UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION. Civil Action No. 3:

Transcription

1 UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION In re DIRECT GENERAL CORPORATION SECURITIES LITIGATION This Document Relates To: ALL ACTIONS. Civil Action No. 3: Judge Todd J. Campbell Magistrate Judge Juliet E. Griffin CLASS ACTION STIPULATION OF SETTLEMENT Case 3:05-cv Document 272 Filed 04/02/2007 Page 1 of

2 This Stipulation of Settlement dated as of March 30, 2007 (the "Stipulation ), is made and entered into by and among the following Settling Parties (as defined further in Section IV hereof): (i) the Lead Plaintiffs (on behalf of themselves and each of the Class Members), by and through their counsel of record, and (ii) the Defendants identified below, by and through their counsel ofrecord in the Litigation. The Stipulation is intended by the Settling Parties to fully, finally and forever resolve, discharge and settle the Released Claims upon and subject to the terms and conditions hereof. I. THE LITIGATION Shortly after January 26, 2005, several securities class action lawsuits were filed in the United States District Court for the Middle District of Tennessee, Nashville Division (the "Court ) on behalf of persons who purchased securities of Direct General Corporation ("Direct General or the "Company ). In March 2005, the Court consolidated the actions for all purposes under the caption In re Direct General Corporation Securities Litigation, Civil Action No. 3: (the "Litigation ). Thereafter, in April 2005, the Court appointed the Structural Ironworkers Local Union #1 Annuity, Pension and Welfare Funds and John Dzaugis as Lead Plaintiffs under 21D(a)(3)(B) of the Securities Exchange Act of 1934 ("Exchange Act ) and approved Lead Plaintiffs ' selection of Lerach Coughlin Stoia Geller Rudman & Robbins LLP as Lead Counsel and Barrett, Johnston & Parsley as liaison counsel. On June 17, 2005, Lead Plaintiffs filed a Consolidated Amended Complaint for Violations of the Federal Securities Laws (the "Complaint ), asserting claims under the Securities Act of 1933 ("Securities Act ) and the Exchange Act on behalf of all persons who purchased Direct General securities between August 11, 2003 and January 26, The Complaint names Direct General, William C. Adair, Jr., Tammy R. Adair, Jacqueline C. Adair, Barry D. Elkins, Brian G. Moore, Fred H. Medling, Raymond L. Osterhout, Stephen Rohde, certain investment banking firms that -1- Case 3:05-cv Document 272 Filed 04/02/2007 Page 2 of

3 underwrote Direct General's stock offerings and the Company 's auditor Ernst & Young LLP ("E&Y ) as defendants. The Complaint alleges that Defendants made materially false and misleading statements and omissions regarding the impact on the Company 's claims exposure and the level of the Company 's related loss reserves as a result of recent Florida legislation, the Florida Motor Vehicle Insurance Affordability Reform Act of Following the filing of the Complaint, all Defendants individually and collectively moved to dismiss the Complaint, arguing among other things that Lead Plaintiffs had not satisfied the heightened pleading standards of the Private Securities Litigation Reform Act of 1995 ("PSLRA ), and that Lead Plaintiffs lacked standing. On November 9, 2005, the Court issued an opinion denying most of Defendants' motions to dismiss, but the Court dismissed with prejudice all claims against the William C. Adair, Jr. Trust and it dismissed claims against E&Y asserted under the Exchange Act, and dismissed certain claims under the Securities Act. Following denial of Defendants' motions to dismiss, Lead Plaintiffs commenced formal discovery. In February 2006, Lead Plaintiffs filed their Motion for Class Certification. Over the following three months, the parties engaged in document and deposition discovery related to class certification, including the depositions of Lead Plaintiffs and their market efficiency expert. Thereafter, all Defendants filed briefs in opposition to Lead Plaintiffs' Motion for Class Certification. On August 8, 2006, the Court certified a class consisting of all purchasers of the securities of Direct General between August 11, 2003 and January 26, 2005, inclusive, including those who purchased shares of Direct General common stock issued pursuant to or traceable to Direct General's August 11, 2003 Registration Statement/Prospectus and Direct General's March 23, 2004 Registration Statement/Prospectus. -2- Case 3:05-cv Document 272 Filed 04/02/2007 Page 3 of

4 On January 23, 2007, the parties participated in mediation with the Honorable Daniel L. Weinstein (Ret.). At the mediation, the Settling Parties reached an agreement - in-principle to settle the Litigation. Thereafter, on March 2, 2007, the parties executed a Memorandum ofunderstanding. II. DEFENDANTS' DENIALS OF WRONGDOING AND LIABILITY The Defendants have denied and continue to deny each and all of the claims and contentions alleged by the Lead Plaintiffs in the Litigation. The Defendants expressly have denied and continue to deny all charges of wrongdoing or liability against them arising out of any of the conduct, statements, acts or omissions alleged, or that could have been alleged, in the Litigation. The Defendants also have denied and continue to deny, inter alia, the allegations that the Lead Plaintiffs or Class Members have suffered damage, that the price of Direct General common stock was artificially inflated by reasons of alleged misrepresentations, non-disclosures or otherwise, that the Lead Plaintiffs or Class Members can prove that any alleged statements caused their losses, or that the Lead Plaintiffs or the Class were otherwise harmed by the conduct alleged in the Litigation. Nonetheless, the Defendants have concluded that further conduct of the Litigation could be protracted and expensive, and that it is desirable that the Litigation be fully and finally settled in the manner and upon the terms and conditions set forth in this Stipulation. The Defendants also have taken into account the uncertainty and risks inherent in any litigation, especially in complex cases like the Litigation. The Defendants have, therefore, determined that it is desirable and beneficial to them that the Litigation be settled in the manner and upon the terms and conditions set forth in this Stipulation. III. CLAIMS OF THE LEAD PLAINTIFFS AND BENEFITS OF SETTLEMENT The Lead Plaintiffs believe that the claims asserted in the Litigation have merit. However, counsel for the Lead Plaintiffs recognize and acknowledge the expense and length of continued proceedings necessary to prosecute the Litigation against the Defendants through trial and through -3- Case 3:05-cv Document 272 Filed 04/02/2007 Page 4 of

5 appeals. Counsel for the Lead Plaintiffs also have taken into account the uncertain outcome and the risk of any litigation, especially in complex actions such as the Litigation, as well as the difficulties and delays inherent in such litigation. Counsel for the Lead Plaintiffs also are mindful of the inherent problems of proof under and possible defenses to the violations alleged in the Litigation. Counsel for the Lead Plaintiffs believe that the settlement set forth in this Stipulation confers substantial benefits upon the Class and is in the best interest of the Class. IV. TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among the Lead Plaintiffs (for themselves and the Class Members) and the Defendants, by and through their respective counsel or attorneys of record, that, subject to the approval of the Court, the Litigation and the Released Claims shall be finally and fully compromised, settled and released, and the Litigation shall be dismissed with prejudice, as to all Settling Parties, upon and subject to the terms and conditions of the Stipulation, as follows. 1. Definitions As used in the Stipulation the following terms have the meanings specified below: 1.1 "Authorized Claimant means any Class Member whose claim for recovery has been allowed pursuant to the terms of the Stipulation. 1.2 "Claimant means any Class Member who files a Proof of Claim in such form and manner, and within such time, as the Court shall prescribe. 1.3 "Claims Administrator means the firm of Gilardi & Co. LLC. 1.4 "Class means a class consisting of all Persons (other than those Persons who timely and validly request exclusion from the Class) who purchased the common stock of Direct General between August 11, 2003 and January 26, 2005, inclusive, including those who purchased shares of Direct General common stock issued pursuant to or traceable to Direct General's August 11, 2003 Registration Statement/Prospectus, and Direct General's March 23, 2004 Registration -4- Case 3:05-cv Document 272 Filed 04/02/2007 Page 5 of

