No. COA17-1280 TWENTY-SEVEN-A DISTRICT

NORTH CAROLINA COURT OF APPEALS

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I. BEVERLY LAKE, JOHN B. LEWIS, JR., EVERETTE M. LATTA, PORTER L. McATEER, ELIZABETH S. McATEER, ROBERT C. HANES, BLAIR J. CARPENTER, MARILYN L. FUTRELLE, FRANKLIN E. DAVIS, THE ESTATE OF JAMES D. WILSON, THE ESTATE OF BENJAMIN E. FOUNTAIN, JR., FAYE IRIS Y. FISHER, STEVE FRED BLANTON, HERBERT W. COOPER, ROBERT C. HAYES, JR., STEPHEN B. JONES, MARCELLUS BUCHANAN, DAVID B. BARNES, BARBARA J. CURRIE, CONNIE SAVELL, ROBERT B. KAISER, JOAN ATWELL, ALICE P. NOBLES, BRUCE B. JARVIS, ROXANNA J. EVANS, and JEAN C. NARRON, and all others similarly situated,

Plaintiffs-Appellees, v.

STATE HEALTH PLAN FOR TEACHERS AND STATE EMPLOYEES, TEACHERS’ AND STATE EMPLOYEES’ RETIREMENT SYSTEM OF NORTH CAROLINA, BOARD OF TRUSTEES OF THE TEACHERS’ AND STATE EMPLOYEES’ RETIREMENT SYSTEM OF NORTH CAROLINA, DALE L. FOLWELL, in his official capacity as Treasurer of the State of North Carolina, and the STATE OF NORTH CAROLINA,

Defendants-Appellants.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

From Gaston County

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DEFENDANTS-APPELLANTS’ REPLY BRIEF

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INDEX

TABLE OF AUTHORITIES ................................................... iii

INTRODUCTION .................................................................. 2

ARGUMENT……………………………………………………………….……. 2

I. Plaintiffs Have Not Established Any Contract for Health Benefits ....................................... 2

A. The benefit statute is not a contract ................ 2

1. The text of the benefit statute does not express any legislative intent to create a contract ........................ 3

2. The right-to-amend provision prevents any contract from forming here ............................................. 4

3. The many amendments to the benefit statute prove that the statute is not a contract .................... 6

B. Plaintiffs’ claim of a nonstatutory contract fails ........................................................7

1. Nonstatutory materials cannot establish the contract asserted here ............................................ 8

2. The cited nonstatutory materials cannot establish the contract alleged ................................. 11

C. Plaintiffs’ “vesting” arguments cannot establish a contract .............................. 14

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II. North Carolina Courts Have Never Recognized a Statutory Contract Like the One Claimed Here ....................................... 17

III. Plaintiffs Have Not Established the Other Elements of Their Claims ................................ 19

CONCLUSION ...................................................................... 22

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

CONTENTS OF APPENDIX ...................................... App. 139

Session Laws ..................................................... App. 140

Codified North Carolina statutes .................... App. 145

CONTENTS OF ADDENDUM ........................... Addendum 1

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TABLE OF AUTHORITIES

Cases Page(s)

Abbruscato v. Empire Blue Cross & Blue Shield, 274 F.3d 90 (2d Cir. 2001) ........................................... 14

Bailey v. State, 348 N.C. 130, 500 S.E.2d 54 (1998)...................... 3, 9, 18

Bowen v. Pub. Agencies Opposed to Soc. Sec. Entrapment,

477 U.S. 41 (1986) ......................................................... 4

Bowers v. City of High Point, 339 N.C. 413, 451 S.E.2d 284 (1994) .......................... 8, 11

Carl v. State, 2009 NCBC LEXIS 36

(N.C. Super. Ct. Dec. 15, 2009) ................................... 18

Denson v. Richmond Cty., 159 N.C. App. 408, 583 S.E.2d 318 (2003) .................... 9

Faulkenbury v. Teachers’ & State Emps.’ Ret. Sys., 345 N.C. 683, 483 S.E.2d 422 (1997) ....................... 6, 18

Gable v. Sweetheart Cup Co., 35 F.3d 851 (4th Cir. 1994) ........................................... 15

Gen. Motors Corp. v. Romein, 503 U.S. 181 (1992) ......................................................... 3

Hinton v. Lacy, 193 N.C. 496, 137 S.E. 669 (1927) ................................. 6

Home Tel. & Tel. Co. v. City of Los Angeles, 211 U.S. 265 (1908) ........................................................ 8

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Inter-Modal Rail Emps. Ass’n v. Atchison, Topeka & Santa Fe Ry. Co.,

520 U.S. 510 (1997)....................................................... 14

Kraushaar v. Flanigan, 45 F.3d 1040 (7th Cir. 1995) ......................................... 4

Lake v. State Health Plan for Teachers & State Emps., 234 N.C. App. 368, 760 S.E.2d 268 (2014) .................... 5

McCaskill v. Dep’t of State Treasurer, Ret. Sys. Div., 204 N.C. App. 373, 695 S.E.2d 108 (2010) ................ 8, 9

N.C. Ass’n of Educators v. State, 368 N.C. 777, 786 S.E.2d 255 (2016) .................. 3, 10, 18

Pritchard v. Elizabeth City, 81 N.C. App. 543, 344 S.E.2d 821 (1986) ................ 10, 18

Simpson v. Local Gov’t Emps.’ Ret. Sys., 88 N.C. App. 218, 363 S.E.2d 90 (1987) ................... 5, 15

State v. Wray, 206 N.C. App. 354, 698 S.E.2d 137 (2010) ..................... 3

Stone v. State, 191 N.C. App. 402, 664 S.E.2d 32 (2008) .................... 10

Styers v. Phillips, 277 N.C. 460, 178 S.E.2d 583 (1971) ............................. 16

Sveen v. Melin, 138 S. Ct. 1815 (2018) .................................................... 21

Whitfield v. Gilchrist, 348 N.C. 39, 497 S.E.2d 412 (1998) .............................. 8

Wiggs v. Edgecombe Cty., 361 N.C. 318, 643 S.E.2d 904 (2007) ............................ 17

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Statutes

N.C. Gen. Stat. § 135-1(22) (2017) ........................................... 11

N.C. Gen. Stat. § 135-2............................................................ 11

N.C. Gen. Stat. § 135-5(b)...................................................... 15

N.C. Gen. Stat. § 135-5(d) ..................................................... 15

N.C. Gen. Stat. § 135-6(a) ...................................................... 12

N.C. Gen. Stat. § 135-6(a) ...................................................... 12

N.C. Gen. Stat. § 135-6(q) ..................................................... 12

N.C. Gen. Stat. § 135-6(r) ...................................................... 12

N.C. Gen. Stat. § 135-18.6 ...................................................... 15

N.C. Gen. Stat. § 135-48.2(a) .................................................. 4

N.C. Gen. Stat. § 135-48.3 ............................................. 4, 6, 14

N.C. Gen. Stat. § 135-48.16 .................................................... 12

N.C. Gen. Stat. § 135-48.20 ................................................... 12

N.C. Gen. Stat. § 135-48.33(a) ............................................... 10

N.C. Gen. Stat. § 135-48.41(f) ................................................ 15

No. COA17-1280 TWENTY-SEVEN-A DISTRICT

NORTH CAROLINA COURT OF APPEALS

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I. BEVERLY LAKE, JOHN B. LEWIS, JR., EVERETTE M. LATTA, PORTER L. McATEER, ELIZABETH S. McATEER, ROBERT C. HANES, BLAIR J. CARPENTER, MARILYN L. FUTRELLE, FRANKLIN E. DAVIS, THE ESTATE OF JAMES D. WILSON, THE ESTATE OF BENJAMIN E. FOUNTAIN, JR., FAYE IRIS Y. FISHER, STEVE FRED BLANTON, HERBERT W. COOPER, ROBERT C. HAYES, JR., STEPHEN B. JONES, MARCELLUS BUCHANAN, DAVID B. BARNES, BARBARA J. CURRIE, CONNIE SAVELL, ROBERT B. KAISER, JOAN ATWELL, ALICE P. NOBLES, BRUCE B. JARVIS, ROXANNA J. EVANS, and JEAN C. NARRON, and all others similarly situated,

Plaintiffs-Appellees, v.

STATE HEALTH PLAN FOR TEACHERS AND STATE EMPLOYEES, TEACHERS’ AND STATE EMPLOYEES’ RETIREMENT SYSTEM OF NORTH CAROLINA, BOARD OF TRUSTEES OF THE TEACHERS’ AND STATE EMPLOYEES’ RETIREMENT SYSTEM OF NORTH CAROLINA, DALE L. FOLWELL, in his official capacity as Treasurer of the State of North Carolina, and the STATE OF NORTH CAROLINA,

Defendants-Appellants.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

From Gaston County

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DEFENDANTS-APPELLANTS’ REPLY BRIEF

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INTRODUCTION

As defendants showed in their opening brief, the trial court erred when

it granted offensive summary judgment. In response, plaintiffs make a

barrage of arguments in an attempt to save the trial court’s decision. Those

arguments fail.

ARGUMENT

I. Plaintiffs Have Not Established Any Contract for Health Benefits.

A. The benefit statute is not a contract.

The law strongly presumes that the benefit statute is not a contract.

Op. Br. 22-24. The text of the benefit statute reinforces that presumption:

The statute never calls itself a contract. Id. at 25-29.

In the statute, the General Assembly expressly reserves the right

to amend or abolish the State Health Plan. Id. at 29-34.

The General Assembly has repeatedly amended the benefit

statute in ways that contradict any claim that the statute is

contractual. Id. at 34-37.

Plaintiffs’ responses to these points do not succeed.

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1. The text of the benefit statute does not express any legislative intent to create a contract.

The benefit statute never says at all—let alone clearly—that the

General Assembly intends health benefits to be contractual. U.S. Supreme

Court decisions thus defeat plaintiffs’ Contracts Clause claim. Id. at 25-29.

Plaintiffs’ main response is to argue that federal law does not govern

this case. Resp. 28-31. They are mistaken. Because plaintiffs are invoking

the Contracts Clause in the U.S. Constitution, federal law decides every

aspect of plaintiffs’ claims, including “[t]he question whether a contract was

made.” Gen. Motors Corp. v. Romein, 503 U.S. 181, 187 (1992).

North Carolina appellate decisions that apply the Contract Clause,

including decisions that plaintiffs themselves cite, apply federal precedents.

E.g., N.C. Ass’n of Educators v. State, 368 N.C. 777, 786-92, 786 S.E.2d 255,

262-66 (2016) [hereinafter NCAE]; Bailey v. State, 348 N.C. 130, 140-53, 500

S.E.2d 54, 59-67 (1998). They do so because, on federal constitutional issues,

U.S. Supreme Court decisions control. State v. Wray, 206 N.C. App. 354, 357,

698 S.E.2d 137, 140 (2010).

This case lacks the key element that Contracts Clause decisions

require: an unmistakable legislative intent to create a contract. Op. Br. 25-

29. For example, the statement that North Carolina “undertakes to make

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available a State Health Plan” is a mere declaration of policy, not a binding

contract. N.C. Gen. Stat. § 135-48.2(a) (2017); see, e.g., Kraushaar v. Flanigan,

45 F.3d 1040, 1048-49 (7th Cir. 1995). In any event, nothing in the

undertaking clause mandates what plaintiffs demand here: lifetime,

premium-free health benefits at a fixed level.

2. The right-to-amend provision prevents any contract from

forming here.

A century of U.S. Supreme Court precedent holds that a broad right-

to-amend clause prevents benefit statutes from becoming contracts. Op. Br.

30-31. Under those cases, the General Assembly’s reservation of the

unlimited power to “alter, amend, or repeal” health benefits, N.C. Gen. Stat.

§ 135-48.3, stops any contract from forming.

Despite plaintiffs’ contrary arguments, the federal cases on right-to-

amend clauses apply here. In Bowen, for example, litigants claimed that

they had an enforceable contract that overlapped with a statute. The U.S.

Supreme Court held that a right-to-amend provision in the statute barred

those contract-based claims. Bowen v. Pub. Agencies Opposed to Soc. Sec.

Entrapment, 477 U.S. 41, 51-53 (1986).

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Plaintiffs also err by arguing that a right-to-amend provision does not

allow a legislature to alter preexisting contracts. Resp. 36 (discussing The

Sinking-Fund Cases). That argument does not apply here: The operative

right-to-amend provision was enacted in 1982, years before the alleged

contract formation. See Op. Br. 7, 29.

None of plaintiffs’ other arguments defeat the principle that a broad

right-to-amend provision bars a contract from forming.

This Court’s earlier decision in Lake addressed sovereign

immunity alone. The Court explicitly avoided ruling on the

merits of plaintiffs’ claims, including the effect of the right-to-

amend provision. Lake v. State Health Plan for Teachers & State

Emps., 234 N.C. App. 368, 374-75, 760 S.E.2d 268, 273 (2014).

Likewise, Simpson says nothing at all about the effect of a right-

to-amend provision. The Court simply mentioned such a

provision when it summarized the parties’ arguments. Simpson

v. Local Gov’t Emps.’ Ret. Sys., 88 N.C. App. 218, 221, 363 S.E.2d

90, 92 (1987), aff ’d per curiam, 323 N.C. 362, 372 S.E.2d 559

(1988).

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In Faulkenbury, our Supreme Court did downplay the right-to-

amend provision in the pension statute, but only because that

provision had explicit limiting language. Faulkenbury v.

Teachers’ & State Emps.’ Ret. Sys., 345 N.C. 683, 691, 483 S.E.2d

422, 427 (1997). The right-to-amend provision at issue here,

however, has no similar language. See N.C. Gen. Stat. § 135-48.3.

