8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 8-K

CURRENT REPORT

Pursuant To Section 13 OR 15(d) Of The Securities Exchange Act Of 1934

Date of report (Date of earliest event reported): August 21, 2007

FIRST MERCURY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	001-33077	38-3164336
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification Number)

29110 Inkster Road Suite 100 Southfield, Michigan	48034
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, including area code:  (800) 762-6837

Not Applicable

(Former name or former address, if changed since last report)

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

Employment Agreement with Richard H. Smith

On August 21, 2007, First Mercury Financial Corporation (the “Company”) entered into an Employment Agreement (the “Agreement”) with its Chairman, President and Chief Executive Officer, Richard H. Smith. The Agreement is effective as of August 1, 2007 and, unless earlier terminated, continues for a period of five years with automatic renewal for successive twelve (12) month periods unless terminated by the Company or Mr. Smith within a specified period prior to the end of the initial term or any renewal thereof. Under the Agreement, Mr. Smith agrees to serve as Chairman, President and Chief Executive Officer of the Company and to perform such duties as are traditionally associated with such positions.

The Agreement provides that Mr. Smith will be paid an annual base salary of $750,000, subject to review at least annually by the Compensation Committee of the Company’s Board of Directors (the “Board”). Mr. Smith will also be eligible to (i) participate in the Company’s Performance Based Annual Incentive Plan (or other short term incentive plan), (ii) receive awards under the Company’s Omnibus Incentive Plan of 2006 (or any successor equity based compensation plan) and (iii) participate in the Company’s Supplemental Executive Retirement Plan.

In addition to termination in the event of death or disability, Mr. Smith’s employment may be terminated by the Company for cause (as defined in the Agreement), by Mr. Smith for good reason (as defined in the Agreement) or by the Company without cause or by Mr. Smith without good reason. In the event of termination by the Company without cause or by Mr. Smith for good reason, Mr. Smith will be entitled to (i) payment of any accrued base salary, accrued vacation and a pro rata bonus in a lump sum within ninety (90) days of the date of termination, (ii) benefits in accordance with the terms of the applicable Company employee benefit plans through the date of termination and (iii) his rights with respect to any equity awards as determined under the terms of the plan and any grant agreement under which such awards were granted and his rights with respect to the Company’s Supplemental Executive Retirement Plan as determined in accordance with the terms of such plan. In addition to the foregoing benefits, if Mr. Smith executes a release of claims against the Company in connection with a termination by the Company without cause or by Mr. Smith for good reason, Mr. Smith will be entitled to receive (1) an amount equal to the sum of (x) thirty (30) months of base salary plus (y) an amount equal to the sum of the actual annual incentive bonuses paid to Mr. Smith in the two fiscal years immediately preceding the fiscal year in which the termination occurs multiplied by 1.25 (the sum of (x) and (y) being the “Separation Amount”), payable as provided in the Agreement and (2) in the event Mr. Smith makes a timely election of COBRA continuation coverage, the Company shall either pay directly or reimburse Mr. Smith for all related COBRA premiums due with respect to such continuation coverage for the lesser of the term of such coverage or thirty (30) months.

In the event that the Company elects to terminate Mr. Smith’s employment without cause or Mr. Smith elects to terminate his employment for good reason and the date of termination occurs within a certain period prior to or following the effective date of a change in control event (as defined in the Agreement), any and all equity awards which are not vested on the termination date shall be deemed to have vested on the termination date and the Separation Amount shall be paid in a lump sum promptly following the later of the termination date or the effective date of the change in control event.

Mr. Smith is subject to perpetual obligations of confidentiality under the Agreement as well as to customary non-competition and non-solicitation covenants which continue for a period of twenty-four (24) months following termination of employment.

The foregoing description of the Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Agreement, a copy of which is attached as Exhibit 10.1 to this Current Report on Form 8-K and is incorporated herein by reference in its entirety.

Supplemental Executive Retirement Plan

On August 21, 2007, the Board adopted the First Mercury Financial Corporation Supplemental Executive Retirement Plan (the “SERP”). The purpose of the SERP is to permit a select group of highly compensated employees of the Company to defer the receipt of income which would otherwise become payable to them. It is intended that all of the benefits payable under the SERP will be subject to the terms of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). The SERP will be administered by a committee (the “Committee”) of individuals named by the Board. Eligibility to participate in the SERP will be limited to those select key employees of the Company who are designated by management from time to time and approved by the Committee.

The amount of the annual contribution, if any, for each participant will be determined annually by the Committee in its sole discretion. In its sole discretion, the Company may also make discretionary contributions to a participant’s account. A participant’s annual contributions and interest thereon will become vested in accordance with a vesting schedule based on the participant’s number of years of service with the Company after becoming eligible for participation in the SERP. A participant’s annual contributions and interest thereon will not become vested until seven (7) years of participation, at which time they will become 50% vested, and will become 100% vested after ten (10) years of participation. A participant’s discretionary contributions and interest thereon will become vested as determined by the Committee. In the event of the death, disability or retirement on or after the age of sixty (60) of a participant, or upon a change in control (as defined in the SERP), such participant’s account shall become 100% vested.

The participant’s account will be distributed to the participant upon the participant’s separation of service with the Company after the age of sixty (60), either in a lump sum equal to the vested account balance or in annual installments for a period of either five (5) or ten (10) years as selected by the participant. Upon separation from service with the Company prior to retirement at age sixty (60), a participant’s vested account will be distributed to the participant in the form of a lump sum payable as soon as practical after the date of the participant’s separation from service. Notwithstanding any other provision of the SERP, payments of benefits from a participant’s account caused by the separation from service (for reason other than death) of a participant who is determined to meet the definition of “Specified Employee” as defined in Section 416(i) of the Code will be payable as provided in the SERP, except that the initial payment shall be made no earlier than six (6) months following separation from service with the Company.

The foregoing description of the SERP does not purport to be complete and is qualified in its entirety by reference to the complete text of the SERP, a copy of which is attached as Exhibit 10.2 to this Current Report on Form 8-K and is incorporated herein by reference in its entirety.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

10.1	Employment Agreement, effective as of August 1, 2007, between First Mercury Financial Corporation and Richard H. Smith.
10.2	First Mercury Financial Corporation Supplemental Executive Retirement Plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

FIRST MERCURY FINANCIAL CORPORATION

(Registrant)

DATE: August 27, 2007	BY	/s/ John A. Marazza
		John A. Marazza
		Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary

EX-10.1

Execution Copy

EMPLOYMENT AGREEMENT

This Employment Agreement is made and entered into as of the Effective Date (as defined below) by and between First Mercury Financial Corporation, a Delaware corporation having its principal place of business in Southfield, Michigan (“Company”), and Richard H. Smith, a resident of the State of Michigan (“Executive”).

RECITALS

A. Executive is currently employed by Company as its Chief Executive Officer.

B.Company and Executive now desire to enter into this Agreement which shall, from and after the Effective Date, govern the terms and conditions of Executive’s continued employment by Company.

NOW, THEREFORE, in consideration of the foregoing premises and the promises and covenants herein, the parties hereby agree as follows:

AGREEMENT

1.Definitions. When used in this Agreement and initially capitalized, the following terms shall have the meanings set forth below:

(a)“Accrued Base Salary” means any unpaid Base Salary of Executive earned through the Termination Date.

(b)“Accrued Bonus Amount” means the unpaid portion of any Annual Incentive Bonus awarded to Executive by action of the Committee with respect to a Fiscal Year.

(c)“Accrued Vacation Amount” means all compensation payable to Executive following his Termination for accrued but unused vacation days determined in accordance with Company’s vacation policy.

(d)“Affiliate” means with respect to any Person any entity controlled by, under the control of, under common control with such Person within the meaning of the Exchange Act.

(e)“Agreement” means this Employment Agreement as in effect from time to time.

(f)“Annual Incentive Bonus” means with respect to a Fiscal Year the award, if any, granted to Executive by the Committee under the terms of the First Mercury Financial Corporation Performance Based Annual Incentive Plan or any other short term incentive compensation plan subsequently established by Company for the benefit of executive level employees of Company.

(g)“Base Amount’ means with respect to Executive as of any point in time his base amount with respect to his employment with Company determined under Section 280G(b)(3)(A).

(h)“Base Salary” means the annual salary amount as in effect from time to time with respect to Executive under Section 5(a).

(i)“Benefits” means any benefits which are vested and accrued prior to or on the Termination Date and to which Executive is otherwise entitled under the terms of any employee benefit plan, program, or arrangement sponsored or contributed to by Company or any Affiliate of Company.

(j)    “Board” means the Board of Directors of Company.

(k)“Business” means the provision of insurance products and services to the specialty commercial insurance markets, and such additional products or services as Company may provide in the future, and such additional insurance or other markets as Company may service in the future.