6 Statement/Prospectus. Excluded from the Class are Defendants, members of the immediate families of the Defendants, any entity in which any Defendant has or had a controlling interest, present or former directors and officers of Direct General, any of the Underwriter Defendants, and E&Y, and the legal representatives, heirs, successors, or assigns of any such Defendant. 1.5 "Class Member or "Member of the Class mean a Person who falls within the definition of the Class as set forth in 1.4 of the Stipulation. Insofar as a Class Member makes a proper and timely request for exclusion from the Class, he, she, or it shall not be considered a Class Member. 1.6 "Class Period means the period commencing on August 11, 2003 to January 26, "Defendants means the Direct General Defendants, E&Y and the Underwriter Defendants. 1.8 "Direct General Defendants means Direct General, William C. Adair, Jr., Tammy R. Adair, Jacqueline C. Adair, Barry D. Elkins, Brian G. Moore, Fred H. Medling, Raymond L. Osterhout and Stephen L. Rohde. 1.9 "Effective Date means the first date by which all of the events and conditions specified in 7.1 of the Stipulation have been met and have occurred "Escrow Agent means the law firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP "Final means: (a) the date of final affirmance on an appeal of the Judgment, the expiration of the time for a petition for or a denial of a writ of certiorari to review the Judgment and, if certiorari is granted, the date of final affirmance of the Judgment following review pursuant to that grant; or (b) the date of final dismissal of any appeal from the Judgment or the final dismissal of any proceeding on certiorari to review the Judgment; or (c) ifno appeal is filed, the expiration date ofthe -5- Case 3:05-cv Document 272 Filed 04/02/2007 Page 6 of

7 time for the filing or noticing of any appeal from the Court's Judgment approving the Stipulation substantially in the form and content of Exhibit B hereto, i.e., thirty (30) days after entry of the Judgment. Any proceeding or order, or any appeal or petition for a writ of certiorari pertaining solely to any plan of allocation and/or application for attorneys' fees, costs or expenses, shall not in any way delay or preclude the Judgment from becoming Final "Judgment means the judgment to be rendered by the Court substantially in the form and content attached hereto as Exhibit B "Lead Counsel means Lerach Coughlin Stoia Geller Rudman & Robbins LLP "Lead Plaintiffs means the Structural Ironworkers Local Union #1 Annuity, Pension and Welfare Funds and John Dzaugis "Notice Order means the preliminary order as approved by the Court for mailing and publication of notice "Person means an individual, corporation, limited liability corporation, professional corporation, limited liability partnership, partnership, limited partnership, association, joint stock company, estate, legal representative, trust, unincorporated association, government or any political subdivision or agency thereof, and any business or legal entity and their spouses, heirs, predecessors, successors, representatives, or assignees "Plaintiffs means each of the plaintiffs who filed a complaint in the Litigation "Plaintiffs' Counsel means counsel who have appeared for any of the Plaintiffs in the Litigation "Plan of Allocation means a plan or formula of allocation of the Settlement Fund whereby the Settlement Fund shall be distributed to Authorized Claimants after payment of expenses of notice and administration of the settlement, Taxes and Tax Expenses and such attorneys' fees, -6- Case 3:05-cv Document 272 Filed 04/02/2007 Page 7 of

8 costs, expenses and interest as may be awarded by the Court. Any Plan of Allocation is not part of the Stipulation and Defendants shall have no responsibility or liability with respect thereto "Related Persons means each of a Defendant's (including its predecessors, successors, parents, subsidiaries, divisions, joint ventures, and related or affiliated entities) past or present directors, officers, managers, employees, partners, members, principals, agents, underwriters, insurers and co-insurers and their reinsurers, controlling shareholders, venture capital investors, attorneys, accountants or auditors, banks or investment banks, financial advisors, associates, personal or legal representatives, assigns, spouses, heirs, any entity in which a Defendant has a controlling interest, any members oftheir immediate families, or any trust ofwhich any Defendant is the settlor or which is for the benefit of any Defendant and/or member(s) of his or her family "Released Claims shall collectively mean all claims (including "Unknown Claims as defined in 1.28 hereof), demands, rights, liabilities and causes of action of every nature and description under federal or state law, whether based upon statutory or common law, whether class or individual in nature, known or unknown, concealed or hidden, that either were asserted or could have been asserted, by the Lead Plaintiffs or any Class Member against the Released Parties arising out of or relating to the purchase of Direct General common stock during the Class Period, and the acts, facts, statements, or omissions that were or could have been alleged in the Litigation "Released Parties means each and all of the Defendants and their Related Persons "Settled Defendants' Claims means all claims (including, but not limited to, "Unknown Claims as defined in 1.28 hereof), demands, losses, rights, and causes of action of any nature whatsoever, whether known or unknown, whether suspected or unsuspected, whether concealed or hidden, that have been or could have been asserted in the Litigation or any forum by the Defendants or any of them or the successors and assigns of any of them against the Lead Plaintiffs, Class Members and Plaintiffs' Counsel which arise out of or relate in any way to the institution, -7- Case 3:05-cv Document 272 Filed 04/02/2007 Page 8 of

9 prosecution, assertion, settlement, or resolution of the Litigation (except for claims to enforce the Stipulation) "Settlement Fund means the principal amount of Fourteen Million Nine Hundred Forty Thousand Dollars ($14,940,000) in cash, plus any accrued interest pursuant to 12.1 and "Settling Parties means, collectively, each ofthe Defendants and the Lead Plaintiffs on behalf of themselves and Members of the Class "Supplemental Agreement means the agreement described in 7.5 hereof "Underwriter Defendants means Keefe, Bruyette & Woods, Inc., Morgan Keegan & Co. Inc., U.S. Bancorp Piper Jaffray Inc. and SunTrust Robinson Humphrey "Unknown Claims means any Released Claims that the Lead Plaintiffs or Class Members do not know or suspect to exist in his, her, or its favor at the time of the release of the Released Parties, and any Settled Defendants' Claims that any Defendant does not know or suspect to exist in his, her, or its favor, which, if known by him, her, or it, might have affected his, her, or its settlement with and release of the Released Parties, or might have affected his, her, or its decision(s) with respect to the settlement. With respect to any and all Released Claims and Settled Defendants' Claims, the Settling Parties stipulate and agree that, upon the Effective Date, Lead Plaintiffs and the Defendants shall expressly waive, and each of the Class Members shall be deemed to have, and by operation of the Judgment shall have, expressly waived the provisions, rights, and benefits conferred by any law of any state or territory of the United States, or principle of common law, which is similar, comparable or equivalent to California Civil Code 1542, which provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor. The Lead Plaintiffs and Class Members may hereafter discover facts in addition to or different from those that any of them now knows or believes to be true related to the subject matter of the Released -8- Case 3:05-cv Document 272 Filed 04/02/2007 Page 9 of