Plaintiffs’ final argument to limit the right-to-amend provision—

an argument that every benefit is either contractually guaranteed

or an unconstitutional emolument—has already been rejected.

See Hinton v. Lacy, 193 N.C. 496, 508, 137 S.E. 669, 676 (1927).

3. The many amendments to the benefit statute prove that

the statute is not a contract.

Plaintiffs do not deny that the many amendments to the benefit

statute over the years weigh against any legislative intent to create contract

rights. Resp. 36-37. Plaintiffs claim, however, that the amendments do not

count because they did not reduce the value of the State Health Plan. That

claim is mistaken.

Over the years, the General Assembly has made dozens of changes that

have reduced the value of the plan. (Doc. Ex. 1137-45) For example, the

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General Assembly has repeatedly increased the coinsurance level on

premium-free benefits—the same type of change that plaintiffs now attack.

Op. Br. 8-10.

Because of these and other changes, the actuarial values of North

Carolina’s premium-free plans have fallen several times over the years. (See

Doc. Ex. 1097-98, 4624) Those earlier reductions in value contradict

plaintiffs’ claim that they have a contract right to a “regular state health

plan” with a fixed value. Op. Br. 58-60.

Moreover, every one of these value-reducing changes was applied to all

Plan members, including retirees. Plaintiffs are thus wrong to argue that the

General Assembly has reduced benefits only prospectively. See Resp. 33, 36-

37.

B. Plaintiffs’ claim of a nonstatutory contract fails.

Because the benefit statute is not a contract, plaintiffs have now

shifted their focus to “offers and representations in documents outside the

statute.” Resp. 19. Plaintiffs’ claim of a nonstatutory contract, however, fares

no better than their claim of a statutory contract.

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1. Nonstatutory materials cannot establish the contract asserted here.

To try to establish a nonstatutory contract, plaintiffs cite handbooks

and similar materials. Resp. 19-26. Those materials cannot create a contract,

because the General Assembly has not authorized the State Health Plan (or

any other state agency or official) to make contracts for retiree health

benefits. Op. Br. 56-57.

A contract with the State is valid only if it is “enter[ed] . . . through an

agent of the State expressly authorized by law to enter into such contract.”

Whitfield v. Gilchrist, 348 N.C. 39, 42-43, 497 S.E.2d 412, 415 (1998); accord

Home Tel. & Tel. Co. v. City of Los Angeles, 211 U.S. 265, 273 (1908).

Applying this principle, our Supreme Court has invalidated a city’s

agreement to give its former employees separation payments. That

agreement was void because no “statute authoriz[ed the city] to enter a

contract for” that benefit. Bowers v. City of High Point, 339 N.C. 413, 423, 451

S.E.2d 284, 291 (1994).

In the absence of explicit statutory authority, even cabinet-level

officials are barred from making contracts for employment-related benefits.

McCaskill v. Dep’t of State Treasurer, Ret. Sys. Div., 204 N.C. App. 373, 396,

695 S.E.2d 108, 125 (2010), aff ’d per curiam, 365 N.C. 69, 706 S.E.2d 226 (2011).

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In McCaskill, a cabinet member purported to contract to grant retirement

benefits to a state employee. Id. at 376-77, 695 S.E.2d at 113. This Court

found the contract void because no statute allowed the official to contract

for retirement benefits. Id. at 396, 695 S.E.2d at 125. Any other conclusion,

the Court explained, would allow state agencies to enter contracts “without

regard to their impact on other agencies or on state government at large.”

Id.; accord, e.g., Denson v. Richmond Cty., 159 N.C. App. 408, 414, 583 S.E.2d

318, 322 (2003).

Plaintiffs do not dispute these points of law. Nor do they claim that

the General Assembly has ever authorized the State Health Plan, or any

other agency or official, to make contracts for retiree health benefits.

Instead, plaintiffs merely argue that North Carolina courts have

sometimes cited written and oral representations in decisions that recognize

statutory contracts. Resp. 18-19. But those cases confirm that plaintiffs

cannot weave a contract out of nonstatutory materials. For example:

In Bailey, the contract at issue was “statutorily created.” 348 N.C.

at 146, 500 S.E.2d at 63.

In Stone v. State, this Court relied solely on statutes to hold that

a contract had been formed. 191 N.C. App. 402, 412-14, 664 S.E.2d

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32, 39-40 (2008). The Court discussed nonstatutory materials

only to amplify that statute-based holding. Id. at 414, 664 S.E.2d

at 40.

In Pritchard v. Elizabeth City, the General Assembly specifically

authorized a city to make benefit-related contracts that would

bind the State. 81 N.C. App. 543, 552, 344 S.E.2d 821, 826 (1986);

see NCAE, 368 N.C. at 780, 786 S.E.2d at 258 (same for local

school boards).

Here, no statute authorizes anyone to make the contract that plaintiffs

allege. The benefit statute gives the State Health Plan limited contracting

authority, but this case falls outside that limited authority. Under the

statute, any contracts worth over $500,000 require the approval of the Plan’s

Board of Trustees. N.C. Gen. Stat. § 135-48.33(a). As plaintiffs do not deny,

the contract alleged here far exceeds $500,000 and was not approved by the

Board of Trustees. Resp. 52.

When a statute delegates only limited authority to an agency, that

narrow delegation “is strong evidence that the legislature did not intend” to

delegate other, unlisted powers as well. Bowers, 339 N.C. at 419, 451 S.E.2d at

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288-89. Here, the contracting limits in the benefit statute show that the

General Assembly never intended to authorize state agencies to guarantee a

fixed level of health benefits for state retirees—let alone authorize agencies

to make such a guarantee through stray references in employee handbooks.

Op. Br. 28-29.

In sum, nonstatutory materials cannot create the massive contract that

plaintiffs allege here.

2. The cited nonstatutory materials cannot establish the

contract alleged.

Even if nonstatutory materials could ever form a contract for a fixed

level of health benefits, plaintiffs have not cited any materials that could

create such a contract here.

First, nearly all of the materials that plaintiffs cite were issued by

agencies with no involvement in the State Health Plan. Plaintiffs cite

materials issued by the Teachers’ and State Employees’ Retirement System,

the state agency that administers pensions. N.C. Gen. Stat. §§ 135-1(22), -2.

When those materials were created, the Retirement System was entirely

- 12 -

separate from the State Health Plan.1 Thus, when materials from that period

refer to “[t]he benefits provided by the State Retirement System,” they are

referring to pension benefits. (Doc. Ex. 3849)

Other Retirement System materials do mention health benefits, but

those references confirm that health benefits fall outside the Retirement

System’s purview. For example, a 1988 booklet mentioned non-pension

benefits only on its last page, after twenty-six pages devoted exclusively to

pensions. (Doc. Ex. 3849-62) The last page listed health benefits with other

benefits that the Retirement System does not administer, including federal

Social Security and Medicare benefits. (Doc. Ex. 3862) By treating retiree

health benefits as a side topic, the booklet confirmed that health benefits are

not part of the pension system.

More detailed discussion of health benefits came in the annual benefit

booklets released by the State Health Plan itself. (Doc. Ex. 1321-3028) Those

booklets never said that retirees have a contract right to lifetime, premium-

1 The Retirement System and the State Health Plan were separate agencies until 2012. Resp. 38; see Doc. Ex. 219. Even today, these agencies are separate divisions of the Department of State Treasurer. See N.C. Gen. Stat. §§ 135-6(q), (r), -48.16. They also have separate boards of trustees. Id. §§ 135-6(a), (b), -48.20.

- 13 -

free health benefits. Indeed, the booklets said explicitly that they do not

create independent legal rights. (E.g., Doc. Ex. 1281, 1300, 1324, 1349, 1377,

1407, 1440)

Nor did the booklets ever promise that retiree health benefits would

stay at a fixed level. To the contrary, they repeatedly warned retirees that

benefits could be reduced in the future. Op. Br. 36.

For example, the 1982 booklet said that because “the cost of

health care is increasing each year at an alarming rate,” the value

of health benefits could fall. (Doc. Ex. 1240)

Likewise, the 1986 booklet informed retirees that the Plan’s value

had already fallen. The booklet pointed out that “[g]iven the

continued rise in health care costs and utilization (some 12% to

14% a year in this plan alone!) further benefit changes may be

necessary.” (Doc. Ex. 1280)

Later booklets repeatedly warned retirees that “[t]he North

Carolina General Assembly determines benefits for the State

Health Plan and has the authority to change benefits.” (E.g.,

Doc. Ex. 1486, 1535, 1652, 1867, 2316, 2765)

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Plaintiffs’ only answer is to quote the booklets’ statement that retirees

may be “eligible” to receive health benefits “under the Plan.” Resp. 20-21; see

Doc. Ex. 1329. That guarded language, however, is nothing like a promise of

a fixed level of health benefits for retirees’ whole lives. At most, the booklets

recognized that retirees are eligible to enroll in the same plan that state

employees receive—a plan with benefits that evolve from year to year. Op.

Br. 52-60.

C. Plaintiffs’ “vesting” arguments cannot establish a contract.

Plaintiffs also argue that they have a contract because they “vested” in

the State Health Plan. That argument fails under two controlling principles

of law.

First, when an employer reserves the right to amend benefits, that

reservation of rights prevents any vested contract rights from forming. E.g.,

Abbruscato v. Empire Blue Cross & Blue Shield, 274 F.3d 90, 99 (2d Cir.

2001). Here, the General Assembly has reserved the unlimited right to

amend health benefits. N.C. Gen. Stat. § 135-48.3. That provision prevents

any “vesting” of the type that plaintiffs claim here.

Second, health benefits are presumed not to vest. Inter-Modal Rail

Emps. Ass’n v. Atchison, Topeka & Santa Fe Ry. Co., 520 U.S. 510, 515 (1997).

- 15 -

Thus, health benefits cannot vest unless a contract explicitly says so. Gable

v. Sweetheart Cup Co., 35 F.3d 851, 855 (4th Cir. 1994).

Here, the benefit statute never says at all—let alone explicitly—that

health benefits vest.2 The 1987 statutory amendment that plaintiffs cite says

only that retirees who worked as state employees for five years are “eligible

for group [health] benefits.” App. 141 (emphasis added).

The guarded language in the benefit statute contrasts sharply with

how the pension statute describes the vesting of pension benefits. The

pension statute says sixty-five times that retirees “shall receive” their pension

benefits. N.C. Gen. Stat. §§ 135-4(f), -5(b), (d), (r). It also says that even if

the pension system is terminated, accrued pensions “shall be nonforfeitable

and fully vested.” Id. § 135-18.6. That emphatic statutory language is what

the law requires before any benefits vest for a lifetime. See, e.g., Simpson, 88

N.C. App. at 220, 363 S.E.2d at 92.

Plaintiffs also base their “vesting” theory on nonstatutory materials,

but the cited materials do not support that theory. For example:

2 The one time that the benefit statute uses the word “vest,” it refers to pension benefits. N.C. Gen. Stat. § 135-48.41(f).

- 16 -

Plaintiffs cite three draft bills that use the word “vest” to describe

health benefits. Resp. 24, 32. The actual statutes that emerged

from these bills, however, say nothing about vesting.3 See App.

143-44. “Courts can find the intent of the Legislature only in the

acts which are in fact passed.” Styers v. Phillips, 277 N.C. 460,

472-73, 178 S.E.2d 583, 591 (1971).

Most of the other cited materials were prepared by the

Retirement System, not by the State Health Plan. Resp. 21-25

(citing booklets and training manuals). As shown above, these

materials are referring only to pensions. See supra pp 11-12.

Many of the cited materials were prepared for internal

government use only. See Resp. 24-26 (citing training manuals

and presentations). Some were even marked confidential. (E.g.,

Doc. Ex. 896) Because plaintiffs did not see these internal

materials until this lawsuit, these materials cannot be contract

offers.

3 Plaintiffs incorrectly describe one draft bill as a session law. Resp. 32. The resulting session law does not mention vesting. App. 143-44.

- 17 -

Many of the cited materials were prepared not by the State, but

by government contractors. Resp. 25 (citing actuarial reports).

Plaintiffs do not claim that these government contractors were

authorized to make contract offers that bind the State.

Finally, if retirees vested into anything, they vested only into the State

Health Plan in its evolving form. See Op. Br. 52-60.

II. North Carolina Courts Have Never Recognized a Statutory Contract Like the One Claimed Here.

As defendants showed in their opening brief, North Carolina courts

have recognized statutory contracts only in the context of pensions. Our

courts have treated pensions as contractual because pensions, unlike health

benefits, function as deferred compensation. Op. Br. 37-52.

Plaintiffs try to stretch the concept of deferred compensation beyond

pensions, but that stretching fails. See Resp. 8.

First, many of the cases that plaintiffs cite involved pensions or their

functional equivalent:

Wiggs v. Edgecombe County involved payments to supplement

pensions. 361 N.C. 318, 319, 643 S.E.2d 904, 905 (2007).

- 18 -

Faulkenbury involved pension payments to disabled retirees. 345

N.C. at 693-94, 483 S.E.2d at 429.

Bailey involved a cap on the tax exemption for pensions. 348

N.C. at 139, 500 S.E.2d at 59.

Other cases that plaintiffs cite do not involve deferred compensation at

all. Instead, those cases involve current compensation to active employees.

E.g. NCAE, 368 N.C. at 779, 786 S.E.2d at 257 (career status); Pritchard, 81

N.C. App. at 551-52, 344 S.E.2d at 826 (vacation pay). In addition, those

cases, unlike this one, involve statutorily authorized contracts. See supra p

10.