(l)“Cause” means a termination of Executive’s employment by formal action of the Board, following the procedure set forth in Section 6(h) below, for any of the following reasons:

(i)embezzlement, fraud or any other illegal or unethical act or omission in connection with the performance of Executive’s duties under this Agreement or as an employee of Company that demonstrably and materially injures or reasonably could demonstrably and materially injure Company or any Affiliate or that the Board determines does demonstrably and materially impairs Executive’s ability to satisfactorily perform his duties hereunder;

(ii)conviction of (or plea of nolo contendere to) any (A) felony or (B) other crime involving moral turpitude or any other conviction (or plea of nolo contendere) that demonstrably and materially impairs or reasonably could demonstrably and materially impair Executive’s ability to satisfactorily perform his duties hereunder;

(iii)any willful and demonstrably material breach by Executive of the terms of this Agreement or any other willful act or omission that demonstrably and materially injures or reasonably could be expected to demonstrably and materially injure Company or any Affiliate or that demonstrably and materially impairs or reasonably could demonstrably and materially impair Executive’s ability to satisfactorily perform his duties hereunder.

(iv)improper, willful and material disclosure or use of Company’s or any Affiliate’s Proprietary Information or other willful material breach of Executive’s fiduciary obligation to Company or any Affiliate of Company; or

(v)Executive’s willful failure or refusal to follow the lawful and good faith directions of the Board. For purposes of this definition, no act or failure to act on the part of Executive shall be considered “willful” unless done, or omitted to be done, by him in bad faith or

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without a reasonable belief that his action or omission are in the best interests of Company or its Affiliates. Any act or omission, based upon directions given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for Company or its Affiliates shall be conclusively presumed to be done, or omitted to be done, in good faith and in the best interests of Company or its Affiliates.

Notwithstanding anything in this Agreement to the contrary, in no event shall the Executive’s inability to perform the essential functions of his job with or without reasonable accommodation as a result of a physical or mental condition constitute “Cause”.

(m)“Change In Control Event” means a transaction or series of related transactions which qualify as a change in control event with respect to Company for purposes of Section 409A of the Code and Treas. Reg. §1.409A-3(i)(5).

(n)“Code” means the Internal Revenue Code of 1986, as amended.

(o)“Committee” means the Compensation Committee of the Board as duly constituted from time to time.

(p)“Company” has the meaning given to such term in the introductory paragraph of this Agreement.

(q)“Competitive Business” means any business activity (other than the Business) in which Company or any Affiliate is actively engaged at the time Executive’s employment terminates.

(r)“Creation” has the meaning given to such term in Section 10 hereof.

(s)“Disability” means a determination by the Board acting in good faith that (i) Executive is unable to perform the essential functions of his job with or without reasonable accommodation as a result of a physical or mental condition and (ii) such condition can reasonably be expected to continue for an indefinite period.

(t)“Equity Award” means any award granted to Executive under the First Mercury Financial Corporation Omnibus Incentive Plan of 2006 or any prior or successor equity incentive plan of Company.

(u)“ERISA Affiliate” means with respect to Company each corporation or trade or business considered to be a single employer with Company under section 414(b) or (c) of the Code.

(v)“Exchange Act” means the Securities Exchange Act of 1934.

(w)“Executive” has the meaning given to such term in the introductory paragraph of this Agreement.

(x)“Effective Date” means August 1, 2007.

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(y)“Fiscal Year” means the fiscal year of Company.

(z)“Good Reason” means any of the following conditions (not consented to in advance by Executive in writing or ratified subsequently by Executive in writing), but only if Executive provides Company with written notice of such condition within ninety (90) days of the initial existence of such condition and only if such condition remain(s) in effect thirty (30) days after written notice to the Board from Executive of his intention to terminate his Employment for Good Reason which specifically identifies such condition:

(i)A material diminution in Executives base compensation; or

(ii)Any action or inaction which constitutes a material breach by Company of this Agreement with respect to any of its obligation to Executive hereunder; or

(iii)Any material diminution in Executive’s authority, duties or responsibilities as measured against Executive’s authority, duties or responsibilities immediately prior to such change; or

(iv)Requiring Executive to report other than to the Board or its Chair; or

(v)Following a Change In Control Event, any material change in the geographic location at which Executive is normally required to perform his duties and responsibilities under this Agreement.

(aa)“Initial Term” has the meaning give to such term in Section 2.

(bb)“Person” has the meaning given to such term is Sections 13(d) and 14(d)(2) of the Exchange Act.

(cc)“Proprietary Information” has the meaning given to such term in Section 10.

(dd)“Pro Rata Bonus” means the Annual Incentive Bonus, if any, awarded to Executive consistent with the compensation practices established by the Committee with respect to other executive level employees of Company with respect to the Fiscal Year in which Executive’s employment terminates based on (i) the Company’s actual financial performance against such financial performance targets as may have been set by the Committee for such Fiscal Year and (ii) the portion of such Fiscal Year during which Executive was employed.

(ee)“Protected Period” means the period commencing 90 days before the effective date of a Change In Control Event and ending on the second anniversary of such Change In Control Event.

(ff)“Separation Amount” means the sum of (i) thirty (30) months Base Salary, at the rate in effect on the Termination Date and (ii) the Termination Bonus Amount.

(gg)“SERP” has the meaning given to such term in Section 5(d).

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(hh)“Target Bonus” means one hundred percent (100%) of Executive’s Base Salary as in effect at the beginning of each fiscal year of the Company.

(ii) “Term” has the meaning given to such term in Section 3.

(jj)“Termination” means a termination of Executive’s employment with Company and all its ERISA Affiliates for any reason, provided that such termination of employment qualifies as a separation from service for purposes of Section 409A of the Code and Treas. Reg. §1.409A-1(h).

(kk)“Termination Bonus Amount” means (AxB), where A is the sum of the actual Annual Incentive Bonuses awarded and paid to Executive with respect to the two Fiscal Years immediately preceding the Fiscal Year in which the Termination Date occurs and B is 1.25.

(ll)“Termination Date” means the date as of which a Termination occurs with respect to Executive.

2.Employment. From and after the Effective Date, Company hereby agrees to employ Executive for the Term as specified below and Executive hereby agrees to accept such ongoing employment for the Term on the terms and subject to the conditions of this Agreement.

3.Term. The Term shall commence on the Effective Date and continue until the fifth anniversary of the Effective Date (“Initial Term”), provided, however, that (i) the Term of this Agreement shall be automatically extended for an additional twelve months on the fifth anniversary of the Effective Date and each successive anniversary of the Effective Date, unless Company or Executive delivers notice of intent not to extend the Term at least sixty (60) days prior to the expiration of the Initial Term or any extension thereof and (ii) the Term of this Agreement shall automatically end upon the termination of Executive’s employment with the Company and all of its ERISA Affiliates pursuant to Section 6 below.

4. Title, Position and Duties.

(a)Title, Duties. Executive shall be employed as the Chairman, President and Chief Executive Officer of Company and shall report directly to the Board. Executive shall have such duties and responsibilities as are traditionally associated with such position at Company and such additional duties and responsibilities as may from time to time be assigned to Executive by the Chair of the Board, provided such duties and responsibilities are consistent with the Office of Chief Executive Officer of Company as historically constituted. Such duties and responsibilities may include providing services to or on behalf of any Affiliate of Company.

(b)Best Efforts, Other Interests. Executive shall diligently and to the best of his abilities assume, perform, and discharge all duties and responsibilities inherent is his position or otherwise assigned to Executive from time to time and shall fully and completely comply with any and all written rules, procedures or policies of Company as from time to time in effect. Executive shall devote all of his business time and efforts to Company and its Affiliates and shall not, without prior written consent from the Board, accept other employment or perform or render any services for compensation, or have a direct or indirect ownership interest in any other

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business, other than in the form of publicly traded securities constituting less than one percent (1%) of the vote or value of the outstanding securities of such public entity. The foregoing notwithstanding, Executive shall be allowed to engage in passive personal investment activity and charitable, educational, religious and similar types of non-compensated activities and speaking engagements, provided that such activity or service does not interfere with Executive’s performance of his duties and responsibilities hereunder. The time involved in such activities, provided it is not significant, shall not be treated as vacation time.

(c)Place of Performance. Executive shall perform his duties and responsibilities at Company’s principal business office or such other location as the Chair of the Board may from time to time designate. Executive acknowledges that his duties and responsibilities may require significant travel. The foregoing notwithstanding, other than in unique circumstances, Company does not anticipate that Executive’s business travel obligations under this Agreement will be materially greater than they have been historically.

