successors of the parties. This Agreement shall not be assigned by the parties.

(4) If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner render invalid or unenforceable any other provision of this Agreement.

(5) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall be deemed one and the same instrument.

(6) The parties shall execute and deliver such other documents or instruments as may be required by law or regulation to implement the provisions and intent of this Agreement.

(7) The persons signing this Agreement on behalf of the parties warrant, covenant, and represent that they are duly authorized to execute this Agreement on behalf of the parties for whom they are signing.

(8) No waiver of any breach or violation of any clause, paragraph, term, or condition of this Agreement shall be deemed a waiver of any subsequent breach or violation of the same, nor shall the same be deemed waived unless such waiver is evidenced by a writing signed by the party being charged therewith.

(9) US Risk shall notify the Company in writing within thirty (30) days when there is a change in the ownership of 10% or more of the outstanding stock of US Risk or when there is any change in US Risk's principal officers or directors.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized representatives have executed this Agreement as of the date first above written.

UNITED SPECIALTY INSURANCE COMPANY

BY: /s/ David Cleff

ITS: EVP

DATE:11/24/2020

U.S. RISK MANAGERS, INC.

BY: /s/ Ronald A. Closser

ITS: President/CEO

DATE:11/21/2020

Exhibit A

US Risk shall administer Claims arising under policies for the classes of business described below issued by the Company in California and other states.

(a) Property

(b) General Liability

(c) Commercial multi-peril property (including burglary, theft, inland marine and truckers’ long haul physical damage and truckers’ short haul physical damage)

(d) Commercial multi-peril liability:

(1) Commercial multi-peril liability (including burglary, theft, garage and fidelity, trucking, long-haul and trucking short-haul), provided that the Broker has no authority to write commercial multi-period liability for contractors

Exhibit B

Company agrees that US Risk shall be paid a fee by the Broker on behalf of the Company as a percentage of earned premium according to the following schedule:

[***]

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

CERTIFICATION:

I, Michael Budnitsky, certify that:

1. I have reviewed this annual report on Form 10-K of Unico American Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 31, 2021

/s/ Michael Budnitsky

Michael Budnitsky

President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

CERTIFICATION

I, Michael Budnitsky, certify that:

1. I have reviewed this annual report on Form 10-K of Unico American Corporation;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 31, 2021

/s/ Michael Budnitsky

Michael Budnitsky

Treasurer, Chief Financial Officer, and Secretary

EXHIBIT 32.1

CERTIFICATION UNDER SECTION 906

OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the annual report on Form 10-K of Unico American Corporation (the "Company") for the period ended December 31, 2020, as filed with the Securities and Exchange Commission (the "Report"), I, Michael Budnitsky, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael Budnitsky

Name: Michael Budnitsky

Title: President and Chief Executive Officer

Date: March 31, 2021

EXHIBIT 32.2

CERTIFICATION UNDER SECTION 906

OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the annual report on Form 10-K of Unico American Corporation (the "Company") for the period ended December 31, 2020, as filed with the Securities and Exchange Commission (the "Report"), I, Michael Budnitsky, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael Budnitsky

Name: Michael Budnitsky

Title: Treasurer, Chief Financial Officer, and Secretary

Date: March 31, 2021