10 Claims, but the Lead Plaintiffs shall expressly and each Class Member, upon the Effective Date, shall be deemed to have, and by operation of Judgment shall have, fully, finally, and forever settled and released any and all Released Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore have existed upon any theory of law or equity now existing or coming into existence in the future, including, but not limited to, conduct that is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. Similarly, the Defendants and Released Parties may hereafter discover facts in addition to or different from those that any of them now know or believe to be true related to the subject matter of the Settled Defendants' Claims, but each Defendant shall expressly and each Released Party, upon the Effective Date, shall be deemed to have, and by operation of the Judgment shall have fully, finally, and forever settled and released any and all Settled Defendants' Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, which now exist, or heretofore have existed upon any theory of law or equity now existing or coming into existence in the future, including, but not limited to, conduct that is negligent, intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent discovery or existence of such different or additional facts. The Settling Parties acknowledge, and the Class Members and the Released Parties shall be deemed by operation of the Judgment to have acknowledged, that the inclusion of "Unknown Claims in the definition of Released Claims and Settled Defendants' Claims was separately bargained for and is a key element of the settlement of which these releases are a part. 2. The Settlement a. The Settlement Fund 2.1 The principal amount of Fourteen Million Nine Hundred Forty Thousand Dollars and no cents ($14,940,000.00) shall be paid or caused to be paid by Defendants in accordance with 2.2, -9- Case 3:05-cv Document 272 Filed 04/02/2007 Page 10 of 88 q

11 into an interest bearing account maintained by the Escrow Agent in settlement of the Litigation within ten ( 10) business days following the Court 's issuance of the Notice Order or April 10, 2007, whichever is later ("Due Date ). Any Defendant not paying his, her, or its contribution to the Settlement Fund as set forth below in 2.2 will owe interest at the rate of 6% per annum, on such unpaid contributions portion from the Due Date until the monies are deposited into the escrow account. 2.2 Defendants and their insurance carriers shall contribute to the Settlement Fund as follows: (a) $11,400,000 to be paid by the Direct General Defendants ' insurers ; (b) $2,940,000 to be paid by the Direct General Defendants ; (c) $300, 000 to be paid by Ernst & Young LLP; and (d) $300,000 to be paid by Direct General on behalf of the Underwriter Defendants which shall reduce by $300,000 Direct General's obligation to indemnify the Underwriter Defendants for reasonable legal fees and expenses pursuant to the underwriting agreements entered into in connection with Direct General's initial public offering on August 11, 2003 and secondary public offering on March 23, b. The Escrow Agent 2.3 The Escrow Agent shall invest the Settlement Fund deposited pursuant to 2.1 above in short-term instruments backed by the full faith and credit of the United States Government or fully insured by the United States Government or an agency thereof and shall reinvest the proceeds of these instruments as they mature in similar instruments at their then current market rates. The Escrow Agent shall bear all risks related to investment of the Settlement Fund. 2.4 The Escrow Agent shall not disburse the Settlement Fund except as provided in the Stipulation, by an order of the Court, or with the written agreement of counsel for Direct General, Direct General' s insurers and Lead Counsel Case 3:05-cv Document 272 Filed 04/02/2007 Page 11 of 88 q

12 2.5 Subject to further order and/or direction as may be made by the Court, the Escrow Agent is authorized to execute such transactions on behalf of Class Members as are consistent with the terms of the Stipulation. 2.6 All funds held by the Escrow Agent shall be deemed and considered to be in custodia legis, and shall remain subject to the jurisdiction of the Court, until such time as such funds shall be distributed pursuant to the Stipulation and/or further order(s) of the Court. 2.7 The Escrow Agent may pay from the Settlement Fund, without further approval from the Defendants or the Court, the costs and expenses reasonably and actually incurred in connection with providing notice to the Class, locating Class Members, soliciting Class claims, assisting with the filing of claims, administering and distributing the Settlement Fund to Authorized Claimants, processing Proof of Claim and Release forms and paying escrow fees and costs, if any. c. Taxes 2.8 (a) The Settling Parties agree that the Settlement Fund is intended to be a "qualified settlement fund within the meaning of Treas. Reg B-1. Settling Parties agree that the Settlement Fund should be treated as being at all times a "qualified settlement fund within the meaning of Treas. Reg B-1. In addition, the Escrow Agent shall timely make such elections as necessary or advisable to carry out the provisions of this 2.8, including the "relation-back election (as defined in Treas. Reg B-1) back to the earliest permitted date. Such elections shall be made in compliance with the procedures and requirements contained in such regulations. It shall be the responsibility of the Escrow Agent to timely and properly prepare and deliver the necessary documentation for signature by all necessary parties, and thereafter to cause the appropriate filing to occur. (b) For the purpose of 468B of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder, the "administrator shall be the Escrow Agent. The -11- Case 3:05-cv Document 272 Filed 04/02/2007 Page 12 of

13 Escrow Agent shall timely and properly file all informational and other tax returns necessary or advisable with respect to the Settlement Fund (including without limitation the returns described in Treas. Reg B-2(k)(1)). Such returns (as well as the election described in 2.8) shall be consistent with this 2.8 and in all events shall reflect that all Taxes (including any estimated Taxes, interest or penalties) on the income earned by the Settlement Fund shall be paid out of the Settlement Fund as provided in 2.8(c) hereof. (c) All (i) Taxes (including any estimated Taxes, interest or penalties) arising with respect to the income earned by the Settlement Fund, including any Taxes or tax detriments that may be imposed upon the Defendants with respect to any income earned by the Settlement Fund for any period during which the Settlement Fund does not qualify as a "qualified settlement fund for federal or state income tax purposes ("Taxes ), and (ii) expenses and costs incurred in connection with the operation and implementation of this 2.8 (including, without limitation, expenses of tax attorneys and/or accountants and mailing and distribution costs and expenses relating to filing (or failing to file) the returns described in this 2.8) ("Tax Expenses ), shall be paid out of the Settlement Fund; in all events neither the Defendants nor their counsel shall have any liability or responsibility for the Taxes or the Tax Expenses. The Escrow Agent shall indemnify and hold each of the Defendants and their counsel harmless for Taxes and Tax Expenses (including, without limitation, Taxes payable by reason of any such indemnification). Further, Taxes and Tax Expenses shall be treated as, and considered to be, a cost of administration of the Settlement Fund and shall be timely paid by the Escrow Agent out of the Settlement Fund without prior order from the Court and the Escrow Agent shall be obligated (notwithstanding anything herein to the contrary) to withhold from distribution to Authorized Claimants any funds necessary to pay such amounts including the establishment of adequate reserves for any Taxes and Tax Expenses (as well as any amounts that may be required to be withheld under Treas. Reg B-2(1)(2)); neither the Defendants, the -12- Case 3:05-cv Document 272 Filed 04/02/2007 Page 13 of

14 insurance carriers, nor their counsel are responsible, nor shall they have any liability therefor. The Settling Parties hereto agree to cooperate with the Escrow Agent, each other, and their tax attorneys and accountants to the extent reasonably necessary to carry out the provisions of this 2.8. d. Termination of Settlement 2.9 In the event that the Stipulation is not approved, or is terminated, canceled, or the Effective Date does not occur, the Settlement Fund (including accrued interest) less expenses actually incurred or due and owing in connection with the settlement provided for herein, shall be refunded directly to each of the persons or entities contributing to the Settlement Fund as described in 7.6 below. 3. Notice Order and Settlement Hearing 3.1 Promptly after execution of the Stipulation, the Settling Parties shall submit the Stipulation together with its Exhibits to the Court and shall apply for entry of an order (the "Notice Order ), substantially in the form and content of Exhibit A hereto, requesting, inter alia, the preliminary approval of the settlement set forth in the Stipulation, and approval for the mailing of a settlement notice (the "Notice ) and publication of a summary notice (the "Summary Notice ), substantially in the form and content of Exhibits A-1 and A-3 hereto. The Notice shall include the general terms of the settlement set forth in the Stipulation, the proposed Plan of Allocation, the general terms of the Fee and Expense Application as defined in 6.1 below, and the date of the Settlement Hearing as defined below. 3.2 Lead Counsel shall request that after notice is given, the Court hold a hearing (the "Settlement Hearing ) and approve the settlement ofthe Litigation as set forth herein. At or after the Settlement Hearing, Lead Counsel also will request that the Court approve the proposed Plan of Allocation and the Fee and Expense Application. Case 3:05-cv Document Filed 04/02/2007 Page 14 of