(d)No Restrictions. Executive hereby represents and warrants that there is no legal restriction on his ability to accept employment with Company or to perform his duties and responsibilities hereunder and that Executive is not subject to any contractual covenant that could restrict his activities on behalf of Company in any way.

5.Compensation and Benefits. Executive shall be compensated by Company for his services as follows:

(a)Base Salary. Executive shall be paid a Base Salary at an annual rate of Seven Hundred Fifty Thousand Dollars ($750,000.00) payable in equal installments in accordance with Company’s normal payroll practice for its senior executive officers. At least annually, the Committee shall review Executive’s Base Salary with a view to making such adjustment to such Base Salary as the Committee shall deem reasonable and appropriate, in its sole discretion, in light of Executive’s performance and the financial performance of Company and its Affiliates, provided that no such adjustment shall be made to reduce the Base Salary below its then current level without Executive’s written consent, unless such reduction is made in conjunction with and consistent with an overall reduction in base compensation paid to the senior executives of Company as a group.

(b)Annual Bonus Compensation. Executive shall be eligible to participate in the First Mercury Financial Corporation Performance Based Annual Incentive Plan or such other short term incentive plan as Company may adopt from time to time for the benefit of its senior executives (“Incentive Plan”) and to earn Annual Incentive Bonuses under such plan as may from time to time be in effect based on the financial performance of Company and Executive’s personal performance against annual targets, goals or other criteria as may be set by the Committee from time to time. Notwithstanding anything in this Agreement or any other plan or arrangement to the contrary, in no event shall the Target Bonus of Executive be reduced without Executive’s written consent, unless such reduction is made in conjunction with and consistent with an overall reduction in target bonus compensation of the senior executives of Company as a group. The Annual Incentive Bonus for each year, if any, shall be paid in accordance with the terms of the Incentive Plan.

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(c)Equity Based Compensation. Executive shall be eligible to receive awards under the First Mercury Financial Corporation Omnibus Incentive Plan of 2006 (“Equity Plan”), as amended, or any successor equity based compensation plan for senior executives as may be adopted Company from time to time. The timing, number of options, shares or equity units involved, and terms and conditions of all such awards shall be determined by the Committee in its sole discretion and shall be subject to the terms of the plan under which such award is made.

(d)Benefits. Executive shall be eligible, on at least the same basis as other similarly situated members of senior management of Company, to participate in and to receive benefits under any of Company’s employee benefit plans, programs or arrangements, in accordance with the terms of such plans, programs or arrangements as in effect from time to time. Executive shall be eligible to participate in the First Mercury Financial Corporation Supplemental Executive Retirement Plan (“SERP”) as in effect from time to time in accordance with the terms of such plan.

(e) Expense Reimbursement.

(i)Executive shall be entitled to reimbursement from Company for all reasonable and customary travel and other business expenses incurred by Executive in carrying out his duties under this Agreement, in accordance with the travel reimbursement policy and general reimbursement policy of Company as in effect from time to time. Executive shall have responsibility for developing and implementing such travel policy and general reimbursement policies and shall provide the Compensation Committee with a copy of such policies as in effect from time to time. Executive shall report all such reimbursable expenditures to Company not less frequently than monthly accompanied by adequate records and other documentary evidence as required by Company’s reimbursement policy, and federal or state tax statutes or regulations governing the substantiation of such expenditures. Executive’s right to reimbursement in accordance with Company’s policies as in effect from time to time shall survive termination of this Agreement.

(ii)To the extent that Executive feels that it is reasonable and necessary to retain personally the services of tax and other professionals in connection with his position as Chairman and Chief Executive Officer and the fulfillment of his duties and responsibilities hereunder, Company shall reimburse Executive for such expenses, subject to such limitations as the Compensation Committee of the Board of Directors may from time to time adopt. Executive may be entitled to reimbursement under this subparagraph (ii) even though such reimbursement may be considered a personal expense and includible as part of Executive’s taxable compensation. Executive shall report all such reimbursable expenditures to Company not less frequently than monthly and accompanied by adequate records and other documentary evidence.

(iii)Company shall reimburse Executive for the costs of his legal representation in connection with the negotiation of this Agreement in an amount up to $10,000.00.

(f)Vacation. Executive shall be entitled to paid vacation time in accordance with Company’s vacation policy as in effect from time to time.

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(g)Withholding. Company shall have the right to deduct and withhold from any taxable compensation paid to or for the benefit of Executive hereunder, whether paid in cash or in property, any federal, state or local income, employment or other taxes required by law to be withheld by Company with respect to such payment or any other taxable payment or transfer made by Company for the benefit of Executive.

6. Termination of Employment.

(a)Termination by Executive Other than for Good Reason. Executive may terminate his employment during the Term upon ninety (90) days prior written notice to Company for other than Good Reason (as defined below). In such event, this Agreement shall terminate as of the Termination Date and the obligations of Company hereunder shall be deemed fully satisfied, except that Executive shall be entitled to and shall be subject to the following as applicable:

(i)Payment of any Accrued Base Salary, Accrued Vacation Amount, or Accrued Bonus Amount in a lump sum within ninety (90) days of the Termination Date;

(ii)Benefits in accordance with the terms of the applicable employee benefit plans; provided, that, Executive’s participation in such plans shall terminate as of the Termination Date, except as otherwise required by law; and

(iii)Executive’s rights with respect to any Equity Awards shall be determined under the terms of the plan under which such Equity Awards were granted and the terms of any grant agreement covering such grant, provided that in the event Executive fails to provide the required ninety (90) days advance written notice of his Termination, Executive’s rights with respect to any unvested Equity Awards shall immediately terminate and be forfeited. Executive’s rights with respect to the SERP shall be determined in accordance with the terms of the SERP.

(b)Death or Disability. Executive’s employment shall automatically terminate upon his death and such employment shall terminate at Company’s election in the event of his Disability, unless otherwise prohibited by law. In such event, this Agreement shall terminate as of the Termination Date and the obligations of Company hereunder shall be deemed fully satisfied and discharged, except that Executive or his legal representatives, as applicable, will be entitled to and subject to the following:

(i)Payment of any Accrued Base Salary, Accrued Vacation Amount, Accrued Bonus Amount; or Pro Rata Bonus in a lump sum within ninety (90) days of Executive’s Termination Date;

(ii)Benefits in accordance with the terms of the applicable employee benefit plans; provided, that, Executive’s participation in all such plans shall terminate as of the date his employment terminates, except as otherwise required by law; and

(iii)Executive’s rights with respect to any Equity Awards shall be determined under the terms of the plan under which such Equity Awards were granted and the

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terms of any grant agreement covering such grant. Executive’s rights with respect to the SERP shall be determined in accordance with the terms of the SERP.

(c)Termination for Cause. Company may terminate Executive’s employment for Cause at any time by following the procedure set forth in paragraph (h) below. In such event, this Agreement shall terminate as of the Termination Date and the obligations of Company hereunder shall be deemed fully satisfied and discharged, except that Executive be entitled to and shall be subject to the following as applicable:

(i)Payment of any Accrued Base Salary, Accrued Vacation Amount, or Accrued Bonus Amount in a lump sum within ninety (90) days of the Termination Date;

(ii)Benefits in accordance with the terms of the applicable employee benefit plans; provided, that, Executive’s participation in all such plans shall terminate as of the date Executive’s employment terminates, except as otherwise required by law; and

(iii)Executive’s rights with respect to any Equity Awards shall be determined under the terms of the plan under which such Equity Awards were granted and the terms of any grant agreement covering such grant, except that Executive’s rights with respect to any unvested Equity Awards shall immediately terminate and be forfeited. Executive’s rights with respect to the SERP shall be determined in accordance with the terms of the SERP.

(d)Termination By Company Other Than for Cause or By Executive for Good Reason Without Release. Company may terminate Executive’s employment without Cause at any time without prior notice and Executive may terminate his employment for Good Reason upon thirty (30) days prior written notice to Company as set forth herein, subject to the Company’s right to cure within such thirty (30) day period. In the event of such a Termination, this Agreement shall terminate as of the Termination Date, the obligations of Company hereunder shall be deemed fully satisfied and discharged, and Executive or his legal representatives, as applicable, will be entitled to the following:

(i)Payment of any Accrued Base Salary, Accrued Vacation Amount, Accrued Bonus Amount or Pro Rata Bonus in a lump sum within ninety (90) days of the Termination Date;

(ii)Benefits in accordance with the terms of the applicable employee benefit plans; provided, that,Executive’s participation in all such plans shall terminate as of the date Executive’s employment terminates, except as otherwise required by law or expressly otherwise provided herein; and

(iii)Executive’s rights with respect to any Equity Awards shall be determined under the terms of the plan under which such Equity Awards were granted and the terms of any grant agreement covering such grants. Executive’s rights with respect to the SERP shall be determined in accordance with the terms of the SERP.