Plaintiffs also err when they claim that North Carolina courts have

treated long-term-care benefits as contractual. See Resp. 8. Plaintiffs’ only

authority for that claim is the mere approval of a settlement. See Carl v.

State, 2009 NCBC LEXIS 36, at *28 (N.C. Super. Ct. Dec. 15, 2009).

Equally irrelevant are the cited decisions from Alaska, Hawaii, and

Illinois. Resp. 16-17. Those states have constitutions that, unlike the North

Carolina Constitution, directly make retiree health benefits contractual. In

states with constitutions like ours, courts have uniformly declined to treat

retiree health benefits as contractual. Op. Br. 48-49 & n.16 (citing cases).

- 19 -

Finally, plaintiffs cite no case that addresses facts like those here.

None of the cited cases involved an unlimited right-to-amend provision—let

alone a right-to-amend provision that the legislature has repeatedly invoked

to reduce benefits in the same way that plaintiffs’ lawsuit decries.

III. Plaintiffs Have Not Established the Other Elements of Their Claims.

Plaintiffs’ Contract Clause claim—and, by extension, their whole

lawsuit—fails for other reasons as well.

Plaintiffs claim that any impairment of their alleged contract rights,

even a de minimis impairment, would violate the Contracts Clause. Resp. 51-

52. That is not the law. Controlling U.S. Supreme Court decisions limit

Contracts Clause violations to substantial impairments. Op. Br. 63-68.

Plaintiffs have not shown any substantial impairment here.

In the trial court, plaintiffs claimed that they had a contract right to a

plan with an 80% actuarial value. (R p 356) As defendants showed in their

opening brief, however, plaintiffs have not identified any evidence that

shows a contract for health benefits with any particular actuarial value, let

alone an actuarial value of 80%. Op. Br. 7, 54-58.

- 20 -

Plaintiffs try to sidestep this problem by restating their argument in

more general language. They now allege that a contract entitles them to a

health plan with a value “equivalent” to earlier versions of the State Health

Plan. Resp. 43. That equivalence argument fails for at least two reasons.

First, plaintiffs’ new theory suffers from the same lack of evidence that

defeats their 80%-actuarial-value theory. After all, plaintiffs’ only measure of

equivalence is the actuarial value of the State Health Plan. See Resp. Br. 49.

Second, even if plaintiffs had a right to a health plan that was

equivalent to pre-2011 plans, plaintiffs still have not justified offensive

summary judgment on the separate element of substantial impairment. For

example:

Plaintiffs do not even claim that the State has impaired any

contract for Medicare-eligible class members, who make up

three-fourths of the certified class. Op. Br. 64.

Plaintiffs do not deny that the Consumer-Directed Health Plan

had an actuarial value that complied with the alleged contract.

See Resp. 52 n.17. That plan involved wellness activities, but

plaintiffs themselves testified that these activities involved “very

minimal” effort. (Doc. Ex. 8087-88)

- 21 -

A reasonable jury could conclude that the premium-free 70/30

PPO plan complies with the alleged contract. Since 2011, that

plan has had a value equivalent to earlier plans that, plaintiffs

agree, comply with the alleged contract. For example, the 2008

non-PPO plan had an actuarial value of only 75%. (Doc. Ex.

4624) From 2011 to 2016, the 70/30 PPO plan had an actuarial

value that was roughly equal to, or even higher than, that value.

(Doc. Ex. 4624)

Plaintiffs’ claim of contract impairment also fails for an independent

reason: Plaintiffs have not even tried to show that the 2011 changes to the

State Health Plan disrupted any reasonable reliance interests. Op. Br. 67-68.

When a state has reserved the right to depart from an alleged contract—as

North Carolina has done here through the right-to-amend provision—a

plaintiff ’s “reliance interests are next to nil.” Sveen v. Melin, 138 S. Ct. 1815,

1823 (2018); supra pp 4-6.

Even if there were any contract impairment here, the State’s actions

would remain reasonable and necessary to serve a legitimate public purpose.

Op. Br. 69-70. Plaintiffs argue that the State could have just raised taxes, but

- 22 -

that glib statement alone cannot defeat reasonableness and necessity. If it

could, the third part of the Contracts Clause test would be meaningless.

Finally, plaintiffs’ takings and due-process claims fail for the same

reasons that defeat their Contracts Clause claim. Plaintiffs do not argue that

those claims can survive if their Contracts Clause claim does not. See Resp.

56-57.

CONCLUSION

Defendants respectfully request that this Court reverse—or,

alternatively, vacate and remand—the trial court’s judgment.

This 1st day of August, 2018.

JOSHUA H. STEIN Attorney General /s/ Matthew W. Sawchak Matthew W. Sawchak Solicitor General N.C. State Bar No. 17059 msawchak@ncdoj.gov I certify that all of the attorneys listed below have authorized me to list their names on this document as if they had personally signed it. Ryan Y. Park Deputy Solicitor General N.C. State Bar No. 52521 rpark@ncdoj.gov

- 23 -

Marc Bernstein Special Deputy Attorney General N.C. State Bar No. 21642 mbernstein@ncdoj.gov Joseph A. Newsome Special Deputy Attorney General N.C. State Bar No. 25434 jnewsome@ncdoj.gov Kenzie M. Rakes Assistant Solicitor General N.C. State Bar No. 46349 krakes@ncdoj.gov North Carolina Department of Justice P.O. Box 629 Raleigh, NC 27602 (919) 716-6900 (919) 716-6703 (fax) Counsel for Defendants-Appellants

CERTIFICATE OF COMPLIANCE

I certify, in accordance with Rule 28(j)(2) of the North Carolina Rules

of Appellate Procedure, that the attached brief uses 14-point Constantia type,

a proportional font. According to Microsoft Word, the brief (excluding the

parts excluded by rule) contains fewer than 3750 words.

This 1st day of August, 2018.

/s/ Electronically submitted Matthew W. Sawchak

CERTIFICATE OF SERVICE

I certify that today, I caused the attached document to be served on all

counsel by email, addressed to:

Michael L. Carpenter, Esq. Marcus R. Carpenter, Esq. Marshall P. Walker, Esq. Gray, Layton, Kersh, Solomon, Furr & Smith, P.A. P.O. Box 2636 Gastonia, NC 28053 mcarpenter@gastonlegal.com mrcarpenter@gastonlegal.com mwalker@gastonlegal.com Gary W. Jackson, Esq. Law Offices of James Scott Farrin 280 S. Mangum St., Suite 400 Durham, NC 27701 gary.jackson@farrin.com Sam McGee, Esq. Tin, Fulton, Walker & Owen, PLLC 301 East Park Ave. Charlotte, NC 28203 smcgee@tinfulton.com

This 1st day of August, 2018.

/s/ Electronically submitted Matthew W. Sawchak

- App. 139 -

CONTENTS OF APPENDIX Session Laws Appendix page Act of August 14, 1987, ch. 857, sec. 9, 1987 N.C.

Sess. Laws 2098, 2101, 2114 ............................... App. 140 Act of July 18, 2006, ch. 174, secs. 1-3, 2006 N.C.

Sess. Laws 630, 631 ............................................App. 143 Codified North Carolina statutes N.C. Gen. Stat. § 135-1(22) (2017) ............................... App. 145 N.C. Gen. Stat. § 135-2................................................ App. 145 N.C. Gen. Stat. § 135-5(b), (d)-(d4) ........................... App. 146 N.C. Gen. Stat. § 135-6(a)-(b), (q)-(r) ........................ App. 151 N.C. Gen. Stat. § 135-18.6 ........................................... App. 156 N.C. Gen. Stat. § 135-48.2 .......................................... App. 156 N.C. Gen. Stat. § 135-48.3 ........................................... App. 157 N.C. Gen. Stat. § 135-48.16 .......................................... App. 157 N.C. Gen. Stat. § 135-48.20 ........................................ App. 159 N.C. Gen. Stat. § 135-48.33 ......................................... App. 162 N.C. Gen. Stat. § 135-48.41(f) ..................................... App. 163

- App. 140 -

- App. 141 -

- App. 142 -

S.L. 2006-174 Session Laws - 2006

630

security number or other identifying information on the public record or on the Department of the Secretary of State's, a register of deeds' or clerk of court's Internet website available to the general public or an Internet Web site available to the general public used by the Department of the Secretary of State, a register of deeds or clerk of court."

SECTION 8. The provisions of G.S. 132-1.10(b)(5) shall not apply to identifying information accessible on the Internet Web site of the Department of the Secretary of State or by magnetic tapes, electronic data feeds, or electronic file transfers of all records or updates of records on file with the Secretary of State until July 1, 2007. Notwithstanding the exemption provided by this section, the Department of the Secretary of State shall, whenever funds are made available, make it a priority to first remove identifying information contained in Uniform Commercial Code financing statements filed with the Department of the Secretary of State under Chapter 25 of the General Statutes no later than June 30, 2007.

SECTION 9. The Department of the Secretary of State shall study the alternatives and costs for redacting identifying information contained in the records of the Department of the Secretary of State, including the Internet Web site of the Department, and shall report the results of its study to the Office of State Budget and Management and to the House and Senate cochairs of the Joint Appropriations Subcommittee on General Government on or before February 1, 2007. This study shall focus on the most expeditious, cost-effective method of redacting identifying information on or before January 1, 2007.

SECTION 10. Section 1 of this act becomes effective October 1, 2006. Sections 5 through 7 of this act are effective when the act becomes law and expire on July 1, 2007. The remainder of this act is effective when the act becomes law.

In the General Assembly read three times and ratified this the 18th day of July, 2006.

Became law upon approval of the Governor at 5:52 p.m. on the 1st day of August, 2006.

S.B. 837 Session Law 2006-174

AN ACT TO REQUIRE THAT RETIRED EMPLOYEES HAVE AT LEAST TWENTY YEARS OF RETIREMENT BENEFIT SERVICE CREDIT IN ORDER TO QUALIFY FOR BENEFITS UNDER THE TEACHERS' AND STATE EMPLOYEES' COMPREHENSIVE MAJOR MEDICAL PLAN ON A NONCONTRIBUTORY BASIS.

The General Assembly of North Carolina enacts: SECTION 1. G.S. 135-40.2(a)(2) reads as rewritten:

"§ 135-40.2. Eligibility. (a) The following persons are eligible for coverage under the Plan, on a

noncontributory basis, subject to the provisions of G.S. 135-40.3: …(2) Retired teachers, State employees, members of the General Assembly,

and retired State law enforcement officers who retired under the Law Enforcement Officers' Retirement System prior to January 1, 1985. For employees first hired on and after October 1, 2006, and members of the General Assembly first taking office on and after February 1, 2007,

- App. 143 -

Session Laws - 2006 S.L. 2006-175

631

future coverage as retired employees and retired members of the General Assembly is subject to a requirement that the future retiree have 20 or more years of retirement service credit in order to be covered by the provisions of this subdivision."

SECTION 2. G.S. 135-40.2 is amended by adding the following new subsection to read:

"(a3) Subject to the provisions of G.S. 135-40.3, employees and members of the General Assembly with 10 but less than 20 years of retirement service credit shall be eligible for coverage under the Plan on a partially contributory basis, provided the employees were first hired on or after October 1, 2006, and the members first took office on or after February 1, 2007. For such future retirees, the State shall pay fifty percent (50%) of the Plan's total noncontributory premiums. Individual retirees shall pay the balance of the total noncontributory premiums not paid by the State."

SECTION 3. G.S. 135-40.2(b) is amended by adding a new subdivision to read:

"(11a) Retired teachers, State employees, and members of the General Assembly with less than 10 years of retirement service credit, provided the teachers and State employees were first hired on or after October 1, 2006, and the members first took office on or after February 1, 2007."

SECTION 4. This act becomes effective July 1, 2006. In the General Assembly read three times and ratified this the 18th day of

July, 2006. Became law upon approval of the Governor at 5:53 p.m. on the 1st day of

August, 2006.

H.B. 1327 Session Law 2006-175

AN ACT TO ALLOW THE DEPARTMENT OF JUSTICE TO CONDUCT CRIMINAL HISTORY RECORD CHECKS FROM STATE AND NATIONAL REPOSITORIES OF CRIMINAL HISTORY OF APPLICANTS FOR LICENSURE.

The General Assembly of North Carolina enacts: SECTION 1. G.S. 90-270.4(e) reads as rewritten:

"(e) Nothing in this Article shall be construed to prevent qualified members of other professional groups licensed or certified under the laws of this State fromrendering services consistent with their professional training and code of ethics,withinthe scope of practice, as defined in the statutes regulating those professional practices,provided they do not hold themselves out to the public by any title or description stating or implying that they are psychologists or are licensed, certified, or registered to practice psychology."

SECTION 2. Article 18A of Chapter 90 of the General Statutes is amended by adding the following new section to read: "§ 90-270.22. Criminal history record checks of applicants for licensure and

licensees.(a) The Board may request that an applicant for licensure or reinstatement of a

license or that a licensed psychologist or psychological associate currently under investigation by the Board for allegedly violating this Article consent to a criminal history record check. Refusal to consent to a criminal history record check may

- App. 144 -

- App. 145 -

North Carolina General Statutes

Chapter 135.

Retirement System for Teachers and State Employees; Social Security; State Health Plan for Teachers and State Employees.

Article 1.

Retirement System for Teachers and State Employees.

§ 135-1. Definitions. The following words and phrases as used in this Chapter, unless a different meaning is plainly required by the context, shall have the following meanings:

. . .

(22) “Retirement System” shall mean the Teachers’ and State Employees’ Retirement System of North Carolina as defined in G.S. 135-2.

. . .

§ 135-2. Name and date of establishment.

A Retirement System is hereby established and placed under the

management of the Board of Trustees for the purpose of providing

retirement allowances and other benefits under the provisions of this

Chapter for teachers and State employees of the State of North Carolina.