15 4. Releases 4.1 Upon the Effective Date, as defined in 1.9 hereof, the Lead Plaintiffs and each Class Member shall be deemed to have fully, finally, and forever released, relinquished and discharged all Released Claims whether or not such Class Member for themselves and their predecessors, successors, heirs and assigns executes and delivers the Proof of Claim and Release form. 4.2 Upon the Effective Date, as defined in 1.9 hereof, each of the Released Parties shall be deemed to have, and by operation of the Judgment shall have, fully, finally, and forever released, relinquished and discharged the Lead Plaintiffs, each and all of the Class Members, and their counsel, from all Settled Defendants' Claims. 5. Administration and Calculation of Claims, Final Awards and Supervision and Distribution of the Settlement Fund 5.1 The Claims Administrator, subject to such supervision and direction of the Court or Lead Counsel, as may be necessary or as circumstances may require, shall administer and calculate the claims submitted by Class Members and shall oversee distribution of the Net Settlement Fund (defined below) to Authorized Claimants. The Settlement Fund shall be applied as follows: (a) to pay all the costs and expenses reasonably and actually incurred in connection with providing notice, locating Class Members, soliciting Class claims, assisting with the filing of claims, administering and distributing the Settlement Fund to Authorized Claimants, processing Proof of Claim and Release forms and paying escrow fees and costs, if any; (b) to pay the Taxes and Tax Expenses described in 2.8 above; (c) to pay to Lead Counsel attorneys' fees, expenses and costs with interest thereon (the "Fee and Expense Award ), and to pay Lead Plaintiffs' expenses (including lost wages) incurred in representing the Class if and to the extent allowed by the Court; and (d) to distribute the balance of the Settlement Fund (the "Net Settlement Fund ) to Authorized Claimants as allowed by the Stipulation, the Plan of Allocation, or the Court Case 3:05-cv Document 272 Filed 04/02/2007 Page 15 of

16 5.2 Upon the Effective Date and thereafter, and in accordance with the terms of the Stipulation, the Plan of Allocation, or such further approval and further order(s) of the Court as may be necessary or as circumstances may require, the Net Settlement Fund shall be distributed to Authorized Claimants, subject to and in accordance with the following. 5.3 Within ninety (90) days after the mailing of the Notice or such other time as may be set by the Court, each Person claiming to be an Authorized Claimant shall be required to submit to the Claims Administrator a completed Proof of Claim and Release, substantially in the form of Exhibit A- 2 hereto, signed under penalty ofperjury and supported by such documents as specified in the Proof of Claim and Release and as are reasonably available to the Authorized Claimant. 5.4 Except as otherwise ordered by the Court, all Class Members who fail to timely submit a Proof of Claim and Release within such period, or such other period as may be ordered by the Court, or otherwise allowed, shall be forever barred from receiving any payments pursuant to this Stipulation and the settlement set forth herein, but will in all other respects be subject to and bound by the provisions of this Stipulation, the releases contained herein, and the Judgment. Notwithstanding the foregoing, Lead Counsel may in their discretion, accept for processing late filed claims so long as the distribution of the Net Settlement Fund to Authorized Claimants is not materially delayed. 5.5 The Net Settlement Fund shall be distributed to the Authorized Claimants substantially in accordance with a Plan of Allocation to be described in the Notice and approved by the Court. 5.6 Except for their obligation to pay or cause payment of the $14,940,000, and interest if applicable pursuant to 2.1, and to reasonably cooperate in the production of information from Direct General's transfer agent for purposes ofproviding notice as provided herein, the Defendants and the Released Parties shall have no responsibility for, interest in, or liability whatsoever with -15- Case 3:05-cv Document 272 Filed 04/02/2007 Page 16 of

17 respect to the investment or distribution of the Settlement Fund, the Plan of Allocation, the determination, administration, or calculation of claims, the payment or withholding of Taxes, or any losses incurred in connection therewith. 5.7 No Person shall have any claim against Lead Counsel, the Lead Plaintiffs, Plaintiffs, any claims administrator, or Defendants or the Released Parties based on the distributions made substantially in accordance with this Stipulation and the settlement contained herein, the Plan of Allocation, or further order(s) of the Court. 5.8 The Net Settlement Fund shall be distributed to the Authorized Claimants substantially in accordance with a Plan of Allocation to be described in the Notice and approved by the Court. However, if there is any balance remaining in the Net Settlement Fund after six (6) months from the date of distribution of the Net Settlement Fund (whether by reason of tax refunds, uncashed checks or otherwise) Lead Counsel shall reallocate such balance among Authorized Claimants in an equitable and economic fashion. Thereafter, any balance which still remains in the Net Settlement Fund shall be donated to an appropriate non-profit organization. 5.9 It is understood and agreed by the Settling Parties that any proposed Plan of Allocation of the Net Settlement Fund including, but not limited to, any adjustments to an Authorized Claimant's claim set forth therein, is not a part of the Stipulation and is to be considered by the Court separately from the Court' s consideration ofthe fairness, reasonableness and adequacy of the settlement set forth in the Stipulation, and any order or proceeding relating to the Plan of Allocation shall not operate to terminate or cancel the Stipulation or affect the finality ofthe Court's Judgment approving the Stipulation and the settlement set forth therein, or any other orders entered pursuant to the Stipulation Case 3:05-cv Document 272 Filed 04/02/2007 Page 17 of

18 6. Lead Counsel's Attorneys' Fees and Reimbursement of Expenses of Counsel and the Lead Plaintiffs 6.1 Lead Counsel may submit an application or applications (the "Fee and Expense Application ) for distributions to them from the Settlement Fund for: (a) an award of attorneys' fees; plus (b) reimbursement of expenses and costs incurred in connection with prosecuting the Litigation, plus any interest on such attorneys' fees, costs and expenses at the same rate and for the same periods as earned by the Settlement Fund (until paid) as may be awarded by the Court and reimbursement of the expenses (including lost wages of the Lead Plaintiffs). Lead Counsel reserve the right to make additional applications for fees and expenses incurred. 6.2 The attorneys' fees, expenses and costs, including the fees of experts and consultants, as awarded by the Court, shall be payable to Lead Counsel from the Settlement Fund, as ordered, immediately after the Court executes an order awarding such fees and expenses. Lead Counsel shall thereafter allocate the attorneys' fees amongst Plaintiffs' Counsel in a manner in which they in good faith believe reflects the contributions of such counsel to the prosecution and settlement of the Litigation. 6.3 In the event that the Effective Date does not occur, or the Judgment or the order making the Fee and Expense Award is reversed or modified, or the Stipulation is terminated, and in the event that any Fee and Expense Award has been paid to any extent, then each Plaintiffs' Counsel, including Lead Counsel, shall within ten (10) business days from receiving notice from Defendants' counsel or from a court of appropriate jurisdiction, refund to the Settlement Fund, any fees, expenses and costs previously paid or otherwise transferred to them from the Settlement Fund plus interest thereon at the same rate as earned on the Settlement Fund: (a) in the full amount if the Effective Date does not occur or the Stipulation is terminated, less notice and administration expenses already incurred or due and owing, or (b) in such other amount corresponding to that portion of any Fee and Expense Award that is reversed or modified. Each such Plaintiffs' Counsel's law firm, as a Case 3:05-cv Document 272 Filed 04/02/2007 Page 18 of