(e)Termination By Company Other Than for Cause or By Executive for Good Reason With Release. If Company terminates Executive’s employment without Cause or Executive terminates his employment for Good Reason in accordance with Section 6(d), in

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addition to the compensation and benefits set forth in Subsections 6(d)(i), (ii) and (iii), contingent upon Executive’s execution of a release of all claims in the form of Exhibit A hereto and subject to subsection (f) below, Executive or his legal representatives, as applicable, will be entitled to and subject to the following:

(i)Payment of an amount equal to the Separation Amount, payable as follows: (a) on the first day of the first through sixth months following the month in which the Termination Date occurs, Executive shall be paid an amount equal to 1/12^th of the maximum amount that may be taken into account under a qualified plan pursuant to section 401(a)(17) of the Code for the calendar year in which the Termination Date Occurs, (b) on the first day of the seventh calendar month following the month in which the Termination Date occurs, Executive shall be paid an amount equal to twenty-five percent (25%) of the Separation Amount less the aggregate amount of payments made under (a) above, and (c) on the first day of the month for the next eighteen months, Executive shall be paid 4.166667 percent of the Separation Amount , provided, however, that in the event the payments made under this paragraph are not subject to Section 409A(a)(2)(A)(i) of the Code on the Termination Date, then the Separation Amount shall be paid in thirty (30) equal installments commencing on the first day of the month coincident with or next following the Termination Date.

(ii)In the event Executive makes a timely election of COBRA continuation coverage for himself, his spouse or his eligible dependents, Company shall either pay directly or reimburse Executive for all related COBRA premiums due with respect to such COBRA continuation coverage for the lesser of (i) the term of such coverage or (ii) thirty months. If the statutory term of such COBRA coverage is less than thirty months, Company shall pay to Executive an amount equal to the amount of the COBRA premium that would have been payable has such coverage continued for the balance of such thirty month period in monthly installments. The foregoing notwithstanding, Company’s obligations to pay or reimburse COBRA premiums or to pay amounts in lieu of COBRA premiums under this paragraph shall terminate and cease as of the date that Executive is first eligible to participate in any other employer sponsored major medical benefit plan.

(f)Termination Related to Change In Control Event. In the event that Company elects to terminate the employment of Executive other than for Cause or Executive elects to terminate such employment for Good Reason and the Termination Date is within the Protected Period:

(i)Any and all Equity Awards which are not vested on the Termination Date shall be deemed to have vested on the Termination Date; and

(ii)Notwithstanding Section 6(e)(i), the Separation Amount shall be paid in a lump sum promptly following the later of (x) the Termination Date o r(y) the effective date of the Change in Control Event.

(g)Limitation On Payment Obligation. The foregoing notwithstanding, except as otherwise expressly provided below, in no event shall Company be obligated to make payments to Executive, under this Agreement or otherwise following his Termination that would constitute “excess parachute payments” within the meaning of Section 280G of the Code. In the event

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Company believes that any payment due Executive would be constitute an “excess parachute payment” and Executive will be subject to the excise tax imposed by Section 4999 of the Code, Company and Executive agree that the aggregate parachute payments (as defined in Section 280G) made to Executive under this Agreement and any and all other agreements shall not exceed 299.99% of Executive’s Base Amount.

(h)For Cause Termination Procedure. The Board shall only terminate Executive for Cause under paragraph (c) above after providing Executive with (i) at least ten days prior to the proposed termination date, written notice setting forth in detail the basis for the proposed termination, (ii) the opportunity to appear before the Board and provide rebuttal to such proposed termination, and (iii) written notice following such appearance confirming such termination and certifying that the decision to terminate Executive for Cause was approved by at least sixth-six percent (66%) of the members of the Board, excluding Executive. Unless otherwise directed by the Board, from and after the date of the notice under (i) above of the proposed termination, Executive shall be relieved of his duties and responsibilities and shall be considered to be on a paid leave of absence pending any final action by the Board confirming such proposed termination.

(i)Timing of Payments. Where this Agreement provides for the payment of an amount to Executive during a designated period (e.g., within ninety (90) days of a specified date) and such period begins and ends in different taxable years of Executive, Executive shall not have the right to designate the taxable year in which such payment is made.

(j)No Obligation To Mitigate. Executive shall not be required to mitigate the amount of the Separation Amount or any portion of it by seeking other employment or otherwise. No portion of the Separation Amount will be offset or reduced by the amount of any compensation or benefits provided to Executive by a successor employer.

7.Confidentiality. Executive acknowledges that by virtue of his employment with Company, he has and will in the future be exposed to or has had or may have access to confidential information of Company or its Affiliates regarding its or their businesses (whether or not developed by Executive), including, but not limited to, algorithms, source code, system designs, data formats, analytical processes, methodologies, business practices, financial information or projections, customer lists or records, customer information, employee records, shareholder records, mark-ups, project materials, marketing techniques, supplier information, accounting methodologies, Creations or other information that gives, or may give, Company or its Affiliates an advantage in the marketplace against its competitors (all of the foregoing are hereinafter referred to collectively as the “Proprietary Information” except for information that was in the public domain when acquired or developed by Company, or that subsequently enters the public domain other than as a result of a breach of this or any other agreement or covenant). Executive further acknowledges that it would be possible for Executive, upon termination of his employment with Company, to use the Proprietary Information to benefit other individuals or entities, and that to the extent Executive engages in the Business or Competitive Activities for himself or others following the termination of his employment it is highly likely that such activity would inevitably require his use or disclosure of Proprietary Information. Executive acknowledges that Company has expended considerable time and resources in the development of the Proprietary Information and that the Proprietary Information has been disclosed to or

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learned by Executive solely in connection with Executive’s employment with Company. Executive acknowledges that the Proprietary Information constitutes a proprietary and exclusive interest of Company, and, therefore, Executive agrees that during the term of his employment and after the termination thereof, for whatever reason, anywhere in the world, Executive shall not directly or indirectly disclose the Proprietary Information to any person, firm, court, governmental entity or body, corporation or other entity or use the Proprietary Information in any manner, except in connection with the business and affairs of Company or pursuant to a validly issued and enforceable court or administrative order. In the event that any court, administrative hearing officer or other judicial or governmental representative shall request or demand disclosure of any Proprietary Information, Executive shall promptly notify Company of the same and cooperate with Company to obtain appropriate protective orders in respect thereof.Executive further agreesto execute such further agreements or understandings regarding his agreement not to misuse or disclose Proprietary Information or Creations as Company may reasonably request.

8.Non-Solicitation/Non-Competition. Executive covenants and agrees that, while employed by Company, and for a period of 24 months following the termination of his employment for any reason, including during the Protected Period, he shall not:

(a)without the written consent of the Board, directly or indirectly engage or assist any person engaging in the Business or any Competitive Activity (as defined below), individually, or as an officer, director, employee, agent, consultant, owner, partner, lender, manager, member, principal, or in any other capacity, or render any services to any entity which is engaged in the Business or Competitive Business; provided, however, that the ownership by Executive of not more than one percent (1%) of any class of equity security of any entity engaged in the Business or any Competitive Business shall not be deemed a breach of this Section provided such securities are listed on a national securities exchange or quotation system or have been registered under Section 12(g) of the Securities Exchange Act of 1934, as amended. Upon the written request of Executive, the Board will advise Executive whether or not a specific activity which Executive in contemplating would violate the foregoing restriction, provided that (I) such request is made prior to Executive engaging in such activity and (II) Executive provides the Board with such information as the Board determines is necessary to make such determination. The current and continuing effectiveness of any such determination shall be conditioned on all such information provided by Executive being complete and accurate in all material respects; or

(b)in any manner, directly or indirectly attempt to divert, take away, solicit, or assist others in soliciting any current or prospective customer, supplier, independent contractor or service provider of Company or any Affiliate or otherwise interfere with the relationship between Company or any Affiliate and any current or prospective customer, service provider, supplier, independent contractor, or shareholder; or

(c)directly or indirectly solicit for employment other than on behalf of Company, seek to induce or influence any person to leave employment with Company, offer employment to, or employ any person who was an employee of Company or any affiliate within 6 months of such solicitation or offer; or

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(d)make any comment (whether or not true) to any Person that could be interpreted, whether or not in fact so interpreted, as critical or disparaging of Company or any of its Affiliates or that otherwise could be reasonably expected to be detrimental to Company or any of its Affiliates or their employees or operations, provided that the foregoing limitation shall not apply to truthful testimony as a witness in any administrative or other legal proceeding, compliance with any obligations imposed under applicable law, or assertion of a defense against any claim of breach of this Agreement by Company, or to his statements or disclosures to officers or directors of Company, and shall not require Executive to make false statements or disclosures.