The Retirement System so created shall be established as of the first day of

July, 1941.

This Retirement System is a governmental plan, within the meaning of

Section 414(d) of the Internal Revenue Code. Therefore, the

- App. 146 -

nondiscrimination rules of Sections 401(a)(5) and 401(a)(26) of the Code do

not apply. This System shall have the power and privileges of a corporation

and shall be known as the “Teachers’ and State Employees’ Retirement

System of North Carolina,” and by such name all of its business shall be

transacted, all of its funds invested, and all of its cash and securities and

other property held.

Consistent with Section 401(a)(1) of the Internal Revenue Code, all

contributions from participating employers and participating employees to

this Retirement System shall be made to funds held in trust through trust

instruments that have the purposes of distributing trust principal and

income to retired members and their beneficiaries and of paying other

definitely determinable benefits under this Chapter, after meeting the

necessary expenses of administering this Retirement System. Neither the

trust corpus nor income from this trust can be used for purposes other than

the exclusive benefit of members or their beneficiaries, except that employer

contributions made to the trust under a good faith mistake of fact may be

returned to an employer, where the refund can occur within less than one

year after the mistaken contribution was made, consistent with the rule

adopted by the Board of Trustees. The Retirement System shall have a

consolidated Plan document, consisting of Article V, Section 6(2) of the

North Carolina Constitution, relevant statutory provisions in this Chapter;

associated regulations in the North Carolina Administrative Code,

substantive and procedural information on the official forms used by the

Retirement System, and policies and minutes of the Board of Trustees.

§ 135-5. Benefits. . . .

(b) Service Retirement Allowances of Persons Retiring on or after July 1, 1959, but prior to July 1, 1963.—Upon retirement from service on or after July 1, 1959, but prior to July 1, 1963, a member shall receive a service retirement allowance which shall consist

- App. 147 -

of:

(1) An annuity which shall be the actuarial equivalent of his accumulated contributions at the time of his retirement; and

(2) A pension equal to the annuity allowable at the age of 65

years or at his retirement age, whichever is the earlier age, computed on the basis of contributions made prior to such earlier age; and

(3) If he has a prior service certificate in full force and effect,

an additional pension which shall be equal to the sum of:

a. The annuity which would have been provided at his retirement age by the contributions which he would have made during such prior service had the System been in operation and had he contributed thereunder at the rate of six and twenty-five hundredths per centum (6.25%) of his compensation; and

b. The pension which would have been provided on

account of such contributions at age 65, or at his retirement age, whichever is the earlier age.

If the member has not less than 20 years of creditable service, he shall be entitled to a total retirement allowance of not less than seventy dollars ($70.00) per month; provided that the computation shall be made prior to any reduction resulting from the selection of an optional allowance as provided by subsection (g) of this section.

. . .

- App. 148 -

(d) Allowance on Disability Retirement of Persons Retiring on or after July 1, 1959, but prior to July 1, 1963.—Upon retirement for disability, in accordance with subsection (c) above, on or after July 1, 1959, but prior to July 1, 1963, a member shall receive a service retirement allowance if he has attained the age of 60 years, otherwise he shall receive a disability retirement allowance which shall consist of:

(1) An annuity which shall be the actuarial equivalent of

his accumulated contributions at the time of retirement;

(2) A pension equal to seventy-five per centum (75%) of the pension that would have been payable upon service retirement at the age of 65 years had the member continued in service to the age of 65 years without further change in compensation.

If the member has not less than 20 years of creditable service, he shall be entitled to a total retirement allowance of not less than seventy dollars ($ 70.00) per month; provided, that the computation shall be made prior to any reduction resulting from an optional allowance as provided by subsection (g) of this section.

(d1) Allowance on Disability Retirement of Persons Retiring on or after July 1, 1963, but prior to July 1, 1969.—Upon retirement for disability, in accordance with subsection (c) above, on or after July 1, 1963, but prior to July 1, 1969, a member shall receive a service retirement allowance if he has attained the age of 60 years, otherwise he shall receive a disability retirement allowance which shall be computed as follows:

(1) Such allowance shall be equal to the service retirement

allowance which would have been payable had he continued in service without further change in compensation, to the age of 60 years, minus the actuarial

- App. 149 -

equivalent to the contributions he would have made during such continued service.

(2) Notwithstanding the foregoing provisions, any member whose creditable service commenced prior to July 1, 1963, shall receive not less than the benefit provided by G.S. 135-5(d).

(d2) Allowance on Disability Retirement of Persons Retiring on or

after July 1, 1969, but prior to July 1, 1971.—Upon retirement for disability, in accordance with subsection (c) above, on or after July 1, 1969, but prior to July 1, 1971, a member shall receive a service retirement allowance if he has attained the age of 60 years, otherwise he shall receive a disability retirement allowance which shall be computed as follows:

(1) Such allowance shall be equal to the service retirement

allowance which would have been payable had he continued in service without further change in compensation to the age of 65 years, minus the actuarial equivalent of the contributions he would have made during such continued service.

(2) Notwithstanding the foregoing provisions, any member whose creditable service commenced prior to July 1, 1963, shall receive not less than the benefit provided by G.S. 135-5(d).

(d3) Allowance on Disability Retirement of Persons Retiring on or

after July 1, 1971, but prior to July 1, 1982.—Upon retirement for disability, in accordance with subsection (c) of this section on or after July 1, 1971, but prior to July 1, 1982, a member shall receive a service retirement allowance if he has attained the age of 65 years; otherwise he shall receive a disability retirement allowance which shall be computed as follows:

- App. 150 -

(1) Such allowance shall be equal to a service retirement allowance calculated on the basis of the member's average final compensation prior to his disability retirement and the creditable service he would have had at the age of 65 years if he had continued in service.

(2) Notwithstanding the foregoing provisions,

a. Any member whose creditable service commenced prior to July 1, 1971, shall receive not less than the benefit provided by G.S. 135-5(d2);

b. The amount of disability allowance payable from the reserve funds of the Retirement System to any member retiring on or after July 1, 1974, who is eligible for and in receipt of a disability benefit under the Social Security Act shall be seventy percent (70%) of the amount calculated under a above, and the balance shall be provided by the employer from time to time during each year in such amounts as may be required to cover such payments as current disbursements; and

c. The amount of disability allowance payable to any

member retiring on or after July 1, 1974, who is not eligible for and in receipt of a disability benefit under the Social Security Act shall not be payable from the reserve funds of the Retirement System but shall be provided by the employer from time to time during each year in such amounts as may be required to cover such payments as current disbursements.

(d4) Allowance on Disability Retirement of Persons Retiring on or

after July 1, 1982, Who Left Service prior to January 1, 1988.—Upon retirement for disability, in accordance with subsection (c) of this section on or after July 1, 1982, a member who left service prior to January 1, 1988 shall receive a service retirement

- App. 151 -

allowance if he has qualified for an unreduced service retirement allowance; otherwise the allowance shall be equal to a service retirement allowance calculated on the member's average final compensation prior to his disability retirement and the creditable service he would have had had he continued in service until the earliest date on which he would have qualified for an unreduced service retirement allowance.

. . . § 135-6. Administration.

(a) Administration by Board of Trustees; Corporate Name; Rights

and Powers; Tax Exemption.—The general administration and

responsibility for the proper operation of the Retirement System

and for making effective the provisions of the Chapter are hereby

vested in a Board of Trustees which shall be organized

immediately after a majority of the trustees provided for in this

section shall have qualified and taken the oath of office.

The Board of Trustees shall be a body politic and corporate

under the name “Board of Trustees Teachers’ and State

Employees’ Retirement System”; and as a body politic and

corporate shall have the right to sue and be sued, shall have

perpetual succession and a common seal, and in said corporate

name shall be able and capable in law to take, demand, receive

and possess all kinds of real and personal property necessary and

proper for its corporate purposes, and to bargain, sell, grant,

alien, or dispose of all such real and personal property as it may

lawfully acquire. All such property owned or acquired by said

body politic and corporate shall be exempt from all taxes

imposed by the State or any political subdivision thereof, and

shall not be subject to income taxes.

- App. 152 -

(b) Membership of Board; Terms.—The Board shall consist of the

following 13 members:

(1) The State Treasurer, ex officio.

(2) The Superintendent of Public Instruction, ex officio.

(2a) The Director of the Office of State Human Resources, ex

officio.

(3) Eight members to be appointed by the Governor and

confirmed by the Senate of North Carolina. One of the

appointive members shall be a member of the teaching

profession of the State; one of the appointive members

shall be a retired teacher who is drawing a retirement

allowance, appointed by the Governor for a term of four

years commencing July 1, 1969, and quadrennially

thereafter; one shall be a retired State employee who is

drawing a retirement allowance, appointed by the

Governor for a term of four years commencing July 1, 1977,

and quadrennially thereafter; one to be a general State

employee, and two who are not members of the teaching

profession or State employees; two to be appointed for a

term of two years, two for a term of three years and one for

a term of four years; one appointive member shall be a law-

enforcement officer employed by the State, appointed by

the Governor, for a term of four years commencing April 1,

1985. One member shall be an active or retired member of

the North Carolina National Guard appointed by the

Governor for a term of four years commencing July 1, 2013.

At the expiration of these terms of office the appointment

shall be for a term of four years.

(4) Two members appointed by the General Assembly, one

appointed upon the recommendation of the Speaker of the

- App. 153 -

House of Representatives, and one appointed upon the

recommendation of the President Pro Tempore of the

Senate in accordance with G.S. 120-121. Neither of these

members may be an active or retired teacher or State

employee or an employee of a unit of local government.

The initial members appointed by the General Assembly

shall serve for terms expiring June 30, 1983. Thereafter,

their successors shall serve for two-year terms beginning

July 1 of odd-numbered years. Vacancies in appointments

made by the General Assembly shall be filled in accordance

with G.S. 120-122.

. . .

(q) Compliance Investigations and Fraud Investigations—Access to

Persons and Records.—In the course of conducting a compliance

investigation or a fraud investigation, the Retirement Systems

Division, or authorized representatives who are assisting the

Retirement Systems Division staff, shall:

(1) Have ready access to persons and may examine and copy

all books, records, reports, vouchers, correspondence, files,

personnel files, investments, and any other documentation

of any employer. The review of State tax returns shall be

limited to matters of official business, and the Division's

report shall not violate the confidentiality provisions of tax

laws.

(2) Have such access to persons, records, papers, reports,

vouchers, correspondence, books, and any other

documentation that is in the possession of any individual,

private corporation, institution, association, board, or

other organization that pertain to the following:

- App. 154 -

a. Amounts received pursuant to a grant or contract

from the federal government, the State, or its

political subdivisions.

b. Amounts received, disbursed, or otherwise handled

on behalf of the federal government or the State.

(3) Have the authority, and shall be provided with ready

access, to examine and inspect all property, equipment,

and facilities in the possession of any employer agency or

any individual, private corporation, institution,

association, board, or other organization that were

furnished or otherwise provided through grant, contract,

or any other type of funding by the employer agency.

With respect to the requirements of sub-subdivision (2)b. of this

subsection, providers of social and medical services to a

beneficiary shall make copies of records they maintain for

services provided to a beneficiary available to the Retirement

Systems Division, or to the authorized representatives who are

assisting the Retirement Systems Division staff. Copies of the

records of social and medical services provided to a beneficiary

will permit verification of the health or other status of a

beneficiary as required for the payment of benefits under Article

1, Article 4, or Article 6 of this Chapter. The Retirement Systems

Division, or authorized representatives who are assisting the

Retirement Systems Division staff, shall request records in

writing by providing the name of each beneficiary for whom

records are sought, the purpose of the request, the statutory

authority for the request, and a reasonable period of time for the

production of record copies by the provider. A provider may

charge, and the Retirement Systems Division, or authorized

representatives who are assisting the Retirement Systems

Division staff, shall, in accordance with G.S. 90-411, pay a

- App. 155 -

reasonable fee to the provider for copies of the records provided

in accordance with this subsection.

(r) Compliance or Fraud Investigative Reports and Work Papers.—

The Director of the Retirement Systems Division shall maintain

for 10 years a complete file of all compliance investigative

reports, fraud investigative reports and reports of other

examinations, investigations, surveys, and reviews issued under

the Director’s authority. Fraud or compliance investigation work

papers and other evidence or related supportive material directly

pertaining to the work of the Retirement Systems Division of the

Department of State Treasurer shall be retained according to an

agreement between the Director of Retirement and State

Archives. To promote intergovernmental cooperation and avoid

unnecessary duplication of fraud and compliance investigative

efforts, and notwithstanding local unit personnel policies to the

contrary, pertinent work papers and other supportive material

relating to issued fraud or compliance investigation reports may

be, at the discretion of the Director of Retirement and unless

otherwise prohibited by law, made available for inspection by

duly authorized representatives of the State and federal

government who desire access to and inspection of such records

in connection with some matter officially before them, including

criminal investigations. Except as provided in this section, or

upon an order issued in Wake County Superior Court upon 10

days' notice and hearing finding that access is necessary to a

proper administration of justice, fraud and compliance

investigation work papers and related supportive material shall

be kept confidential, including any information developed as a

part of the investigation.

. . .

- App. 156 -

§ 135-18.6. Termination or partial termination; discontinuance of contributions. In the event of the termination or partial termination of the Retirement System or in the event of complete discontinuance of contributions under the Retirement System, the rights of all affected members to benefits accrued to the date of such termination, partial termination, or discontinuance, to the extent funded as of such date, or the amounts credited to the members’ accounts, shall be nonforfeitable and fully vested.

Article 3B.

State Health Plan for Teachers and State Employees.