19 condition ofreceiving such fees and expenses, on behalf of itself and each partner and/or shareholder of it, agrees that the law firm and its partners and/or shareholders are subject to the jurisdiction of the Court for the purpose of enforcing the provisions of this paragraph. 6.4 The procedure for and the allowance or disallowance by the Court of any applications by Lead Plaintiffs or Lead Counsel for attorneys' fees, costs and expenses to be paid out of the Settlement Fund, are not part of the settlement set forth in the Stipulation, and are to be considered by the Court separately from the Court 's consideration ofthe fairness, reasonableness and adequacy of the settlement set forth in the Stipulation, and any order or proceeding relating to the Fee and Expense Application, or any appeal from any order relating thereto or reversal or modification thereof, shall not operate to terminate or cancel the Stipulation, or affect or delay the finality of the Judgment approving the Stipulation and the settlement of the Litigation set forth therein. 6.5 Defendants and the Released Parties shall have no responsibility for, and no liability whatsoever with respect to, any payment to Plaintiffs' Counsel from the Settlement Fund. 6.6 Defendants and the Released Parties shall have no responsibility for, and no liability whatsoever with respect to, the allocation among Plaintiffs' Counsel, and/or any other Person who may assert some claim thereto, of any Fee and Expense Award that the Court may make in the Litigation. 7. Conditions of Settlement, Effect of Disapproval, Cancellation or Termination 7.1 The Effective Date ofthe Stipulation shall be conditioned on the occurrence of all of the following events: (a) Defendants have timely made, or caused to be made, their contributions to the Settlement Fund as required by above; pursuant to 7.5 hereof; (b) Defendants have not exercised their option to terminate the Stipulation Case 3:05-cv Document 272 Filed 04/02/2007 Page 19 of

20 (c) the Court has entered the Judgment, or a judgment substantially in the form and content of Exhibit B attached hereto, or a judgment in a form other than that provided above ("Alternate Judgment ) acceptable to all of the Settling Parties; and (d) the Judgment (or the Alternate Judgment) has become Final, as defined in 1.11 hereof. 7.2 Upon the occurrence of all of the events referenced in 7.1 hereof, any and all remaining interest or right of Defendants in or to the Settlement Fund, if any, shall be absolutely and forever extinguished. 7.3 Defendants' or Lead Counsel shall each have the right to terminate the settlement and this Stipulation by providing written notice of their election to do so ("Termination Notice ) to all other parties hereto within thirty (30) days of: (a) the Court's declining to enter the Notice Order in any material respect; (b) the Court's refusal to approve this Stipulation or any material part of it; (c) the Court's declining to enter the Judgment in any material respect; (d) the date upon which the Judgment is modified or reversed in any material respect by the Court of Appeals or the Supreme Court; or (e) the date upon which an Alternate Judgment is modified or reversed in any material respect by the Court of Appeals or the Supreme Court. 7.4 If all of the conditions specified in 7.1 are not met, then the Stipulation shall be canceled and terminated subject to 7.7 unless Lead Counsel and Defendants mutually agree in writing to proceed with the Stipulation. 7.5 In addition to the grounds for termination of the settlement in 7.3, Defendants shall have the option to terminate the settlement in the event that Persons who would otherwise be Class Members who purchased more than a certain number of shares of Direct General common stock during the Class Period choose to exclude themselves from the Class, as set forth in a separate -19- Case 3:05-cv Document 272 Filed 04/02/2007 Page 20 of

21 agreement (the "Supplemental Agreement ) executed among the Lead Plaintiffs and Defendants, which is incorporated into this Stipulation. 7.6 Unless otherwise ordered by the Court, in the event the Stipulation shall terminate, or be canceled, or shall not become effective for any reason, within five (5) business days after written notification of such event is sent by counsel for Defendants or Lead Counsel, the Settlement Fund (including accrued interest), less any notice and administration expenses and costs paid or payable from the Settlement Fund, shall be refunded by the Escrow Agent pursuant to written instructions from counsel for Defendants. At the request of counsel for Defendants, the Escrow Agent or its designee shall apply for any tax refund owed to the Settlement Fund and pay the proceeds, after deduction of any fees or expenses incurred in connection with such application(s) for refund, to Direct General. 7.7 In the event that the Stipulation is not approved by the Court or the settlement set forth in the Stipulation is terminated or fails to become effective in accordance with its terms, the Settling Parties shall be restored to their respective positions in the Litigation as of March 1, In such event, the terms and provisions of the Stipulation, with the exception of , , , , herein, shall have no further force and effect with respect to the Settling Parties and shall not be used in the Litigation or in any other proceeding for any purpose, and any judgment or order entered by the Court in accordance with the terms of the Stipulation shall be treated as vacated, nuncpro tunc. No order of the Court or modification or reversal on appeal of any order of the Court concerning the Plan of Allocation or the amount of any attorneys' fees, costs, expenses and interest awarded by the Court to the Lead Plaintiffs constitute grounds for cancellation or termination of the Stipulation. or any of their counsel shall If the Stipulation is terminated pursuant to its terms, neither the Lead Plaintiffs, nor any oftheir counsel shall have any obligation to -20- Case 3:05-cv Document 272 Filed 04/02/2007 Page 21 of

22 repay any amounts paid or payable from Settlement Fund for notice and administration of the settlement. 8. Miscellaneous Provisions 8.1 The Settling Parties: (a) acknowledge that it is their intent to consummate this agreement; and (b) agree to cooperate to the extent reasonably necessary to effectuate and implement all terms and conditions of this Stipulation and to exercise their best efforts to accomplish the foregoing terms and conditions of this Stipulation. 8.2 Each Defendant warrants as to himself or itself that, at the time any of the payments provided for herein are made on behalf of himself or itself, he or it is not insolvent and the payment will not render him or it insolvent. This representation is made by each Defendant as to himself or itself only, and is not made by counsel for the Defendants. 8.3 If a case is commenced in respect to Direct General (or any Defendant or insurer contributing funds to the Settlement Fund) under Title 11 ofthe United States Code (Bankruptcy), or a trustee, receiver or conservator is appointed under any similar law, and in the event of the entry of a final order of a court of competent jurisdiction determining the transfer ofmoney to the Settlement Fund or any portion thereof by or on behalf of Defendants to be a preference, voidable transfer, fraudulent transfer or similar transaction and any portion thereof is required to be returned, and such amount is not promptly deposited to the Settlement Fund by other Defendants, then, at the election of Lead Counsel, the parties shall jointly move the Court to vacate and set aside the releases given and Judgment entered in favor of the Defendants, which releases and Judgment shall be null and void, and the parties shall be restored to their respective positions in the Litigation as of March 1, 2007, and any cash amounts in the Settlement Fund shall be returned as provided in 7.6 above. 8.4 The Settling Parties intend this settlement to be a final and complete resolution of all disputes between them with respect to the Litigation. The settlement compromises claims which are -21- Case 3:05-cv Document 272 Filed 04/02/2007 Page 22 of

23 contested and shall not be deemed an admission by any Settling Party as to the merits of any claim or defense. While retaining their right to deny that the claims advanced in the Litigation were meritorious, Defendants will not contend that the Litigation was not filed in good faith. The Final Judgment will contain a statement that during the course of the Litigation, the parties and their respective counsel at all times complied with the requirements of Federal Rule of Civil Procedure 11, and that the Litigation is being settled voluntarily after consultation with competent legal counsel. The Settling Parties agree that the amount paid to the Settlement Fund and the other terms of the settlement were negotiated in good faith by the Settling Parties, and reflect a settlement that was reached voluntarily after consultation with competent legal counsel. The Settling Parties reserve their right to rebut, in a manner that such party determines to be appropriate, any contention made in any public forum that the Litigation was brought or defended in bad faith or without a reasonable basis. 8.5 Neither the Stipulation nor the settlement, nor any act performed or document executed pursuant to or in furtherance ofthe Stipulation or the settlement: (a) is or may be deemed to be or may be used as an admission of, or evidence of, the validity of any Released Claim or of any wrongdoing or liability of the Defendants and the Released Parties; or (b) is or may be deemed to be or may be used as an admission of, or evidence of, any fault or omission of any of the Defendants and the Released Parties in any civil, criminal or administrative proceeding in any court, administrative agency or other tribunal. Defendants and the Released Parties may file the Stipulation and/or the Judgment in any action that may be brought against them in order to support a defense or counterclaim based on principles of resjudicata, collateral estoppel, release, good faith settlement, judgment bar or reduction, or any other theory of claim preclusion or issue preclusion or similar defense or counterclaim Case 3:05-cv Document 272 Filed 04/02/2007 Page 23 of