The foregoing notwithstanding, the provisions of paragraph (a) above shall not be applicable to Executive in the event that Executive’s employment is terminated for Cause based on Executive’s conviction of a felony or other crime, unless such felony or other crime was committed in connection with the performance of Executive’s duties under this Agreement.

9.Return of Materials. Executive shall, at any time upon the request of Company, and in any event upon his Termination for any reason, immediately return and surrender to Company all originals and all copies, regardless of medium, of all algorithms, source code, system designs, data formats, forms, records, notes, memoranda, price lists, supplier lists, brochures, project materials, sales materials, manuals, letterhead, business cards and other property belonging to Company, its Affiliates, or any of its clients, as the case may be, created or obtained by Executive as a result of or in the course of or in connection with Executive’s employment regardless of whether such items constitute Proprietary Information. Executive acknowledges that all such materials are, and will remain, the exclusive property of Company.

10. Creations and Other Matters.

(a)Executive agrees that all materials, inventions, discoveries, improvements or the like that Executive, individually or with others, may originate, develop or reduce to practice while employed with Company relating to the business or products of Company, Company’s actual or demonstrably anticipated research or development or any work performed by Executive for Company (individually, a “Creation” and collectively, the “Creations”) shall, as between Company and Executive, belong to and be the sole property of Company. Executive hereby waives any and all “moral rights,” including, but not limited to, any right to identification of authorship, right of approval on modifications or limitation on subsequent modification, that Executive may have in respect of any Creation. Executive further agrees, without further consideration, to promptly disclose each such Creation to Company and to such other individuals as Company may direct. Executive further agrees to execute and to join others in executing such applications, assignments and other documents as may be necessary or convenient to vest in Company or any client of Company, as appropriate, full title to each such Creation and as may be reasonably necessary or convenient to obtain United States and foreign patents or copyrights thereon to the extent Company or any client of Company, as appropriate, may choose. Executive further agrees to testify in any legal or administrative proceeding relative to any such Creation whenever requested to do so by Company, provided that Company agrees to reimburse Executive for any reasonable expenses incurred in providing such testimony.

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(b)The foregoing covenant shall not apply to any Creation for which no equipment, supplies, facilities, or trade secret information of Company was used and which was developed entirely on Executive’s own time, unless (i) the Creation relates to (A) the business of Company or (B) any actual or reasonably anticipated research or development of Company or (ii) the Creation results from any work performed by Executive for Company.

11.Post-Termination Cooperation. Executive agrees that following his Termination for any reason he will be available on a reasonable basis consistent with and subject to Executive’s other responsibilities to assist Company and its Affiliates, and will upon request assist Company and its Affiliates, (i) as necessary, for a period of twelve (12) months in order to insure the orderly transition of his duties and responsibilities and (ii) for a period of sixty (60) months in the prosecution or defense of any claims, suits, litigation, arbitrations, investigations, or other proceedings, whether pending or threatened involving Company or any Affiliate. Such assistance shall include, but not by way of limitation, attending meetings with and truthfully and completely answering questions posed by representatives of Company. Company shall reimburse Executive for his reasonable and necessary expenses incurred at the request of Company upon submission of appropriate supporting documents. In addition, if Company is not then currently obligated to make severance payments to Executive under the terms of this Agreement, Company shall compensate executive for such time at a rate of $2,000.00 per day for providing such assistance.

12.Remedies. Executive acknowledges that in the event that his employment with Company terminates for any reason, he will be able to earn a livelihood without violating the foregoing restrictions and that his ability to earn a livelihood without violating such restrictions is a material condition to his employment with Company. Executive acknowledges that compliance with the covenants set forth in Sections 7 through 11 hereof is necessary to protect the business, goodwill and Proprietary Information of Company and its clients and that a breach of these restrictions will irreparably and continually damage Company or its clients for which money damages may not be adequate. Consequently, Executive agrees that, in the event that he breaches or threatens to breach any of these covenants, Company shall be entitled to a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm without any obligation to post a bond. In addition, without limiting Company’s remedies for any breach of any restriction on Executive set forth in Sections 7 through 11 hereof, except as required by law, the obligation of Company to pay any amounts payable to Executive under Section 6 of this Agreement is contingent upon Executive’s acting in accordance with the covenants of Sections 7 through 11 and in the event of any breach of such obligations, Company’s obligation to make further payments shall terminate and Company shall be entitled to recoup from Executive all payments previously made to Executive under Section 6. Nothing in this agreement, however, shall be construed to prohibit Company from also pursuing any other remedy, the parties having agreed that all remedies are to be cumulative. The parties expressly agree that Company may, in its sole discretion, choose to enforce the covenants in Sections 7 through 11 hereof in part or to enforce any of said covenants to a lesser extent than that set forth herein.

13.Survival. Notwithstanding any other provision of this Agreement, Executive’s obligations in Sections 7 through 11 (to the extent provided therein) and Company’s obligations to make payments under Section 6 shall survive the termination of this Agreement.

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14.Revision. The parties hereto expressly agree that in the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon Executive or are otherwise invalid, for whatsoever cause, then the court so holding is hereby authorized to (a) reduce the territory to which said covenant, warranty or agreement pertains, the period of time in which said covenant, warranty or agreement operates or the scope of activity to which said covenant, warranty or agreement pertains or (b) effect any other change to the extent necessary to render any of the restrictions contained in this Agreement enforceable.

15.Dispute Resolution. In the event of any dispute or claim relating to or arising out of this Agreement (including, but not limited to, any claims of breach of contract, wrongful termination or age, sex, race or other discrimination), Executive and Company agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association (“AAA”) in Southfield, Michigan in accordance with the AAA’s National Rules for the Resolution of Employment Disputes, provided, however, that this arbitration provision shall not apply to, and Company shall be free to seek, injunctive or other equitable relief with respect to any actual or threatened breach or violation by Executive of his obligations under Sections 7 through 11 hereof in any court having appropriate jurisdiction. Executive acknowledges that by accepting this arbitration provision he is waiving any right to a jury trial in the event of a covered dispute. The arbitrator may, but is not required, to order that the prevailing party shall be entitled to recover from the losing party its attorneys’ fees and costs incurred in any arbitration arising out of this Agreement.

16.Interpretation. Executive and Company agree that this Agreement shall be interpreted in accordance with and governed by the internal laws of the State of Illinois.

17.Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon Company and its successors and assigns. In view of the personal nature of the services to be performed under this Agreement by Executive, he shall not have the right to assign or transfer any of his rights, obligations or benefits under this Agreement, except as otherwise noted herein.

18.Notice. Any notice provided for in this Agreement shall be in writing and shall be deemed given on the date it is delivered in person or sent via overnight delivery service to the other party and addressed,

In the case of Company, to:

First Mercury Financial Corporation

29621 Northwestern Highway

Southfield, Michigan 48203

Attn: General Counsel

And in the case of Executive, to

Mr. Richard H. Smith

____________________________

____________________________

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Or such other addresses as either party may designate by giving written notice of a change of address in the manner provided above. Notices given by personal delivery shall be deemed given on the date of delivery. Notices given by overnight courier service shall be deemed given upon deposit with the courier. If notice is given to a business address, receipt by a receptionist or any other person employed at such business address shall be deemed to constitute actual delivery to the addressee.

19.Validity. If any one or more of the provisions (or any part thereof) of this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or impaired thereby. Each term and provision of this agreement shall be valid and enforceable to the fullest extent permitted by law and any invalid, illegal or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid, illegal or unenforceable term or provision.

20.Entire Agreement – Prior Agreements. This Agreement constitutes the entire agreement between Executive and Company regarding the terms and conditions of his employment. This Agreement supersedes all prior negotiations, representations or agreements between Executive and Company, whether written or oral, concerning Executive’s employment by Company.

21.Nonexclusivity and Nonduplication. Notwithstanding Section 20 above, and except as otherwise specifically provided herein, the provisions of this Agreement will not effect any other plan, program or arrangement of the Company under which Executive may accrue or earn benefits or compensation. Notwithstanding the foregoing, amounts owed to Executive under any other severance plan of the Company or any Affiliate will be reduced by amounts payable under this Agreement.

22.Modification. This Agreement may only be modified or amended by a supplemental written agreement signed by Executive and Company.

23.Insurance and Indemnification. Company shall, at no cost to Executive, (i) use its reasonable best efforts to at all times include Executive, during the term of Executive’s employment hereunder and for so thereafter as Executive may be subject to any such claim, as an insured under any directors’ and officers’ liability insurance policy maintained by Company, which policy shall provide such coverage in such amounts as the Board shall deem appropriate for coverage for all officers and directors of Company and (ii) provide Executive with at least the same indemnification rights as it provides to its officers.