Part 1.

General Provisions. § 135-48.2. Undertaking.

(a) The State of North Carolina undertakes to make available a State Health Plan (hereinafter called the “Plan”) exclusively for the benefit of eligible employees, eligible retired employees, and certain of their eligible dependents, which will pay benefits in accordance with the terms of this Article. The Plan shall have all the powers and privileges of a corporation and shall be known as the State Health Plan for Teachers and State Employees. The State Treasurer, Executive Administrator, and Board of Trustees shall carry out their duties and responsibilities as fiduciaries for the Plan. The Plan shall administer one or more group health plans that are comprehensive in coverage. The State Treasurer may operate group plans as a preferred provider option, or health maintenance, point-of-service, or other organizational arrangement.

. . .

- App. 157 -

§ 135-48.3. Right to amend. The General Assembly reserves the right to alter, amend, or repeal this Article. § 135-48.16. Fraud detection and audit programs.

(a) Access to Persons and Records.—In the course of conducting an

investigation or an audit under G.S. 135-48.30(a)(9), the Plan, or

authorized representatives who are assisting the State Health

Plan Division staff, shall have ready access to the following:

(1) Persons, books, records, reports, vouchers,

correspondence, files, personnel files, investments, and any

other documentation of any employing unit. The Plan shall

have the authority to examine and make copies of the

information described in this subdivision only insofar as it

directly relates to a specific investigation or audit. The

review of State tax returns shall be limited to matters of

official business, and the Plan's report shall not violate the

confidentiality provisions of the tax laws. A confidentiality

agreement may be put in place with an agency providing

documentation to the Plan.

(2) Persons, records, papers, reports, vouchers,

correspondence, books, and any other documentation that

is in the possession of any individual, private corporation,

institution, association, board, or other organization that

pertain to any benefits received, disbursed, or otherwise

handled pursuant to a grant or contract from the federal

government that is administered by the State Health Plan,

the State, or its political subdivisions. Providers of social

and medical services to a beneficiary shall make copies of

- App. 158 -

records they maintain for services provided to the

beneficiary.

Authorized representatives who are assisting the State

Health Plan Division staff must have a HIPAA business

associate agreement with the State Health Plan and enter

into a HIPAA data sharing agreement with any vendor

whose records they are copying.

(b) Records of Providers of Social and Medical Services.—Providers

of social and medical services who provide ready access to the

Plan under subdivision (2) of subsection (a) of this section shall

make copies of records they maintain for services provided to a

beneficiary available to the Plan or to the authorized

representatives who are assisting the State Health Plan Division

staff. The Plan, or authorized representatives who are assisting

the State Health Plan Division staff, shall request records in

writing by providing the name of each beneficiary from whom

records are sought, the purpose of the request, the authority for

the request, and a reasonable period of time for the production

of record copies by the provider. A provider may charge and the

Plan, or authorized representatives who are assisting the State

Health Plan Division staff, shall, in accordance with G.S. 90-411,

pay a reasonable fee to the provider for copies of the records

provided.

(c) Fraud Detection and Audit Reports and Work Papers.—The Plan

shall maintain for 10 years a complete file of all compliance

investigative reports, fraud investigative reports, and reports of

other examinations, investigations, surveys, and reviews issued

under the Plan’s authority under G.S. 135-48.30(a)(9). Fraud or

compliance investigation work papers and other evidence or

related supportive material directly pertaining to the work of the

State Health Plan Division of the Department of State Treasurer

shall be retained according to an agreement between the Plan

- App. 159 -

and State Archives. To promote intergovernmental cooperation

and avoid unnecessary duplication of fraud investigative effort,

and notwithstanding local unit personnel policies to the

contrary, pertinent work papers and other supportive material

relating to issued fraud or compliance investigation reports may

be, at the discretion of the Executive Administrator of the Plan,

and unless otherwise prohibited by law, made available for

inspection by duly authorized representatives of the State and

federal government who desire access to, and inspection of, such

records in connection with some matter officially before them,

including criminal investigations. Except as provided in this

section, or upon an order issued in Wake County Superior Court

upon 10 days' notice and hearing finding that access is necessary

to a proper administration of justice, fraud investigation work

papers and related supportive material shall be kept confidential,

including any information developed as a part of the

investigation.

Part 2.

Administrative Structure.

§ 135-48.20. Board of Trustees established.

(a) There is established the Board of Trustees of the State Health Plan for Teachers and State Employees.

(b) The Board of Trustees of the State Health Plan for Teachers and State Employees shall consist of 10 members.

(c) The State Treasurer shall be an ex officio member of the Board

and shall serve as its Chair, but shall only vote in order to break a tie vote.

- App. 160 -

(d) The Director of the Office of State Budget and Management shall be an ex officio nonvoting member of the Board.

(e) Two members shall be appointed by the Governor. Terms shall

be for two years. Vacancies shall be filled by the Governor.

(f) Two members shall be appointed by the State Treasurer. Terms shall be for two years. Vacancies shall be filled by the State Treasurer.

(g) Two members shall be appointed by the General Assembly upon

the recommendation of the Speaker of the House of Representatives in accordance with G.S. 120-121. Terms shall be for two years. Vacancies shall be filled in accordance with G.S. 120-122.

(h) Two members shall be appointed by the General Assembly upon

the recommendation of the President Pro Tempore of the Senate in accordance with G.S. 120-121. Terms shall be for two years. Vacancies shall be filled in accordance with G.S. 120-122.

(i) In making appointments, the appointing authorities shall ensure

that one of the appointees under subsection (e) of this section, one of the appointees under subsection (f) of this section, and one of the appointees under subsection (g) of this section, and one of the appointees under subsection (h) of this section are one of the following:

(1) An employee of a State department, agency, or institution;

(2) A teacher employed by a North Carolina public school

system;

(3) A retired employee of a State department, agency, or institution; or

- App. 161 -

(4) A retired teacher from a North Carolina public school system.

In making appointments to the Board under this section, each appointing authority shall consult with all other appointing authorities prior to making its own appointments to ensure that the Board includes members of each of the groups listed in subdivisions (1) through (4) of this subsection.

(j) In making appointments, the appointing authorities shall appoint individuals from the following areas of expertise: (1) Actuarial science.

(2) Health economics.

(3) Health benefits and administration.

(4) Health law and policy.

In making appointments to the Board under this section, each appointing authority shall consult with all other appointing authorities prior to making its own appointments to ensure that each of the areas of expertise listed in subdivisions (1) through (4) of this subsection is represented by at least one member of the Board.

(k) Each appointing authority may remove any member appointed

by that appointing authority.

(l) The members of the Board of Trustees shall receive one hundred dollars ($ 100.00) per day, except employees eligible to enroll in the Plan, whenever the full Board of Trustees holds a public session, and travel allowances under G.S. 138-6 when traveling to and from meetings of the Board of Trustees or hearings under G.S. 135-48.24, but shall not receive any subsistence allowance or per diem under G.S. 138-5, except when holding a meeting or

- App. 162 -

hearing where this section does not provide for payment of one hundred dollars ($ 100.00) per day.

(m) No member of the Board of Trustees may serve more than three

consecutive two-year terms.

(n) Immunity.—Except to the extent provided under Article 31A of Chapter 143 of the General Statutes and to the extent of insurance coverage purchased pursuant to G.S. 58-32-15, a person serving on the Board of Trustees shall be immune individually from civil liability for monetary damages for any act, or failure to act, arising out of that service, except where any of the following apply:

(1) The person was not acting within the scope of that

person’s official duties.

(2) The person was not acting in good faith.

(3) The person committed gross negligence or willful or wanton misconduct that resulted in damages or injury.

(4) The person derived an improper personal financial benefit,

either directly or indirectly, from the transaction.

(5) The person incurred the liability from the operation of a motor vehicle.

Part 3.

Plan Operation. § 135-48.33. Contracting provisions; large contract review by Board of Trustees and Attorney General, auditing, no cost plus contracts.

(a) The Board of Trustees must approve all Plan contracts in excess

- App. 163 -

of five hundred thousand dollars ($500,000), including contracts with an initial cost of less than five hundred thousand dollars ($500,000), but that may exceed five hundred thousand dollars ($500,000) during the term of the contract.

(b) The Plan shall: (i) submit all proposed contracts for supplies,

materials, printing, equipment, and contractual services that exceed one million dollars ($1,000,000) authorized by this Article to the Attorney General or the Attorney General’s designee for review as provided in G.S. 114-8.3; and (ii) include in all proposed contracts to be awarded by the Plan under this section a standard clause which provides that the State Auditor and internal auditors of the Plan may audit the records of the contractor during and after the term of the contract to verify accounts and data affecting fees and performance. The Plan shall not award a cost plus percentage of cost agreement or contract for any purpose.

Part 4.

Eligibility and Enrollment. § 135-48.41. Additional eligibility provisions. . . .

(f) For the support of the benefits made available to any member vested at the time of retirement, their spouses or surviving spouses, and the surviving spouses of employees who are receiving a survivor’s alternate benefit under G.S. 135-5(m) of those associations listed in G.S. 135-27(a), licensing and examining boards under G.S. 135-1.1, the North Carolina State Art Society, Inc., and the North Carolina Symphony Society, Inc., each association, organization or board shall pay to the Plan the full cost of providing these benefits under this section as determined by the State Health Plan for Teachers and State

- App. 164 -

Employees. In addition, each association, organization or board shall pay to the Plan an amount equal to the cost of the benefits provided under this section to presently retired members of each association, organization or board since such benefits became available at no cost to the retired member. This subsection applies only to those individuals employed prior to July 1, 1983, as provided in G.S. 135-27(d).

. . .

- Addendum 1 -

CONTENTS OF ADDENDUM

Order Addendum Page

Carl v. State,

2009 NCBC LEXIS 36

(N.C. Super. Ct. Dec. 15, 2009) ................. Addendum 2

- Addendum 2 -

2009 NCBC LEXIS 36 North Carolina Superior Court, Wake County

Carl v. State

No. 06 CVS 13617

December 15, 2009, Decided December 15, 2009, Filed

FINAL ORDER and JUDGMENT Based on the submissions of the parties, including their oral presentations at the Fairness Hearing held on December 15, 2009, in the Superior Court of Wake County, North Carolina, IT IS HEREBY ORDERED, ADJUDGED AND DECREED as follows: PROCEDURAL BACKGROUND 1. Plaintiffs Linda Carl and Charles Eilber filed a Complaint on September 15, 2006 against the State of North Carolina, the North Carolina Teachers’ and State Employees’ Comprehensive Major Medical Plan (a/k/a the State Health Plan) and MedAmerica Insurance Company. Plaintiffs filed an Amended Complaint on October 13, 2006.

2. On November 15, 2006, the State Defendants filed a Motion to Dismiss the Amended Complaint. On February 6, 2007, MedAmerica filed its Answer to the Amended Complaint and asserted two cross claims against the State Defendants. On March 20, 2007, the State Defendants moved to dismiss the cross claims. 3. On February 26, 2007, Plaintiffs moved the Court for leave to file a Second Amended Complaint, which was granted on April 24, 2007. On May 1, 2007 the State Defendants filed a Motion to Dismiss Plaintiffs’ additional claim asserted in their Second Amended [*2] Complaint.

- Addendum 3 -

4. On May 18, 2007, the Plaintiffs filed a (Corrected) Third Amended Complaint by consent. The Third Amended Complaint asserted claims of breach of contract, breach of third-party beneficiary contract and violation of state constitution against the State and the State Health Plan and breach of contract against MedAmerica. 5. The State Defendants moved to dismiss the Plaintiffs’ contract, third-party beneficiary, and state constitutional claims under North Carolina Rules of Civil Procedure 12(b)(1), (2) and (6). The State Defendants moved to dismiss MedAmerica’s crossclaims under North Carolina Rules of Civil Procedure 12(b)(1), (2) and (6). Specifically, the State asserted a sovereign immunity defense to each claim and cross claim under North Carolina Rules of Civil Procedure 12(b)(1) and (b)(2). The State moved to dismiss the Plaintiffs’ constitutional claim pursuant to 12(b)(6). 6. The Court denied the State Defendants’ motions to dismiss by Order entered September 5, 2007. 7. On September 7, 2006, the State Defendants filed a Notice of Appeal from the Court’s Order of September 7, 2007. By Order entered September 28, 2007, the Court denied the State Defendants’ Motion for [*3] Stay pending appeal. On October 19, 2007, the North Carolina Court of Appeals granted the State’s Petition for Supersedeas, staying all proceedings pending appeal. 8. On September 2, 2008, the Court of Appeals affirmed the Court’s Order denying the State’s motion to dismiss the Plaintiffs’ contract and third-party beneficiary claims and reversed this Court’s Order denying the State’s motion to dismiss the constitutional or “Corum” claim. The Court of Appeals reversed this Court’s Order denying the State’s Motion to Dismiss MedAmerica’s cross claim for indemnity but affirmed the Court’s denial of the State’s Motion to Dismiss MedAmerica’s cross claim for breach of contract. 9. The North Carolina Supreme Court declined further review of the Court of Appeals’ decision on February 5, 2009 and dissolved the stay on that date as well.