24 8.6 All of the Exhibits to this Stipulation are material and integral parts hereof and are fully incorporated herein by this reference. 8.7 This Stipulation may be amended or modified only by a written instrument signed by or on behalf of all Settling Parties or their respective successors-in-interest. 8.8 This Stipulation and the Exhibits attached hereto and the Supplemental Agreement constitute the entire agreement between Lead Plaintiffs and Defendants and no representations, warranties or inducements have been made to any party concerning the Stipulation or its Exhibits or the Supplemental Agreement other than the representations, warranties and covenants contained and memorialized in such documents. Except as otherwise provided herein, each party shall bear its own costs. 8.9 Lead Counsel, on behalf of the Class, are expressly authorized by the Lead Plaintiffs to take all appropriate action required or permitted to be taken by the Class pursuant to the Stipulation to effectuate its terms and also are expressly authorized to enter into any modifications or amendments to the Stipulation on behalf of the Class which they deem appropriate Each counsel or other Person executing the Stipulation or any of its Exhibits on behalf of any party hereto hereby warrants that such Person has the full authority to do so This Stipulation may be executed in one or more counterparts. All executed counterparts and each of them shall be deemed to be one and the same instrument. A complete set of original executed counterparts shall be filed with the Court This Stipulation shall be binding upon, and inure to the benefit of, the successors and assigns of the parties hereto The Court shall retain jurisdiction with respect to implementation and enforcement of the terms of this Stipulation, and all parties hereto submit to the jurisdiction of the Court for purposes of implementing and enforcing the settlement embodied in this Stipulation Case 3:05-cv Document 272 Filed 04/02/2007 Page 24 of

25 8.14 This Stipulation and the Exhibits hereto shall be considered to have been negotiated, executed and delivered, and to be wholly performed, in the State of Tennessee, and the rights and obligations of the parties to this Stipulation shall be construed and enforced in accordance with, and governed by, the internal, substantive laws of the State of Tennessee without giving effect to that State's choice-of-law principles. IN WITNESS WHEREOF, the parties hereto have caused this Stipulation to be executed, by their duly authorized attorneys, dated as of March 30, BARRETT, JOHNSTON & PARSLEY GEORGE E. BARRETT, #2672 DOUGLAS S. JOHNSTON, JR. #5782 TIMOTHY L. MILES, #21605 s/ GEORGE E. BARRETT GEORGE E. BARRETT 217 Second Avenue, North Nashville, TN Telephone: 615/ / (fax) Liaison Counsel LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP DARREN J. ROBBINS TOR GRONBORG JEFFREY D. LIGHT X. JAY ALVAREZ RAMZI ABADOU s/ JEFFREY D. LIGHT JEFFREY D. LIGHT 655 West Broadway, Suite 1900 San Diego, CA Telephone: 619/ / (fax) Lead Counsel for Plaintiffs -24- Case 3:05-cv Document 272 Filed 04/02/2007 Page 25 of

26 CAVANAGH & O'HARA WILLIAM K. CAVANAGH, JR. 407 East Adams Street Springfield, IL Telephone : 217/ / (fax) Additional Counsel for Plaintiffs ALSTON & PETER Q. F SCOTT P: One Atlantic Center 1201 West Peachtree Street Atlanta, GA Telephone: 404/ / (fax) BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, P.C. MATTHEW SWEENEY JIM DELANIS 211 Commerce Street, Suite 1000 Nashville, TN / / (Fax) Counsel for Direct General Defendants BASS, BERRY & SIMS, PLC MICHAEL L. DAGLEY MATTHEW M. CURLEY BRIAN D. ROARK MATTHEW M. CURLEY 315 Deaderick Street, Suite 2700 Nashville, TN Telephone: 615/ / (Fax) Case 3:05-cv Document 272 Filed 04/02/2007 Page 26 of

27 CAVANAGH & O'HARA WILLIAM K. CAVANAGH, JR. 407 East Adams Street Springfield, IL Telephone : 217/ / (fax) Additional Counsel for Plaintiffs ALSTON & BIRD, LLP PETER Q. BASSETT SCOTT P. HILSEN SCOTT P. HILSEN One Atlantic Center 1201 West Peachtree Street Atlanta, GA Telephone : 404/ / (fax) BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, P.C. MATTHEW SWEENEY JIM DELANIS 211 Commerce Street, Suite 1000 Nashville, TN / / (Fax) Counsel for Direct General Defendants BASS, BERRY & SIMS, PLC MICHAEL L. DAGLEY MATTHEW M. CURLEY BRIAN D. ROARK MATTHEW M. C(J EY 315 Deaderick Street, Suite 2700 Nashville, TN Telephone: 615/ / (Fax) -25- Case 3:05-cv Document 272 Filed 04/02/2007 Page 27 of

28 BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, P.C. MATTHEW SWEENEY JIM DELANIS 211 Commerce Street, Suite 1000 Nashville, TN / / (Fax) Counsel for Direct General Defendants BASS, BERRY & SIMS, PLC MICHAEL L. DAGLEY MATTHEW M. CURLEY BRIAN D. ROARK MATTHEW M. CURLEY 315 Deaderick Street, Suite 2700 Nashville, TN Telephone: 615/ / (Fax) ERNST & YOUNG LLP BRUCE CORMIER ANTOINETTE DECAMP 1225 Connecticut Avenue, NW Washington, DC Telephone: 202/ / (Fax) Attorneys for Ernst & Young LLP WILLKIE FARR & GALLAGHER LLP STEPHEN W. GREINER ANTONIO YANEZ, JR. STEPHEN W. GREINER 787 Seventh Avenue New York, NY Telephone: 212/ / (Fax) -27- Case 3:05-cv Document 272 Filed 04/02/2007 Page 28 of

29 EXHIBIT A Case 3:05-cv Document 272 Filed 04/02/2007 Page 29 of

30 UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION In re DIRECT GENERAL CORPORATION SECURITIES LITIGATION This Document Relates To: ALL ACTIONS. Civil Action No. 3: Judge Todd J. Campbell Magistrate Judge Juliet E. Griffin CLASS ACTION [PROPOSED] ORDER PRELIMINARILY APPROVING SETTLEMENT AND PROVIDING FOR NOTICE EXHIBIT A Case 3:05-cv Document 272 Filed 04/02/2007 Page 30 of