24.Counterparts. The parties may execute this Agreement in one or more counterparts, all of which together shall constitute but one Agreement.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below.

Date:   August 21, 2007	FIRST MERCURY FINANCIAL CORPORATION By:       /s/ John A. Marazza Its:        Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary
Date:   August 21, 2007	/s/ Richard H. Smith RICHARD H. SMITH

EXHIBIT A

Form of Release

Date: ________________________

In consideration of the agreement of First Mercury Financial Corporation (“Company”) to enter into that certain Employment Agreement, dated as _____________, 2007, with the undersigned and the promises and covenants of Company made there under, the undersigned, on behalf of himself and his respective heirs, representatives, executors, family members, and assigns hereby fully and forever releases and discharges Company and its past, present and future shareholders, directors, officers, employees, agents, attorneys, investors, administrators, affiliates, divisions, subsidiaries, predecessors, successors and assigns from and against, and agrees not to sue or otherwise institute or cause to be instituted any legal, alternative dispute resolution or administrative proceeding concerning, any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that he may possess arising from any omissions, acts or facts that have occurred through the date his employment terminates, including without limitation:

A.Any and all claims relating to or arising from his employment by Company and the termination of such employment;

B. Any and all claims under his Employment Agreement;

C.Any and all claims for wrongful discharge, termination in violation of good policy, discrimination, breach of contract, both expressed or implied, covenants of good faith or fair dealing, both expressed or implied, promissory estoppel, negligent or intentional infliction of emotional distress, negligent or intentional misrepresentation, negligent or intentional interference with contract or prospective economic advantage, unfair business practice, defamation, libel, slander, negligence, personal injury, assault, battery, invasion of privacy, false imprisonment, or conversion;

D.Any and all claims for violation of any federal, state or municipal statute, including, without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, the Worker Adjustment and Retraining Notification Act, the Michigan’s Elliott Larsen Civil Rights Act, and all amendments to each such Act as well as the regulations issued there under; and

E. Any and all claims for attorneys’ fees and costs.

The foregoing release shall not apply with respect to Company’s payment obligations under Sections 5 and 6 of the Employment Agreement or the undersigned’s rights under any “employee benefit plans” as that term is defined in the Employee Retirement Income Security Act of 1974, as amended.

The undersigned acknowledges that (i) he has been advised by Company to consult a lawyer of his own choice prior to executing this release and has done so or voluntarily declined to seek such counsel, (ii) he has read this release and understands the terms and conditions hereof and the binding nature hereof, (iii) he has had at least twenty-one (21) days within which to consider the terms of this release and executed this release voluntarily and without duress or undue influence on the part of Company, (iv) he has seven (7) days to revoke his execution of this release and that such execution shall not be effective until seven (7) days following delivery to Company, and (v) he understands that his right to receive payments under Section 6 of the Employment Agreement is subject to and conditioned on the undersigned’s full and complete compliance with the Covenants following his Termination and subject to full recoupment by Company in the event of a violation of any Covenant. In the event of such recoupment, the release set forth in this document shall remain in full force and effect.

Initially capitalized terms used in this release and defined in the Employment Agreement shall have the meanings given to such terms under the Employment Agreement.

_____________________________________

Printed Name

_____________________________________

Signature

Date: _________________________________

_________________________________

Notary

My Commission expires ________________.

EX-10.2

THE FIRST MERCURY FINANCIAL CORPORATION

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Effective as of August 21, 2007.

THE FIRST MERCURY FINANCIAL CORPORATION

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

ARTICLE I - PURPOSE; EFFECTIVE DATE

1.1. Purpose. The purpose of the FIRST MERCURY FINANCIAL CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN, is to permit a select group of highly compensated employees of First Mercury Financial Corporation (and its selected subsidiaries and/or affiliates) to defer the receipt of income which would otherwise become payable to them. It is intended that this Plan, by providing these eligible individuals with an opportunity to defer the receipt of income, will assist in the retaining and attracting individuals of exceptional ability.

1.2. Effective Date. This Plan shall be effective on August 21, 2007. It is intended that all of the benefits payable under this Plan will be subject to the terms of Section 409A of the Code.

1.3. Plan Type. For purposes of §409A, the amounts deferred as annual or discretionary contributions and benefits attributable thereto, shall be considered an nonelective account balance plan as defined in Treas. Reg. §1.409A -1(c)(2)(i)(B), or as otherwise provided by the Code.

ARTICLE II - DEFINITIONS

For the purpose of this Plan, the following terms shall have the meanings indicated, unless the context clearly indicates otherwise:

2.1. Account. “Account” means the account maintained on the books of the Company used solely to calculate the amount payable to each Participant under this Plan and shall not constitute a separate fund of assets. Account shall be deemed to exist from the time amounts are first credited to such Account until such time that the entire Account Balance has been distributed in accordance with this Plan.

2.1. Annual Contribution. “Annual Contribution” means the amount credited to a Participant’s Account under Section 4.1, below. The amount of the Annual Contribution, if any, for each Participant shall be determined annually by the Committee in its sole discretion.

2.2. Beneficiary. “Beneficiary” means the person, persons or entity as designated by the Participant, entitled under Article VI to receive any Plan benefits payable after the Participant’s death.

2.3. Board. “Board” means the Board of Directors of the Company.

2.4. Change in Control. A “Change in Control” shall mean a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, as defined and determined under Section 409A(a)(2)(A)(v) of the Code (or its successor provisions), Treasury Notice 2005-1 and any further guidance published with respect to such term. Without in any way limiting the scope of the preceding sentence, a Change of Control shall be deemed to occur on the date upon which one of the following events occurs:

a) any one person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or more than one person acting as a group (as determined under Treasury regulations), acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of either the total fair market value or total voting power of the stock of the Company (except that the acquisition of additional control of the Company by the same person or persons during such 12-month period is not considered to cause a change in control of the Company); or

b) any one person (as such term is used in the Exchange Act), or more than one person acting as a group (as determined under Treasury regulations), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 35% or more of the total voting power of the Company (except that the acquisition of additional control of the Company by the same person or persons during such 12-month period is not considered to cause a change in control of the Company); or

c) a majority of members of the Board is replaced during any 12-month period by directors whose appointment or election is not recommended by a majority of the members of the Board prior to the date of the appointment or election; or

d) any one person (as such term is used in the Exchange Act), or more than one person acting as a group (as determined under Treasury regulations), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions.

2.5. Code. “Code” means the Internal Revenue Code of 1986, as amended and the regulations promulgated thereunder.

2.6. Committee. “Committee” means the Committee appointed by the Board to administer the Plan pursuant to Article VII.

2.7. Company. “Company” means First Mercury Financial Corporation, a Delaware corporation, and any directly or indirectly affiliated subsidiary corporations, any other affiliate designated by the Board, or any successor to the business thereof.

2.8. Determination Date. “Determination Date” means each business day.

2.9. Disability. “Disability means, with respect to a Participant who is a party to an employment agreement with the Company, a termination of such Participant’s employment due to a Disability as defined in such employment agreement, and with respect to all other Participants, a physical or mental condition whereby the Participant: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3

months under an accident and health plan covering employees of the Company.

2.10. Discretionary Contribution. “Discretionary Contribution” means the Company contribution credited to a Participant’s Account(s) under Section 4.4, below.

2.11. Financial Hardship. “Financial Hardship” means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Section 152(a) of the Code) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.

2.12. Interest. “Interest” means the amount credited to or charged against a Participant’s Account on each Determination Date, which shall be based on the Valuation Funds chosen by the Participant as provided in Section 2.18, below and in a manner consistent with Section 4.3, below. Such credits or charges to a Participant’s Account may be either positive or negative to reflect the increase or decrease in value of the Account in accordance with the provisions of this Plan, and shall reflect the income, gains, losses, and expenses of the Valuation Funds since the prior Determination Date had the Account been invested in the applicable Valuation Funds.

2.13. Participant. “Participant” means any individual who is eligible, pursuant to Section 3.1, below, to participate in this Plan, and who is determined by the Committee in their sole discretion as being eligible to receive an Annual Contribution or a Discretionary Contribution. Such individual shall remain a Participant in this Plan until such time as all benefits payable under this Plan have been paid in accordance with the provisions hereof.

2.14. Plan. “Plan” means The First Mercury Financial Corporation Supplemental Executive Retirement Plan as set forth herein and as amended from time to time.

2.15. Retirement. “Retirement” means the Separation from Service of a Participant from the employment with the Company, for reasons other than death or Disability, on or after the attainment of age sixty (60).

2.16. Separation from Service. “Separation from Service” means a Participant’s “separation from service” with the Company, for any reason, within the meaning of Section 409A of the Code.