- Addendum 4 -

10. The State Defendants filed an Amended Answer to the Third Amended Complaint and Amended Crossclaims against MedAmerica on February 6, 2009. 11. The State Defendants voluntarily dismissed certain crossclaims against MedAmerica on March 19, 2009. 12. The Plaintiffs have claims for (1) breach of contract and (2) breach of third-party beneficiary contract against [*4] the State Defendants and (3) a breach of contract claim against MedAmerica. 13. MedAmerica has a crossclaim against the State Defendants for breach of contract. 14. The State Defendants have three cross claims of breach of contract and one claim for common-law indemnity against MedAmerica. 15. The Plaintiffs moved for class certification on April 3, 2009, filing a memorandum in support of said motion and supporting exhibits. The State Defendants and MedAmerica filed opposition memoranda and supporting exhibits on June 8, 2009. Plaintiffs filed a reply memorandum and supporting exhibits on June 23, 2009. 16. The Court heard oral argument on the Motion for Class Certification on July 10, 2009. 17. On August 11, 2009, the Court entered an Order certifying a class defined as follows:

All enrollees in Long Term Care Benefits through the State Health Plan under a group policy of insurance by MedAmerica Insurance Company who (1) purchased individual long term care policies from MedAmerica following the termination of the MedAmerica group policy by the State Health Plan as of December 31, 2004, and (2) whose premiums for their individual MedAmerica long term care policies are higher than their premiums [*5] for the MedAmerica group policy.

- Addendum 5 -

18. The Plaintiffs filed a Motion for Partial Summary Judgment on its contract claim against the State Health Plan on July 28, 2009. 19. The State Defendants filed a response to Plaintiffs’ Motion for Partial Summary Judgment and a Motion for Partial Summary Judgment on the Plaintiffs’ contract claim. 20. Prior to the hearing scheduled for the aforementioned motions for partial summary judgment, the parties reached agreement on settlement of their claims subject to approval by this Court. 21. The parties filed a Joint Motion for Preliminary Approval of Class Action Settlement and Memorandum in Support of Joint Motion for Preliminary Approval. 22. In conjunction with their Motion for Preliminary Approval of Class Action Settlement, the parties filed a joint Motion for Modification of Class Definition, seeking expansion of the Class as follows:

All enrollees in Long Term Care Benefits through the State Health Plan under a group policy of insurance by MedAmerica Insurance Company who purchased individual long term care policies from MedAmerica following the termination of the MedAmerica group policy by the State Health Plan as of December 31, 2004.

23. A hearing [*6] was held on the Joint Motion for Preliminary Approval of Class Action Settlement on October 15, 2009, at which time the Court entered an Order Preliminarily Approving Class Action Settlement and Notice, expanding the Class to include all individuals who converted to the MedAmerica individual policy from the State Health Plan group policy, and directed Notice to be sent to the Class. NOTICE 24. Notice was mailed via U.S. Mail, first class, postage pre-paid to the last known address for each of the 2,531 Class members. The Notice advised each Class member of the nature of the claims asserted by Plaintiffs, that a class

- Addendum 6 -

had been certified, the terms of the Settlement, that they could exclude themselves from the Class, and of the proposed attorney’s fees. The Notice provided a telephone number for the Claims Administrator as well as email addresses to send inquiries. The Notice provided the world wide web address for an internet site nclongtermcaresettlement.com, which provided a copy of the Notice, the Settlement Agreement and the Order Preliminarily Approving Class Action Settlement and Notice. The Notice advised the Class of the date, time and location of the Fairness Hearing and the [*7] procedure for filing an objection to or excluding themselves from the Settlement. An appendix was attached to the Notice for those 2,254 Class members whose premiums increased following conversion that outlined the premium paid before conversion and after conversion; the total difference in premiums paid through 2009; and the portion of the monetary relief they would receive. 25. Notice was also placed on a website, www.nclongtermcaresettlement.com, which also contained the Notice, the Settlement Agreement and the Order Preliminarily Approving Class Action Settlement. 26. Notice was placed on the State Health Plan website and the Retirement Systems Division of the North Carolina Department of State Treasurer’s website by the State. 27. There were four (4) objections to the Settlement and 14 (fourteen) requests for exclusion. THE CLAIMS 28. In 1997, the General Assembly authorized the State Health Plan (“SHP”) to offer Long Term Care Benefits (“LTC Benefits”) to State employees, retirees, and retired local government workers, and their qualified dependents, on a voluntary self-pay basis. N.C. Gen. Stat. § 135-41. The SHP’s Executive Administrator and Board of Trustees were given the sole authority [*8] to implement and administer LTC Benefits as fiduciaries of the SHP. N.C. Gen. Stat. §§ 135-39.5(22), 135-40(a), and 135-41. The enabling legislation gave the SHP discretion to make LTC Benefits available

- Addendum 7 -

through a contract of insurance with a third-party carrier selected on a competitive bid basis or by the establishment of a self-insured program administered by the SHP. N.C. Gen. Stat. § 135-41. 29. In 1997, the SHP issued a request for proposal (RFP) from insurance carriers for the LTC contract, to which MedAmerica responded and was the successful bidder. Upon acceptance, MedAmerica’s response to the RFP became part of MedAmerica’s LTC Contract with the SHP, under which MedAmerica was to provide LTC Benefits from March 1, 2998 through December 31, 2003, with two options for one-year extensions. 30. The MedAmerica LTC Contract with the SHP underwent three amendments, the second of which was enacted on November 12, 1998 and stated:

3.12 Continuation All enrollees shall remain members of the group even when an event occurs after enrollment such as termination of employment or divorce, which would have rendered them ineligible to enroll in the group. At the termination of this Contract, [*9] all enrollees will remain members of the group and move with the group to new group coverage unless group coverage is no longer offered by the Plan. In the event the Plan does not continue to offer group coverage, upon the termination of this Contract, the Contractor will enroll all enrollees in individual coverage with the same benefits and rates as provided by this Contract.

31. The MedAmerica LTC group plan was priced with a “level” premium, meaning that premiums were based on age of enrollment and designed to remain constant for life. Because the LTC Benefits had a level premium, reserves were a natural by product from the excess of premiums over claims in the early years of the policy. MedAmerica contracted to transfer the reserves to the replacing carrier upon the replacing carrier’s acceptance of the group risk from MedAmerica.

- Addendum 8 -

32. The MedAmerica LTC group plan also offered a 10-year paid-in-full option, by which an enrollee could have a paid-in-full LTC policy at the end often years. 33. The SHP and MedAmerica sent LTC Benefits enrollment materials to eligible SHP members. Under the 1997 RFP, the SHP had to approve all information sent by MedAmerica to enrollees regarding LTC Benefits. [*10] Furthermore, Department of Insurance approval was required for the promotional materials for LTC Benefits. 34. Enrollment materials stated: “These [LTC] Benefits were designed specifically for North Carolina’s active and retired teachers, state employees and local government retirees. Available on a voluntary self-pay basis, Long-Term Care Benefits are intended to supplement benefits provided by your health plan. They are offered to you at group rates which are substantially less than comparable individual plans.” 35. Enrollment materials further explained that “[p]remiums are based upon age at the time coverage is purchased, so the younger you are, the less expensive your premiums will be. And when you enroll, you lock in your lower premiums.” 36. The enrollment materials also explained that “[y]our premiums are designed to remain level over your lifetime. They will only be changed if a change is justified based on the claims experience and if approval is obtained from the North Carolina Department of Insurance. Any change of premiums must be made for everyone with similar coverage so you will never be singled out for a rate increase.” In addition, MedAmerica guaranteed the premium rate [*11] from 12:01 a.m. on January 1, 1998 through midnight of December 31, 2003. 37. The SHP notified MedAmerica on April 10, 2003 that the SHP would not be exercising its option to extend its contract with MedAmerica past the initial 5 year term, and that the contract would terminate on December 31, 2003. The SHP issued an RFP on August 14, 2003 for a replacement LTC Benefits carrier. The SHP received responses to its 2003 RFP, but none contained the ten-year paid-in-full option. The SHP withdrew its 2003 RFP

- Addendum 9 -

and exercised one of its one-year extensions with MedAmerica to extent the contract to December 31, 2004. 38. On March 9, 2004, the SHP issued another RFP for a LTC Benefits carrier. The 2004 RFP required that bidders have a policy form to provide for existing 10-year paid up policy holders and to take current enrollees at original enrollment age. Reserves were to be transferred to the new carrier as part of that carrier’s acceptance of the risk associated with the group. 39. An addendum to the 2004 RFP stated that it was the SHP’s preference that all current insureds transfer to the new carrier with no change in rates or benefits. 40. Prudential Insurance Co. was awarded the LTC Contract [*12] under the 2004 RFP. The Prudential group rates at original issue age, or the age of enrollment in the MedAmerica group policy, were on average 30% higher than the MedAmerica group rates. Even though Prudential agreed in its bid to offer a 10-year paid-in-full option to existing MedAmerica group members, Prudential ultimately did not offer a 10-year paid-in-full option, and could not, therefore, be certified as being substantially similar to the MedAmerica policy. As a consequence, the MedAmerica group could not be transferred to Prudential consistent with Department of Insurance regulations, and MedAmerica group enrollees were entitled to an offer of a conversion policy with MedAmerica pursuant to the terms of their certificates issued by MedAmerica and required by DOI regulations. If MedAmerica group enrollees wanted to maintain their LTC Benefits through a group plan offered by the SHP, they were required to enroll in the new Prudential group plan at their attained age versus their original enrollment age in the MedAmerica group plan. 41. Because the MedAmerica policy was not replaced with a group policy offering similar or better benefits and priced at the age of enrollment in the [*13] MedAmerica policy, MedAmerica was required to offer an individual conversion policy offering similar benefits with premiums based on age of enrollment in the group policy. Because none of the risk that MedAmerica had been insuring with its now-terminated group policy

- Addendum 10 -

transferred to the SHP’s new group insurer Prudential, MedAmerica retained the reserves. 42. Plaintiff Charles Eilber enrolled in LTC Benefits through the MedAmerica group policy in 1998. When Mr. Eilber’s MedAmerica group certificate terminated, he converted to an individual MedAmerica policy. The premiums for his individual policy were 69% higher than the premiums under the MedAmerica group policy. 43. Plaintiff Linda Carl enrolled in LTC Benefits through the MedAmerica group plan and selected the MedAmerica 10-year paid-in-full benefit. When her MedAmerica group certificate terminated, she converted to an individual MedAmerica policy with a 21% increase in her premium. 44. Plaintiffs assert that the SHP and MedAmerica breached their promises that their LTC Benefits and long-term care insurance premiums would remain level -calculated based on their age of enrollment and constant for life unless a change was justified by [*14] the claims experience and approved by the Department of Insurance for “everyone with similar coverage.” Plaintiffs assert that the SHP breached its contract with MedAmerica to move them, along with the remainder of the MedAmerica group, as a group to replacement group coverage consistent with N.C. Admin. Code 12.1005, and that contract was made for the Plaintiffs’ direct and intended benefit. 45. MedAmerica asserts a claim for breach of contract against the State Health Plan arising from Section 3.12, Continuation, of their LTC Contract with the SHP. 46. The SHP asserts claims for breach of contract and indemnity against MedAmerica. 47. Plaintiffs claim that as a result of Defendants’ breaches of contract, they lost their level premium for long term care insurance and also lost the promised restriction on which that level premium could change - when justified by the claims experience. Plaintiffs claim that the SHP was obligated to continue their level premium and the restriction placed on its revision

- Addendum 11 -

when transitioning into replacement group coverage. If the SHP received no responses to their RFP for a LTC Benefits replacement carrier, the Plaintiffs contend that the SHP could have self-insured. 48. [*15] The State Defendants denied liability. The State Defendants contended that statements in the promotional literature did not give rise to a contractual obligation for a level premium. The State Defendants also argued that under Department of Insurance regulations as the State Health Plan understood them, the responsibility for the content of the promotional materials for the MedAmerica group policy, regardless of by whom drafted or distributed, was on MedAmerica and, thus, if any contractual obligation arose from those materials, it could only be a contractual obligation of MedAmerica. Finally, the State Defendants argued that any promise or limitation contained in the promotional material applied only to the MedAmerica group policy and not to future, replacement coverage, the terms of which would be determined by the competitive bid process. 49. The State Defendants denied that the Continuation provision of the MedAmerica LTC Contract was made for the Plaintiffs’ direct or intended benefit. The State Defendants further contended that the State Health Plan had no power to force any insured to transfer to the replacement group coverage. The State Defendants argued that MedAmerica’s failure [*16] to transfer the reserves to Prudential resulted in Prudential not offering a ten-year paid-in-full policy. 50. MedAmerica contended that the contract between it and the insureds was the MedAmerica group certificate and that under the certificate, MedAmerica’s ability to raise premiums was restricted only by the guarantee to the State Health Plan and the Department of Insurance regulations. MedAmerica also argued that since the State Health Plan offered replacement coverage, although it failed to transfer the group, MedAmerica was not obligated under the Continuation section of the LTC Contract to provide conversion coverage with the same benefits and rates. MedAmerica argued that Plaintiffs’ damages resulted from the State Health Plan’s breach of contract with MedAmerica resulting from the State Health Plan’s failure to move the MedAmerica group to replacement group coverage in accordance with the N.C. Dept. of Insurance continuation regulations.