31 WHEREAS, a consolidated class action is pending before this Court entitled In re Direct General Corporation Securities Litigation, Civil Action No. 3: (the "Litigation ); WHEREAS, the parties having made application, pursuant to Federal Rule of Civil Procedure 23(e), for an order approving the settlement of this Litigation, in accordance with a Stipulation of Settlement dated as of March 30, 2007 (the "Stipulation ), which, together with the Exhibits annexed thereto sets forth the terms and conditions for a proposed settlement of the Litigation and for dismissal of the Litigation with prejudice upon the terms and conditions set forth therein; and the Court having read and considered the Stipulation and the Exhibits annexed thereto; and WHEREAS, all defined terms contained herein shall have the same meanings as set forth in the Stipulation. NOW, THEREFORE, IT IS HEREBY ORDERED: 1. The Court does hereby preliminarily approve the Stipulation and the settlement set forth therein, subject to further consideration at the Settlement Hearing described below. 2. Pursuant to Rule 23 of the Federal Rules of Civil Procedure, the Court hereby certifies, for purposes of effectuating this settlement, a Class defined as all Persons (other than those Persons who timely and validly request exclusion from the Class) who purchased the common stock of Direct General Corporation ("Direct General ) between August 11, 2003 and January 26, 2005, inclusive, including those who purchased shares ofdirect General common stock issued pursuant to or traceable to Direct General's August 11, 2003 Registration Statement/Prospectus, and Direct General's March 23, 2004 Registration Statement/Prospectus. Excluded from the Class are Defendants, members of the immediate families of the Defendants, any entity in which any Defendant has or had a controlling interest, present or former directors and officers of Direct -1- Case 3:05-cv Document 272 Filed 04/02/2007 Page 31 of

32 General, any of the Underwriter Defendants, and E&Y, and the legal representatives, heirs, successors, or assigns of any such Defendant. 3. The Court finds, for the purposes of the settlement only, that the prerequisites for a class action under Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure have been satisfied in that: (a) the number of Class Members is so numerous that joinder of all members thereof is impracticable; (b) there are questions of law and fact common to the Class; (c) the claims of the Lead Plaintiffs are typical of the claims of the Class they seek to represent; (d) the Lead Plaintiffs have and will fairly and adequately represent the interests of the Class ; (e) the questions of law and fact common to the Members of the Class predominate over any questions affecting only individual Members of the Class; and (f) a class action is superior to other available methods for the fair and efficient adjudication of the controversy. 4. Pursuant to Rule 23 of the Federal Rules of Civil Procedure, Lead Plaintiffs are certified as class representatives. 5. A hearing (the "Settlement Hearing ) shall be held before this Court on, 2007, at _.m., at the United States District Court for the Middle District of Tennessee, Nashville Division, Estes Kefauver Federal Building and United States Courthouse, 801 Broadway, Nashville, Tennessee, to determine whether the proposed settlement of the Litigation on the terms and conditions provided for in the Stipulation is fair, reasonable and adequate to the Class and should be approved by the Court; whether a Judgment as provided in 1.12 of the Stipulation should be entered herein; whether the proposed Plan of Allocation should be approved; and to determine the amount of fees and expenses that should be awarded to Lead Counsel. The Court may adjourn the Settlement Hearing without further notice to Members of the Class. 6. The Court approves, as to form and content, the Notice of Pendency and Proposed Settlement of Class Action (the "Notice ), the Proof of Claim and Release form (the "Proof of -2- Case 3:05-cv Document 272 Filed 04/02/2007 Page 32 of

33 Claim ), and Summary Notice annexed as Exhibits A-1, A-2 and A-3 hereto, and finds that the mailing and distribution of the Notice and publishing of the Summary Notice substantially in the manner and form set forth in this Order meet the requirements offederal Rule of Civil Procedure 23, 21D(a)(7) of the Securities Exchange Act of 1934, 15 U.S.C. 78u-4(a)(7) as amended by the Private Securities Litigation Reform Act of 1995, and due process, and is the best notice practicable under the circumstances and shall constitute due and sufficient notice to all Persons entitled thereto. 7. Lead Counsel are hereby authorized to retain the firm of Gilardi & Co. LLC ("Claims Administrator ) to supervise and administer the notice procedure as well as the processing of claims as more fully set forth below: (a) Not later than, 2007 (the "Notice Date ), the Claims Administrator shall cause a copy of the Notice and the Proof of Claim, substantially in the form annexed as Exhibits A-1 and A-2 hereto, to be mailed by first class mail to all Class Members who can be identified with reasonable effort; (b) Not later than, 2007, the Claims Administrator shall cause the Summary Notice to be published once in Investor's Business Daily; and (c) At least seven (7) days prior to the Settlement Hearing, Lead Counsel shall serve on Defendants' counsel and file with the Court proof, by affidavit or declaration, of such mailing and publishing. 8. Nominees who purchased Direct General common stock during the period beginning August 11, 2003 to January 26, 2005 for the beneficial ownership of another Person shall send the Notice and the Proof of Claim to such beneficial owners of such Direct General common stock within ten (10) days after receipt thereof, or send a list of the names and addresses of such beneficial owners to the Claims Administrator within ten (10) days of receipt thereof in which event the Claims Administrator shall promptly mail the Notice and Proof of Claim to such beneficial owners. -3- Case 3:05-cv Document 272 Filed 04/02/2007 Page 33 of

34 9. All Members of the Class shall be bound by all determinations and judgments in the Litigation concerning the settlement, whether favorable or unfavorable to the Class. 10. Class Members who wish to participate in the settlement shall complete and submit Proof of Claim forms in accordance with the instructions contained therein. Unless the Court orders otherwise, all Proof of Claim forms must be submitted no later than ninety (90) days from the Notice Date. Any Class Member who does not timely submit a Proof of Claim within the time provided for, shall be barred from sharing in the distribution of the proceeds of the Settlement Fund, unless otherwise ordered by the Court, but shall nevertheless be bound by any Final Judgment entered by the Court. 11. Any Member of the Class may enter an appearance in the Litigation, at his, her or its own expense, individually or through counsel of their own choice. If they do not enter an appearance, they will be represented by Lead Counsel. 12. Pending final determination ofwhether the settlement should be approved, neither the Lead Plaintiffs nor any Class Member, either directly, representatively, or in any other capacity, shall commence or prosecute against any of the Released Parties, any action or proceeding in any court or tribunal asserting any of the Released Claims. 13. Any Person falling within the definition of the Class may, upon request, be excluded from the Class. Any such Person must submit to the Claims Administrator a request for exclusion ("Request for Exclusion ), postmarked no later than, A Request for Exclusion must be signed and state: (a) the name, address, and telephone number of the Person requesting exclusion; (b) the Person's purchases and sales of Direct General common stock made during the Class Period, including the dates, the number of shares purchased, and price paid or received for each such purchase or sale ; and (c) that the Person wishes to be excluded from the Class. All Persons who submit valid and timely Requests for Exclusion in the manner set forth in this -4- Case 3:05-cv Document 272 Filed 04/02/2007 Page 34 of

35 paragraph shall have no rights under the Stipulation, shall not share in the distribution of the Net Settlement Fund, and shall not be bound by the Stipulation or the Final Judgment. 14. Any Member of the Class may appear and show cause, if he, she or it has any reason why the proposed settlement of the Litigation should not be approved as fair, reasonable and adequate, or why a Judgment should not be entered thereon, why the Plan of Allocation should not be approved, why attorneys' fees and expenses should not be awarded to counsel for the Lead Plaintiffs or why Lead Plaintiffs' expenses (including lost wages) should not be awarded; provided, however, that no Class Member or any other Person shall be heard or entitled to contest the approval of the terms and conditions of the proposed settlement, or, if approved, the Judgment to be entered thereon approving the same, or the order approving the Plan of Allocation, or the attorneys' fees and expenses to be awarded to counsel for the Lead Plaintiffs unless that Person has served on the following counsel (delivered by hand or sent by first class mail) written objections and copies of any papers and briefs in support thereof on or before, 2007: Lerach Coughlin Stoia Geller Rudman & Robbins LLP, Jeffrey D. Light, 655 West Broadway, Suite 1900, San Diego, California 92101; Alston & Bird, LLP, Scott P. Hilsen, One Atlantic Center, 1201 West Peachtree Street, Atlanta, GA , and filed said objections, papers and briefs with the Clerk of the United States District Court, Middle District of Tennessee, Nashville Division on or before Any objection must contain a written notice of the grounds for opposing the settlement, Plan of Allocation, application for attorneys' fees and expenses or Lead Plaintiffs ' expenses and must demonstrate the objecting Person's membership in the Class by including: (a) the objecting Person's name, address and telephone number; (b) formal proof of the number of shares of Direct General common stock purchased and sold during the Class Period by the objecting Person; and (c) a statement of the reasons for objection. Any Member of the Class who does not make his, her or its objection in the manner provided shall be deemed to have waived such objection and shall forever be -5- Case 3:05-cv Document 272 Filed 04/02/2007 Page 35 of