2.17. Specified Employees. “Specified Employees” means key employees of the Company and its affiliates, as defined in Section 416(i) of the Code without regard to paragraph (5) thereof.

2.18. Valuation Funds. “Valuation Funds” means one or more of the independently established funds (including mutual funds) or indices that are identified and listed by the Committee. These Valuation Funds are used solely to calculate the Interest that is credited to each Participant’s Account in accordance with Article IV, below, and does not represent, nor should it be interpreted to convey any beneficial interest on the part of the Participant in any asset or other property of the Company. The determination of the increase or decrease in the performance of each Valuation Fund shall be made by the Committee in its reasonable discretion. The Committee shall select the various Valuation Funds available to the Participants with respect to this Plan and shall set forth a list of these Valuation Funds attached hereto as Exhibit A, which may be amended from time to time in the discretion of the Committee.

2.19. Years of Participation. “Years of Participation” means the number of complete years of service

with the Company as determined by the Committee, in their sole discretion, after first becoming eligible for participation in this Plan.

ARTICLE III - ELIGIBILITY AND PARTICIPATION

3.1. Eligibility. Eligibility to participate in the Plan shall be limited to those select key employees of the Company who are designated by management, from time to time, and approved by the Committee.

3.2. Participation. An individual’s participation in the Plan shall be effective upon notification to the individual by the Committee of eligibility to participate, and the completion and submission of an Allocation Form to the Committee no later than thirty (30) days following the notice of eligibility to participate in this Plan.

ARTICLE IV - PARTICIPANT ACCOUNT

4.1. Annual Contributions. Annual Contributions and Interest thereon, shall be credited to the Participant’s Account at such times and in such amounts as recommended by the Committee, and this Account shall be used solely to calculate the amount payable to each Participant under this Plan and shall not constitute a separate fund of assets.

4.2. Timing of Credits; Withholding. Any Annual Contributions shall be credited to the Account at the time and as provided by this Plan or as the Committee shall determine, but in no event will the Annual Credit attributable to any calendar year be made more than 60 days following the close of the calendar year, except that an initial Annual Credit may be made within 60 days of the effective date of the Plan. Any withholding of taxes or other amounts with respect to such contributions that is required by local, state or federal law shall be withheld from compensation otherwise payable to the Participant to the maximum extent possible, and any remaining amount shall reduce the amount credited to the Participant’s Account in a manner specified by the Committee.

4.3. Valuation Funds. A Participant shall designate, at a time and in a manner acceptable to the Committee, one or more Valuation Funds for each Account for the sole purpose of determining the amount of Interest to be credited or debited to such Account. Such election shall designate the portion of the Account that shall be allocated among the available Valuation Fund(s), and such election shall become effective as determined by the Committee, but no later than five (5) business days following the date the election is filed with the Committee. The manner in which such elections shall be made and the frequency with which such elections may be changed and the manner in which such elections shall become effective shall be determined in accordance with the procedures to be adopted by the Committee or its delegates from time to time.

4.4. Discretionary Contributions. In its sole discretion, the Company may make Discretionary Contributions to a Participant’s Account. Discretionary Contributions shall be credited at such times and in such amounts as recommended by the Committee and approved by the Compensation Committee of the Board, or the Board in its sole discretion.

4.5. Determination of Account. Each Participant’s Account as of each Determination Date shall consist of the balance of the Account as of the immediately preceding Determination Date, adjusted as follows:

a) Annual Contributions. Each Account shall be increased by any Annual Contributions

credited since such prior Determination as set forth above and as directed by the Committee.

b) Discretionary Contributions. The Account shall be increased by any Discretionary Contributions credited since such prior Determination as set forth above in section 4.4 or as otherwise directed by the Committee.

c) Distributions. Each Account shall be reduced by the amount of each benefit payment made from that Account since the prior Determination Date. Distributions shall be deemed to have been made proportionally from each of the Valuation Funds maintained within such Account based on the proportion that such Valuation Fund bears to the sum of all Valuation Funds maintained within such Account for that Participant as of the Determination Date immediately preceding the date of payment.

c) Interest. Each Account shall be increased or decreased by the Interest credited to such Account since such Determination Date as though the balance of that Account as of the beginning of the current month had been invested in the applicable Valuation Funds chosen by the Participant.

4.6. Vesting of Account. Each Participant shall be vested in the amounts credited to such Participant’s Account and Interest thereon as follows:

a) Annual Contributions. A Participant shall be vested in the Annual Contributions, and Interest thereon according to the following schedule based on Years of Participation:

Years of Participation	Vesting Percentage
Less than 7	0%
7 years	50%
8 years	67%
9 years	84%
10 years or more	100%

b) Discretionary Contributions. A Participant’s Discretionary Contributions and Interest thereon shall become vested as determined by the Committee.

c) Effect of Death, Disability or Retirement. Notwithstanding anything to the contrary, a Participant’s Account shall become one hundred percent (100%) vested upon the death, Disability, or Retirement of the Participant or upon a Change in Control.

4.7. Statement of Account.      To the extent that the Company does not arrange for the Account balance to be accessible online by the Participant, the Committee shall provide to each Participant a statement showing the balances in the Participant’s Account no less frequently than annually.

ARTICLE V - PLAN BENEFITS

5.1. Retirement. The Participant’s Account shall be distributed to the Participant upon the Participant’s Separation from Service with the Company after attaining Retirement.

a) Timing of Payment. Subject to Section 5.5, benefits payable from the Participant’s Account shall commence as soon as practical after the date of the Participant’s Separation from Service, but no later than ninety (90) days following the Participant’s Separation from Service.

b) Form of Payment. The form of benefit payment shall be the form selected by the Participant in the first Deferral Commitment which designated that a portion of the Compensation deferred be allocated to the Participant’s Account. The permissible forms from which the Participant may select shall include only the following:

i) A lump sum amount which is equal to the vested Account balance;

ii) Annual installments for a period of five (5) years; or

iii) Annual installments for a period of ten (10) years.

With respect to annual installments, each annual payment shall be equal to the balance of the Account immediately prior to the payment, multiplied by a fraction, the numerator of which is one (1) and the denominator of which commences at the number of annual payment initially chosen and is reduced by one (1) in each succeeding year. The initial payment shall be made as stated above, and subsequent payments shall be made on the anniversary of the initial payment.

5.2. Prior to Retirement. Subject to Section 5.5, upon Separation from Service with the Company prior to Retirement, the Participant’s vested Account shall be distributed to the Participant in the form of a lump sum payable as soon as practical after the date of the Participant’s Separation from Service, but no later than ninety (90) days following the Participant’s Separation from Service.

5.3. Death Benefit. Upon the death of a Participant prior to the commencement of benefits under this Plan, the Company shall pay to the Participant’s Beneficiary an amount equal to the Account balance in the form of a lump sum payment. In the event of the death of the Participant after the commencement of benefits under this Plan, the benefits shall be paid to the Participant’s designated Beneficiary from the Account at the same time and in the same manner as if the Participant had survived.

5.4. Hardship Distributions. Upon a finding that a Participant has suffered a Financial Hardship, the Committee may, in its sole discretion, make distributions from the Participant’s Account. The amount of such distribution shall be limited to the amount reasonably necessary to meet the Participant’s needs resulting from the Financial Hardship plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such Financial Hardship is or may be relieved through the reimbursement or compensation by insurance, or otherwise or by liquidation of the Participant’s assets (to the extent that liquidation of such assets would not itself cause severe financial hardship). The amount of such distribution will not exceed the Participant’s vested Account balance.

5.5. Payment to Specified Employees. Notwithstanding anything else to the contrary, payments of benefits from the Account caused by the Separation from Service (for reason other than death) of a Participant who is determined to meet the definition of Specified Employee shall be payable as otherwise provided, except that the initial payment shall be made no earlier than the six (6) months following the Separation from Service with the Company.

5.6. Payments in Connection with a Domestic Relations Order. Notwithstanding anything to the contrary, the Company may make distributions to someone other than the Participant if such payment is necessary to comply with a domestic relations order, as defined in §414(p)(1)(B), involving the Participant. Where the domestic relations order permits discretion on the part of the non-Participant spouse and such discretion has not been exercised, the Company shall distribute to the non-Participant spouse the amounts subject to the order as soon as practical.

5.7. Withholding; Payroll Taxes. The Company shall withhold from any payment made pursuant to this Plan any taxes required to be withheld from such payments under local, state or federal law. A Beneficiary, however, may elect not to have withholding of federal income tax pursuant to Section 3405(a)(2) of the Code, or any successor provision thereto.

5.8. Payment to Guardian. If a Plan benefit is payable to a minor or a person declared incompetent or to a person incapable of handling the disposition of the property, the Committee may direct payment to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution. Such distribution shall completely discharge the Committee and the Company from all liability with respect to such benefit.  