- Addendum 12 -

51. Defendants argued that Plaintiffs’ damages should be limited to the difference between the MedAmerica conversion premiums and the Prudential group premium at original issue age. Defendants argued that to the extent there was an obligation [*17] to provide a level premium, that continuation regulations by the N.C. Dept. of Insurance provided only that the replacement coverage be substantially-similar and priced at the age of original enrollment. The Prudential group policy priced at age of original enrollment had premiums that were approximately 30% higher than the MedAmerica group policy. The difference between the premiums for the Prudential group policy at original enrollment and the MedAmerica conversion policy in which the Plaintiffs ultimately enrolled was small. 52. Defendants also maintained that the only restriction on the ability to raise future premiums for LTC Benefits was the Department of Insurance regulations, which take into account information beyond past claims experience to support a request for a rate increase. 53. The parties have engaged in extensive discovery in this action, including responses to interrogatories and requests for admission as well as the production and review of thousands of pages of documents. Plaintiffs conducted the depositions of multiple key state witnesses involved in both the original LTC Contract with MedAmerica and the 2004 RFP under which Prudential was awarded the LTC Contract. [*18] In addition, the Plaintiffs have retained experts to calculate the damages that the Class has suffered by the rate increase that took place upon converting to the MedAmerica individual policy as well as the damages the Class will suffer through future rate increases. THE SETTLEMENT 54. Class Counsel provided an actuarial analysis that demonstrated there were two components of damages to the Class. The first component consisted of the damages resulting from the premium increase experienced by some in the Class when they converted from the MedAmerica group policy to the individual policy. Of the 2,531 Class members, 277 experienced a decrease in premiums upon conversion. However, for the remainder of the Class such premiums increased. An actuarial analysis was performed to

- Addendum 13 -

calculate the present and future costs of the premium increase over the life expectancy of those Class members whose premiums increased. That analysis showed that, reduced to present value, the damages resulting from premium increase were between $8.6 million and $10.5 million. To date, the Class has paid $4,387,210.54 in extra premium following their conversion. Plaintiffs negotiated monetary relief in the amount of [*19] $5.6 million as to this first component of damages. 55. The second component of damages were the future rate increases that Plaintiffs’ actuaries opined would occur for the MedAmerica individual policy. This component of damages resulted from the loss of the alleged promise that premiums would only be increased based on claims experience. Plaintiffs offered actuarial analysis that there would be two increases in the amount of 35% each in years 2011 and 2013. In addition, Plaintiffs offered actuarial analysis based on an actuarial analysis supplied by MedAmerica that justified a 64.3% rate increase in premiums beginning in 2009 as well as evidence that large increases in premiums have been sought and approved in North Carolina and other states in recent years. Plaintiffs negotiated caps on the rate increases equal to 7.5% in 2010 followed by 6.0% increases every two years through 2020. Plaintiffs’ actuary opined that the value of these caps resulted in future costs savings for the Class of $8.4 million assuming two 35% increases and as high as $14.4 million discounted to present value assuming the 64.3% increase justified by MedAmerica. 56. The total value of the Settlement ranges between [*20] $14 million and $20 million, depending upon the value ascribed to the caps on future premium increases. 57. Class Counsel have conducted a thorough investigation of the facts relating to the claims asserted in this action and have evaluated the relevant law and facts to assess the merits of Plaintiffs’ claims and likelihood of success at trial. Based upon the extensive discovery and evaluation, the Named Plaintiffs and Class Counsel have agreed to settle the action pursuant to the provisions of the Settlement Agreement, after considering, among other things: (a) the fairness, reasonableness, and adequacy of the Settlement Agreement; (b) the substantial risks and uncertainties of protracted litigation and trial; (c) the needs and interests of the Class

- Addendum 14 -

members; and (d) the desirability of consummating the Settlement Agreement promptly so as to provide effective relief to the Class. 58. The proposed Settlement is the result of extensive negotiation among the parties, including three rounds of mediation with the Honorable Frank W. Bullock, Jr., retired judge for the United State District Court for the Middle District of North Carolina, serving as mediator. 59. The Named Plaintiffs and Class [*21] Counsel agree that the proposed Settlement is fair, reasonable and adequate because it provides substantial benefits to the Class, is in the best interests of the Class, and fairly resolves the claims alleged in the action. 60. While Defendants deny any wrongdoing, they consider it desirable for this action to be settled and dismissed because this Settlement will: (a) provide substantial benefits to the Class members; (b) finally put Plaintiffs’ claims and the underlying matters to rest; and (c) avoid the substantial expense, burdens, risks and uncertainties associated with the continued litigation of this Action. 61. The Court finds that the proposed Settlement resulted from extensive arm’s-length negotiations and was concluded only after Class Counsel had conducted broad discovery and consulted independent experts about the issues raised by Plaintiffs’ claims. Class Counsel have carefully analyzed the merits of their claims and of Defendants’ defenses to those claims through a careful review of the law as it is applied to the facts of this case. And Class Counsel have taken into consideration the likelihood of protracted litigation, particularly appeals on the many issues of law that [*22] this case would have required the Court to rule upon, most if not all of which would have been reviewable de novo on appeal. These issues include the authority and discretion of government administrators, the degree to which statements in promotional material for long term care insurance are binding, the effect of insurance regulations upon the authority of the State Health Plan’s Executive Administrator, and whether the State Health Plan satisfied its obligation to the Class by contracting with a replacement carrier to offer substantially-equivalent or better benefits that were priced on the age of original enrollment. Because the Settlement was negotiated at arm’s length, there

- Addendum 15 -

was sufficient discovery, the proponents of the Settlement are experienced in similar litigation, and there were only four objections out of a Class of 2,531 individuals, there is an initial presumption of fairness. See Warfarin Sodium Antitrust Litig., 212 F.R.D. 231, 254 (D.Del. 2002). 62. In addition, there is a strong public policy favoring settlement of complex litigation which can linger for years and usurp extraordinary amounts of judicial and private resources. See generally In re School Asbestos Litig., 921 F.2d 1330, 1333 (3d Cir. 1990); [*23] Penn Dixie Lines v. Grannick, 238 N.C. 552, 78 S.E.2d 410 (1953). That policy is served by the Settlement proposed here, as much of the Class is over the age of sixty and retired, and where the defining issues in this litigation would be subject to appellate review that could take as much as an additional two years to resolve. 63. The Court finds that the Settlement is fair, adequate and reasonable based on analysis of the following factors: complexity, expense and likely duration of the litigation; reaction of the class to the Settlement; the stage of the proceedings and amount of discovery completed; risks of establishing liability; risks of establishing damages; risks of maintaining a class through trial; ability of the Defendants to withstand a greater settlement; the range of reasonableness of the settlement in light of the best possible recovery; and the range of reasonableness of the settlement in light of all the attendant risks of litigation. See Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975). 64. The complexity of the issues surrounding this case supports approval. The issues included the extent to which statements in promotional/enrollment material for one insurance policy could [*24] bind the executive administrator of the State Health Plan or bind MedAmerica Insurance Company when the Plaintiffs received group certificates stating that was their contract. Other issues included the regulatory definition of a level premium, and if the State Health Plan could have satisfied its obligations to the Plaintiffs simply by complying with the continuation regulations. Each of these issues would have been subject to appellate review. This factor supports approval of the Settlement.

- Addendum 16 -

65. The reaction of the Class supports approval of the Settlement. There were only four objections and fourteen exclusions out of 2,531 Class members. 66. The parties had conducted extensive written discovery and had deposed the key State witnesses. Furthermore, Plaintiffs and the State Defendants had filed motions for partial summary judgment, indicating the completion of the factual record with respect to certain aspects of liability. This factor supports approval of the Settlement. 67. The risks of establishing liability and damages supports approval. Plaintiffs would have been required to establish that the statements in the enrollment/promotional materials for the MedAmerica policy created a [*25] contractual obligation upon Defendants. In addition, had the Court determined that the State Health Plan could have satisfied its obligation to the Plaintiffs by moving the MedAmerica group into the Prudential group coverage at original issue age, this would have greatly reduced the damages for the Class. 68. While not great, there was risk that the Class could have been decertified during trial. 69. The State Defendants’ ability to withstand a greater settlement is in serious doubt considering the current financial crises. Furthermore, MedAmerica’s willingness to limit future premium increases amidst great uncertainty in the markets also supports approval. This factor overall supports approval. 70. The Settlement falls well within the range of reasonableness in light of the best possible recovery, which would have been approximately $20 million. The Settlement is also within the range of reasonableness in light of the risk that Plaintiffs’ damages could have been greatly reduced had this Court or an appellate court found that the measure of damages was the difference between the MedAmerica group and Prudential group premiums based on original issue age and the risk that the Court could [*26] have determined that there was no contractual obligation beyond what the continuation regulations imposed.

- Addendum 17 -

71. Nathan Wolfe’s objection is overruled. Mr. Wolfe’s preference is to allow the Court to make the ultimate decision on liability, irrespective of the risks posed to the Class. Mr. Wolfe’s objection fails to take into account the risks of proceeding. Furthermore, Mr. Wolfe seeks punitive damages, which are unavailable for a breach of contract under North Carolina law. 72. The objection by Arthur and Sally Greg is overruled. The Gregs’ primary objection is to the amount of the attorney’s fee. The Gregs offer no support for their claim that the caps on future premium increases are illusory. Class Counsel are entitled to a reasonable attorney’s fee for their efforts that produced the Settlement for the Class. See Boeing Co. v. Van Gemert, 444 U.S. 472, 478, 100 S. Ct. 745, 62 L. Ed. 2d 676 (1980). Class Counsel have produced actuarial analysis that future premiums were actuarially justified and likely to be approved by the Department of Insurance, if not through one request then through multiple requests. The savings in future premium costs is value to the Class which Class Counsel have achieved through their efforts [*27] and for which they are entitled to be compensated. 73. The objection by Fallie Sohr Cecil on behalf of Dewette B. Lohr was withdrawn, as Ms. Lohr recently died. Ms. Cecil seeks reinstatement of the level of benefits that her mother paid for prior to converting. Whether this would be an appropriate measure of damages is a complicated legal question with much uncertainty and risk; moreover, it would present a number of factual questions with difficult management problems for a class. The settlement damages for Class members who downgraded their benefits were calculated in part using the difference in premiums for the MedAmerica group and conversion policies assuming no downgrade in benefits. Thus, the damages calculation took into account the downgrade in benefits. And, to the extent that a Class member seeks relief different from that offered to the Class, they could have excluded themselves from the Settlement. 74. [*28] In sum, the Settlement presents significant recovery for the Class, providing them with approximately 64% of the difference in their premiums through 2009 and limiting the amount of increases in the future. The Court finds that this Settlement is fair, reasonable and adequate.

- Addendum 18 -

75. The Court further finds the method of allocation of the monetary relief of the Settlement to the Class members to be fair and reasonable, as it is purely based on the amount of increased premiums they paid following the conversion to date. Plaintiffs’ expert, William C. Cutlip, FSA, MAAA, FCA, CLU, ChFC, CPCU, developed a plan of allocation that is based on the extra premium paid, calculated by multiplying each Class member’s annualized extra premium rate times the time period during which the extra premium rate was paid. The Court approves the method of distribution outlined by Plaintiffs’ expert, William C. Cutlip, FSA, MAAA, FCA, CLU, ChFC, CPCU. The methodology can be applied to the monetary relief and is not contingent upon its size; thus, to the extent that the portion of monetary relief available to the Class increases due to exclusions, then the methodology can be employed to distribute the larger [*29] fund. Because there have been some exclusions, the shares of the monetary relief by those Class members entitled to it will increase proportionately to the decrease in the number of Class members in light of the exclusions. ATTORNEY’S FEES 76. Class Counsel seek attorney’s fees in the amount of $2,677,266.14 and reimbursement of expenses in the amount of $112,733.86. 77. Where the efforts of class counsel create a common fund for the benefits of absent class members, class counsel is entitled to a reasonable attorney’s free from that fund for their efforts so as to prevent the absent class members from being unjustly enriched. Bailey v. State, 348 N.C. 130, 159-61, 500 S.E.2d 54, 71-73 (1998); see also Horner v. Chamber of Commerce, 236 N.C. 96, 97-98, 72 S.E.2d 21, 22 (1952). While it is well-established in North Carolina that attorneys’ fees are appropriate when a litigant at his own expense has maintained a successful suit for the preservation, protection, or increase of a common fund or of common property, or has created at his own expense or brought into court a fund which others may share with him, id., it is less clear how the court is to calculate and determine the amount of that [*30] fee. It appears that no North Carolina appellate court has articulated standards governing the award of attorney’s fees in a common-fund class action.

- Addendum 19 -

78. The percentage-of-recovery method is used by the overwhelming majority of federal courts in cases where a common fund is created. See MANUAL FOR COMPLEX LITIGATION § 14.121 (4th ed. 2007). The other method of awarding attorney’s fees - the lodestar method - has been criticized as being difficult to apply, time-consuming to administer, and inconsistent in result. Id. The percentage-of-recovery method encourages efficiency and requires much less judicial resources to implement. Id.; see also In re Am. Bank Note Holographics Sec. Litig., 127 F. Supp.2d 418, 431-32 (S.D.N.Y. 2001) (finding percentage-of-recovery method preferable because it directly aligns the interests of the class with its counsel and provides powerful incentive for efficient prosecution of litigation). 79. While there is no North Carolina appellate case on point, the North Carolina Business Court has addressed the standards governing the award of attorney’s fees in class actions. Most of those cases involve substantially different facts. See e.g., In re Quintiles Transnation Corp. Shareholder Litigation, 2003 NCBC 11, 2003 NCBC LEXIS 3 (Dec. 19, 2003) (attorneys [*31] fees in a shareholder dispute); Long v. Abbott Laboratories, Inc., 1999 NCBC 10, 1999 NCBC LEXIS 10 (July 31, 1999) (awarding fees in case settled for nuisance value); In re Senergy and Thoro Class Action Settlement, 1999 NCBC 7, 1999 NCBC LEXIS 7 (New Hanover Cty July 14, 1999) (awarding fees where actual amount of monetary benefit to be received by the class was unknown). 80. One Business Court case, however, Judge Tennille’s decision in Byers v. Carpenter, 1998 NCBC 1, 1998 NCBC LEXIS 3 (January 30, 1998), is directly useful as an articulation of the relevant principles and for setting guideposts in a case, like this one, in which a favorable monetary settlement is reached on behalf of a class. That case concerned an action by approximately 2,000 depositors in a savings and loan which converted from a mutual to a state chartered institution, and which then merged with another institution. The class members challenged the permissibility of the transaction and the terms upon which it was consummated, including the contention that directors of the institution improperly appropriated 50%, or about $5 million, of the financial benefit created by the transactions at issue.