36 foreclosed from making any objection to the fairness or adequacy of the proposed settlement as incorporated in the Stipulation, to the Plan of Allocation, and to the award of attorneys' fees and expenses to Lead Counsel and Lead Plaintiffs' expenses, unless otherwise ordered by the Court. 15. The passage of title and ownership of the Settlement Fund to the Escrow Agent in accordance with the terms and obligations of the Stipulation is approved. No Person that is not a Class Member or counsel to the Lead Plaintiffs shall have any right to any portion of, or in the distribution of, the Settlement Fund unless otherwise ordered by the Court or otherwise provided in the Stipulation. 16. All funds held by the Escrow Agent shall be deemed and considered to be in custodia legis, and shall remain subject to the jurisdiction of the Court, until such time as such funds shall be distributed pursuant to the Stipulation and/or further order(s) of the Court. 17. All papers in support ofthe settlement, the Plan ofallocation, and any application by counsel for the Lead Plaintiffs for attorneys' fees or reimbursement of expenses shall be filed with the Court and served at least seven (7) days prior to the Settlement Hearing. 18. Neither Defendants nor Defendants' counsel shall have any responsibility for the Plan of Allocation or any application for reimbursement of attorneys' fees or reimbursement of expenses submitted by Plaintiffs' Counsel, and such matters will be considered separately from the fairness, reasonableness and adequacy of the settlement. 19. At or after the Settlement Hearing, the Court shall determine whether the Plan of Allocation proposed by Lead Counsel, and any application for attorneys' fees or reimbursement of expenses shall be approved. 20. All reasonable expenses incurred in identifying and notifying Class Members as well as administering the Settlement Fund, shall be paid as set forth in the Stipulation. In the event the settlement is not approved by the Court, or otherwise fails to become effective, neither the Lead -6- Case 3:05-cv Document 272 Filed 04/02/2007 Page 36 of

37 Plaintiffs nor any of their counsel shall have any obligation to repay any amounts actually and properly disbursed from the Settlement Fund for such reasonable expenses. 21. Neither the Stipulation, nor any of its terms or provisions, nor any of the negotiations or proceedings connected with it, shall be construed as an admission or concession by Defendants of the truth of any of the allegations in the Litigation, or of any liability, fault, or wrongdoing of any kind. 22. The Court reserves the right to adjourn the date of the Settlement Hearing without further notice to the Members of the Class, and retains jurisdiction to consider all further applications arising out of or connected with the proposed settlement. The Court may approve the settlement, with such modifications as may be agreed to by the Settling Parties, if appropriate, without further notice to the Class. IT IS SO ORDERED. DATED: THE HONORABLE TODD J. CAMPBELL UNITED STATES DISTRICT JUDGE Submitted by, BARRETT, JOHNSTON & PARSLEY GEORGE E. BARRETT, #2672 DOUGLAS S. JOHNSTON, JR. #5782 TIMOTHY L. MILES, #21605 GEORGE E. BARRETT 217 Second Avenue, North Nashville, TN Telephone: 615/ / (fax) Liaison Counsel -7- Case 3:05-cv Document 272 Filed 04/02/2007 Page 37 of

38 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP DARREN J. ROBBINS TOR GRONBORG JEFFREY D. LIGHT X. JAY ALVAREZ RAMZIABADOU 655 West Broadway, Suite 1900 San Diego, CA Telephone : 619/ / (fax) Lead Counsel for Plaintiffs CAVANAGH & O'HARA WILLIAM K. CAVANAGH, JR. 407 East Adams Street Springfield, IL Telephone : 217/ / (fax) Additional Counsel for Plaintiffs S:\Settlement\Direct General.set\(v1) EA doc -8- Case 3:05-cv Document 272 Filed 04/02/2007 Page 38 of

39 EXHIBIT A-1 Case 3:05-cv Document 272 Filed 04/02/2007 Page 39 of

40 UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION In re DIRECT GENERAL CORPORATION SECURITIES LITIGATION This Document Relates To: ALL ACTIONS. Civil Action No. 3: Judge Todd J. Campbell Magistrate Judge Juliet E. Griffin CLASS ACTION NOTICE OF PENDENCY AND PROPOSED SETTLEMENT OF CLASS ACTION EXHIBIT A-1 Case 3:05-cv Document 272 Filed 04/02/2007 Page 40 of

41 TO: ALL PERSONS (OTHER THAN THOSE PERSONS WHO TIMELY AND VALIDLY REQUEST EXCLUSION FROM THE CLASS) WHO PURCHASED THE COMMON STOCK OF DIRECT GENERAL CORPORATION ("DIRECT GENERAL OR THE "COMPANY) BETWEEN AUGUST 11, 2003 AND JANUARY 26, 2005, INCLUSIVE, INCLUDING THOSE WHO PURCHASED SHARES OF DIRECT GENERAL COMMON STOCK ISSUED PURSUANT TO OR TRACEABLE TO DIRECT GENERAL'S AUGUST 11, 2003 REGISTRATION STATEMENT/PROSPECTUS, AND DIRECT GENERAL'S MARCH 23, 2004 REGISTRATION STATEMENT/PROSPECTUS PLEASE READ THIS NOTICE CAREFULLY AND IN ITS ENTIRETY. YOUR RIGHTS MAY BE AFFECTED BY PROCEEDINGS IN THIS LITIGATION. PLEASE NOTE THAT IF YOU ARE A CLASS MEMBER (DEFINED BELOW), YOU MAY BE ENTITLED TO SHARE IN THE PROCEEDS OF THE SETTLEMENT DESCRIBED IN THIS NOTICE. TO CLAIM YOUR SHARE OF THIS FUND, YOU MUST SUBMIT A VALID PROOF OF CLAIM AND RELEASE FORM POSTMARKED ON OR BEFORE, IF YOU ARE A MEMBER OF THE CLASS AND DO NOT SUBMIT A TIMELY REQUEST FOR EXCLUSION, YOU WILL BE BOUND BY THE RELEASE WHETHER OR NOT YOU SUBMIT A CLAIM. 1. SUMMARY OF SETTLEMENT AND RELATED MATTERS This Notice has been sent to you pursuant to Rule 23 of the Federal Rules of Civil Procedure and an Order of the United States District Court, Middle District of Tennessee, Nashville Division (the "Court ). The purpose of this Notice is to inform you of the pendency of this class action (the "Litigation ) and the proposed settlement thereof and of the hearing to be held by the Court to consider the fairness, reasonableness, and adequacy of the settlement. This Notice describes the rights you may have in connection with participation in this settlement, what steps you may take in relation to the settlement and this class action litigation, and alternatively, what steps you must take if you wish to be excluded from the settlement and this class action. The proposed settlement creates a fund in the amount of $14,940, in cash (the "Settlement Fund ) and will include interest that accrues on the fund prior to distribution. Based on Lead Plaintiffs' estimate of the number of shares entitled to participate in the settlement and the -1- Case 3:05-cv Document 272 Filed 04/02/2007 Page 41 of