5.9. Effect of Payment. The full payment of the applicable benefit under this Article V shall completely discharge all obligations on the part of the Company to the Participant (and the Participant’s Beneficiary) with respect to the operation of this Plan, and the Participant’s (and Participant’s Beneficiary’s) rights under this Plan shall terminate.

ARTICLE VI - BENEFICIARY DESIGNATION

6.1. Beneficiary Designation. Each Participant shall have the right, at any time, to designate one (1) or more persons or entity as Beneficiary (both primary as well as secondary) to whom benefits under this Plan shall be paid in the event of Participant’s death prior to complete distribution of the Participant’s vested Account balance. Each Beneficiary designation shall be in a written form prescribed by the Committee and shall be effective only when filed with the Committee during the Participant’s lifetime.

6.2. Changing Beneficiary. Any Beneficiary designation may be changed by a Participant without the consent of the previously named Beneficiary by the filing of a new Beneficiary designation with the Committee.

6.3. No Beneficiary Designation. If any Participant fails to designate a Beneficiary in the manner provided above, if the designation is void, or if the Beneficiary designated by a deceased Participant dies before the Participant or before complete distribution of the Participant’s benefits, the Participant’s Beneficiary shall be the person in the first of the following classes in which there is a survivor:

a) The Participant’s surviving spouse;

b) The Participant’s children in equal shares, except that if any of the children predeceases the Participant but leaves surviving issue, then such issue shall take by right of representation the share the deceased child would have taken if living;

c) The Participant’s estate.

6.4. Effect of Payment. Payment to the Beneficiary shall completely discharge the Company’s obligations under this Plan.

ARTICLE VII - ADMINISTRATION

7.1. Committee; Duties. This Plan shall be administered by the Committee, which shall consist of those individuals named by the Board, except in the event of a Change in Control as provided in Section 7.5 below. The Committee shall have the authority to make, amend, interpret and enforce all appropriate rules and regulations for the administration of the Plan and decide or resolve any and all questions, including interpretations of the Plan, as they may arise in such administration. A majority vote of the Committee members shall control any decision. Members of the Committee may be Participants under this Plan.

7.2. Agents. The Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company.

7.3. Binding Effect of Decisions. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in the Plan.

7.4. Indemnity of Committee. The Company shall indemnify and hold harmless the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan on account of such member’s service on the Committee, except in the case of gross negligence or willful misconduct.

7.5. Election of Committee After Change in Control. After a Change in Control, vacancies on the Committee shall be filled by majority vote of the remaining Committee members and Committee members may be removed only by such a vote. If no Committee members remain, a new Committee shall be elected by majority vote of the Participants in the Plan immediately preceding such Change in Control. After a Change in Control, no amendment shall be made to Article VII or other Plan provisions regarding Committee authority with respect to the Plan

without prior approval by the Committee.

ARTICLE VIII - CLAIMS PROCEDURE

8.1. Claim. Any person or entity claiming a benefit, requesting an interpretation or ruling under the Plan (hereinafter referred to as “Claimant”), or requesting information under the Plan shall present the request in writing to the Committee, which shall respond in writing as soon as practical, but in no event later than ninety (90) days after receiving the initial claim (or no later than forty-five (45) days after receiving the initial claim regarding a Disability under this Plan).

8.2. Denial of Claim. If the claim or request is denied, the written notice of denial shall state:

a) The reasons for denial, with specific reference to the Plan provisions on which the denial is based;

b) A description of any additional material or information required and an explanation of why it is necessary, in which event the time frames listed in section 8.1 shall be one hundred and eighty (180) and seventy-five (75) days from the date of the initial claim respectively;

c) An explanation of the Plan’s claim review procedure; and

d) A description of the claimant’s right to file suit under section 502(a) of ERISA in the case of an adverse determination on appeal.

8.3. Review of Claim. Any Claimant whose claim or request is denied or who has not received a response within sixty (60) days (or one hundred and eighty (180) days in the event of a claim regarding a Disability) may request a review by notice given in writing to the Committee. Such request must be made within sixty (60) days (or one hundred and eighty (180) days in the event of a claim regarding a Disability) after receipt by the Claimant of the written notice of denial, or in the event Claimant has not received a response sixty (60) days (or one hundred and eighty (180) days in the event of a claim regarding a Disability) after receipt by the Committee of Claimant’s claim or request. The claim or request shall be reviewed by the Committee which may, but shall not be required to, grant the Claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit issues and comments in writing.

8.4. Final Decision. The decision on review shall normally be made within sixty (60) days (or forty-five (45) days in the event of a claim regarding a Disability) after the Committee’s receipt of claimant’s claim or request. If an extension of time is required for a hearing or other special circumstances, the Claimant shall be notified and the time limit shall be one hundred twenty (120) days (or ninety (90) days in the event of a claim regarding a Disability). The decision shall be in writing and shall state the reasons and the relevant Plan provisions, and shall include a statement of the claimant’s right to file suit under section 502(a) of ERISA. All decisions on review shall be final and bind all parties concerned.

ARTICLE IX - AMENDMENT AND TERMINATION OF PLAN

9.1. Amendment. The Board may at any time amend the Plan by written instrument, except that no amendment shall reduce the amount accrued in any Account as of the date the amendment is adopted.

9.2. Company’s Right to Terminate. The Board may, in its sole discretion, terminate the entire Plan, as a nonelective account balance plan as defined in Treas. Reg. §1.409A -1(c)(2)(i)(B), and require distribution of all benefits due under the Plan or portion thereof, provided that:

a) The termination of the Plan does not occur proximate to a downturn in the financial health, as determined by the Committee, of the Company;

b) The Company also terminates all other plans or arrangements which are considered to be of a similar type as defined in Treas. Reg. §1.409A -1(c)(2)(i), or as otherwise provided by the Code;

c) No payments made in connection with the termination of the Plan occur earlier than 12 months following the Plan termination date other than payments the Plan would have made irrespective of Plan termination;

d) All payments made in connection with the termination of the Plan are completed within 24 months following the Plan termination date;

e) The Company does not establish a new plan of a similar type as defined in Treas. Reg. §1.409A -1(c)(2)(i), within 3 years following the Plan termination date; and,

f) The Company meets any other requirements deemed necessary to comply with provisions of the Code and applicable regulations which permit the acceleration of the time and form of payment made in connection with plan terminations and liquidations.

ARTICLE X - MISCELLANEOUS

10.1. Unfunded Plan. This plan is an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of “management or highly-compensated employees” within the meaning of Sections 201, 301, and 401 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and therefore is exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA.

10.2. Unsecured General Creditor. Notwithstanding any other provision of this Plan, Participants and Participants’ Beneficiary shall be unsecured general creditors, with no secured or preferential rights to any assets of the Company or any other party for payment of benefits under this Plan. Any property held by the Company for the purpose of generating the cash flow for benefit payments shall remain its general, unpledged and unrestricted assets. The Company’s obligation under the Plan shall be an unfunded and unsecured promise to pay money in the future.

10.3. Trust Fund. The Company shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Company may establish one (1) or more trusts, with such trustees as the Board may approve, for the purpose of assisting in the payment of such benefits. The assets of any such trust shall be held for payment of all the Company’s general creditors in

the event of insolvency. To the extent any benefits provided under the Plan are paid from any such trust, the Company shall have no further obligation to pay them. If not paid from the trust, such benefits shall remain the obligation of the Company.

10.4. Nonassignability.          Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgements, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.

10.5. Not a Contract of Employment. This Plan shall not constitute a contract of employment between Company and the Participant. Nothing in this Plan shall give a Participant the right to be retained in the service of Company or to interfere with the right of the Company to discipline or discharge a Participant at any time.

10.6. Protective Provisions. A Participant will cooperate with the Company by furnishing any and all information requested by the Company, in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Company may deem necessary and taking such other action as may be requested by the Company.

10.7. Governing Law. The provisions of this Plan shall be construed and interpreted according to the laws of the State of Michigan, except as preempted by federal law.

10.8. Validity. If any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein.

10.9. Notice. Any notice required or permitted under the Plan shall be sufficient if in writing and hand delivered or sent by registered or certified mail. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Mailed notice to the Committee shall be directed to the company’s address. Mailed notice to a Participant or Beneficiary shall be directed to the individual’s last known address in the Company’s records.

10.10. Successors. The provisions of this Plan shall bind and inure to the benefit of Company and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of Company, and successors of any such corporation or other business entity.

FIRST MERCURY FINANCIAL CORPORATION

By: /s/ John A. Marazza

Name: John A. Marazza

Title: Executive Vice President, Chief Financial Officer

Treasurer and Corporate Secretary

Dated: August 21, 2007