- Addendum 20 -

81. Judge Tennille [*32] held that the appropriate level of compensation in such cases is typically 25% of the relief obtained if the case is settled before filing; 1/3 if after filing; and 40% if after an appeal had been taken. 1998 NCBC LEXIS 3 at **32. After approving a “hybrid” approach that references both the attorney’s lodestar and the value of the relief awarded, Id. At **33, Judge Tennille awarded class counsel fees in the amount of one-third of the value of the settlement, or $1,666,666, as well as their costs of $96,758.37. Id. at ** 34. 82. Following Byers, and in reliance on the substantial federal case law in this area, the Court concludes that the principle basis upon which to determine a reasonable attorney’s fees is the percentage-of-recovery method, using the “lodestar” method as a cross-check, and evaluating the amount requested in light of all the relevant factors in the particular case. The Court finds in this case that the attorney’s fees requested are reasonable based upon the size of the fund and the number of persons benefitted; the small number of objections by the Class; the skill and efficiency of Class Counsel; the complexity and duration of the litigation; the risk of nonpayment; [*33] the amount of time spent on the case; and awards in similar cases. See Gunter v. Ridgewood Energy Corp., 223 F.3d 190, 195 n.1 (3d Cir. 2000). 83. A common benchmark percentage is 25%, which courts adjust upwards or downwards depending on the size of the recovery, the size of the class and other factors. MANUAL FOR COMPLEX LITIGATION § 14.121. Federal courts frequently award fees in the 20% to the 50% range in class actions. Id; see also Maywalt v. Parker & Parsley Petroleum Co., 963 F. Supp. 310 (S.D.N.Y. 1997). Usually, 50% is the upper limit on a reasonable fee award from a common fund. Alba Conte and Herbert Newberg, NEWBERG ON CLASS ACTIONS § 14:6 (4th ed. 2002). 84. Class Counsel’s lodestar is $1,956,627.70 based upon 4,168.85 hours, resulting in a multiplier of approximately 1.38. As Judge Tennille noted, courts frequently award multipliers between 2 and 4 in class actions. The instant multiplier of 1.38 for the requested fee is well within the range of reasonableness. Accordingly, the lodestar crosscheck provides further support for the attorney’s fee award that Class Counsel have requested.

- Addendum 21 -

85. Class Counsel have produced a Settlement valued at between $14 million and $20 million [*34] according to their actuarial expert, William C. Cutlip, FSA, MAAA, FCA, CLU, ChFC, CPCU. The Settlement has a cash component in the amount of $5.6 million. The limitations on future rate increases have a present value ranging between $8.4 million assuming two rate increases of 35% each in 2011 and 2013, or $14.4 million using the 64.3% increase in 2009 supported by the actuarial analysis by Amy Pahl of Milliman, an actuarial firm. These limits on future rate increases are real and have substantial value to the class members. 86. Using the more conservative $14 million, Class Counsel seek a fee of 19%, well within the range of awards in similar cases. 87. The value of the Settlement and the number of persons benefitted support approval of the fee award. Each Class member will receive value from the Settlement, either through a cash payment, limitation on future premium increases or both. The cash payments to those Class members whose premiums increased range from $174.23 at the 25th percentile, $655.27 at the 50th percentile, and $1,561.77 at the 75th percentile. The average of the projected payments for each class member entitled to such relief is $1,106.28. The Settlement benefits over [*35] 2,500 Class members. 88. The absence of objectors supports the fee awards. There were only 3 objections to the fee, two of which were identical and filed by spouses, and one of which posed no specific objection but suggested that Class Counsel should allow the suit to be decided by the Court. 89. Class Counsel demonstrated skill and efficiency in achieving the Settlement. Class Counsel vigorously pursued the claims on behalf of the Class, conducting extensive discovery and addressing through motions to dismiss some of the many legal issues the litigation posed. Class Counsel defended against an appeal that resolved favorably, for the most part, to the Class. Class Counsel moved for class certification in a timely manner and as soon as was practicable filed a motion for partial summary judgment against the State Defendants. This factor supports approval of the fee request.

- Addendum 22 -

90. The complexity and duration of the litigation as described herein also supports the fee request. 91. The amount of time Class Counsel spent on the case supports the fee request. Class Counsel expended 4,168.95 hours on the litigation with a lodestar of $1,956,627.70. 92. The risk of nonpayment supports the fee request. [*36] Class Counsel undertook representation in this matter on a contingency basis, advancing all costs. The outcome was uncertain and the matter was vigorously defended by Defendants. 93. The percentage requested is consistent with awards in similar cases and this supports approval of the fee request. 94. Class Counsel’s expenses are fair and reasonable, and all relate to the prosecution of the litigation, including copying costs, postage, travel, deposition costs, and filing fees. INCENTIVE PAYMENTS TO THE CLASS REPRESENTATIVES 95. Class Counsel have requested and Defendants have agreed to not object to incentive payments up to $5,000 each for the Class Representatives. Incentive payments are regularly awarded to class representatives in recognition of their time, expense and risk undertaken to secure a benefit for the Class they represent. Whether to award incentive payments and in what amount lies within the discretion of the Court. There is no entitlement to incentive payments, and both named Plaintiffs agreed to serve as Class Representatives with no compensation or remuneration above what they may receive by being a member of the Class. 96. The Class Representatives brought this matter [*37] to the attention of legal counsel experienced in complex litigation and class actions. Furthermore, the Class Representatives provided assistance in responding to interrogatories and requests for admission, and participated in the mediation. The Class Representatives made themselves available to Class Counsel for consultation and were sent copies of the extensive court filings

- Addendum 23 -

in this matter. The Class Representatives were not deposed and did not prepare for deposition. 97. At no time did Class Counsel promise the Class Representatives an incentive award, stating only their practice to request one based on the Class Representatives’ involvement and participation in the case and that ultimately whether to award an incentive payment and in what amount lies within the discretion of the Court. Class Counsel fully explained the terms of the Settlement and the amount of the attorney’s fee and bases for that fee to the Class Representatives before disclosing the amount of incentive payments; thus, there is no concern that the Class Representatives were influenced in any way by the amount of their proposed incentive payments. 98. Mrs. Carl has requested the Court independently review the incentive [*38] payment request, having previously requested Counsel to increase her incentive payment from $5,000 to $20,000 - a request which Class Counsel declined based on their analysis of the level of participation and risk undertaken by Mrs. Carl in the litigation as well as awards in other cases. 99. Class Counsel’s fiduciary obligation is to the Class they represent rather than to the special interests of a named plaintiff. To the extent that an incentive award is requested, it must be based on an analysis of the factors supporting such an award. Furthermore, the proposed incentive award must be reasonable in light of the amount of recovery for the Class, the amount of time and resources devoted by the Class Representative to the litigation, and the awards of Class members. 100. Class Counsel performed an analysis and have made a recommendation to the Court based on that analysis. There was no compromise of Mrs. Carl’s interests, as her interests are no greater than those of the Class she agreed to represent. Class Representatives simply are not entitled to bounty. 101. Mr. Eilber does not join in Mrs. Carl’s request and has no objection to the amount of incentive award requested for him.

- Addendum 24 -

102. [*39] Mrs. Carl estimates that she has spent between 100 and 105 hours working on behalf of the Class. There is no evidence that she faced risk of retaliation or the risk that she would be dropped from coverage. Mrs. Carl does not claim to have suffered any personal notoriety because of her service as a Class Representative. 103. Based on the efforts of the Class Representatives, the Court finds that an incentive payment in the amount of $5,000 to each of the Class Representatives is reasonable and fair. CONCLUSION NOW THEREFORE, based on the foregoing, it is hereby ORDERED, ADJUDGED AND DECREED as follows: 1. Incorporation of Documents. This Order incorporates and makes a part hereof:

a. The Settlement Agreement which sets for the terms and conditions of the Settlement.

b. The Court’s Order Preliminarily Approving Class Action Settlement and Notice entered on October 15, 2009.

2. Jurisdiction. The Court has personal jurisdiction over the Parties and the Class and has subject matter jurisdiction over this action, including without limitation, the jurisdiction to approve the Settlement, to settle and release all claims arising out of the transactions alleged in the Third Amended (Corrected) Complaint, [*40] and the Crossclaim by MedAmerica Insurance Co. and the Crossclaims by the State of North Carolina and the State Health Plan, and as set forth in the Settlement Agreement, and to dismiss the action on the merits and with prejudice. All Class members who have not excluded themselves from the Class have consented to jurisdiction of this Court for purposes of this action and the settlement of this action. 3. The Class: Persons and Entities Excluded Therefrom. The Class is defined as All enrollees in Long Term Care Benefits through the State Health

- Addendum 25 -

Plan under a group policy of insurance by MedAmerica Insurance Company who purchased individual long term care policies from MedAmerica following the termination of the MedAmerica group policy by the State Health Plan as of December 31, 2004. The identification of the fourteen persons who have requested exclusion from the Class in accordance with the terms of the Settlement Agreement, Order Preliminarily Approving Class Action Settlement and Notice, and Notice is on file with the Court as exhibits to the Declaration of Paul Mulholland, CPA, CVS and is incorporated herein and made a part hereon. These persons are hereby excluded from the Class. 4. [*41] Adequacy of Representation. Marcus & Auerbach LLC and Twiggs Beskind Strickland & Rabenau, P.A., acting as Class Counsel have fully and adequately represented the Class for purposes of entering into and implementing the Settlement and have satisfied the requirements of North Carolina Rule of Civil Procedure 23 and applicable law. Marcus & Auerbach LLC and Twiggs Beskind Strickland & Rabenau, P.A. having effectively served in this capacity are hereby formally appointed to continue to serve as Class Counsel. 5. Settlement Administrator. The selection and retention of Strategic Claims Services as Settlement Administrator was reasonable and appropriate. 6. Class Notice. Individual notice was sent to each reasonably identifiable Class member via first class mail to their last known address, and notice and other materials were made available on a publicly available Internet site in accordance with the Order Preliminarily Approving Class Action Settlement and Notice. The Court finds that this Notice:

a. constituted the best practicable notice to the Class members under the circumstances of this action;

b. was reasonably calculated under the circumstances to apprise Class members of (i) the pendency [*42] of this class action lawsuit; (ii) their right to exclude themselves from the Class; (iii) their right to object to any aspect of the proposed Settlement, the fairness or

- Addendum 26 -

reasonableness or adequacy of the Settlement, the adequacy of representation by Class Counsel, and/or the award of attorney’s fees and expenses; (iv) their right to request to appear at the Fairness Hearing, personally or through counsel, if they did not exclude themselves from the Class; and (v) the binding effect of the orders and judgment in this action, whether favorable or unfavorable, on all persons who do not request exclusion from the Class; c. was reasonable and constituted due, adequate and sufficient notice to all persons entitled to be provided with notice; d. complied with N.C.R. Civ. P. 23; e. fully satisfied the requirements of the United States Constitution (including the Due Process Clause) and the North Carolina Constitution and all other applicable law and procedural rules.

7. Final Settlement Approval and Binding Effect. The terms and provisions of the Settlement have been entered into in good faith, and are fair, reasonable and adequate as to, and in the best interests of the parties and Class members, [*43] and in full compliance with all applicable requirements of the United States Constitution (including the Due Process Clause) and the North Carolina Constitution and all other applicable law and procedural rules. Therefore, the Settlement is approved and the objections to the Settlement are overruled. The Settlement, and this Final Order and Judgment, shall be forever binding on the Plaintiffs and other members of the Class, as well as their heirs, executors and administrators, successors and assigns, and shall have res judicata and other preclusive effect in all pending and future claims, lawsuits, arbitrations or other proceedings maintained by or on behalf of any such persons, to the fullest extent allowed by law. 8. Implementation of Settlement. The [*44] parties are directed to implement the Settlement according to its terms and conditions. Defendants will make payment in the amount of $5,600,000 according to the terms of the Settlement and this Order as set forth herein. As of the date of the entry of this Final Order and Judgment and through December 31, 2020,

- Addendum 27 -

MedAmerica can seek rate increases for the Class from the Department of Insurance only in accordance with the Settlement Agreement. 9. Communications with Class Members. Class Counsel are hereby authorized to Communicate with Class members as contemplated by and in accordance with the terms of the Settlement without requiring further approval of the Court. 10. Appeal. Any [*45] appeal from this Final Order and Judgment must be preceded by (i) a timely objection to the Settlement filed in accordance with the requirements of the Settlement Agreement and the Order Preliminarily Approving Class Action Settlement and Notice, and as further set forth in the Notice, (ii) request for a stay of implementation of the Settlement, and (iii) posting of an appropriate bond. Absent satisfaction of all three of these requirements, the Parties are authorized to proceed with implantation of the Settlement. 11. Distribution of Monetary Relief. MedAmerica shall make payment of six hundred thousand dollars ($600,000.00) per the terms of the Settlement Agreement to the Settlement Administrator for distribution in accordance with this Order. The State of North Carolina shall pay five million dollars ($5,000,000.00), less the attorney’s fees and expenses awarded, to the Settlement Administrator for distribution in accordance with this Order. Defendants shall make such payments in accordance with wiring instructions received from the Settlement Administrator. Furthermore, the State of North Carolina shall pay to Class Counsel the amounts awarded in attorneys fees and reimbursed expenses [*46] pursuant to Class Counsel’s directions and the terms of the Settlement Agreement. The Settlement Administrator is directed to distribute the monetary relief to the Class per the terms of the Settlement and consistent with the plan of allocation as set forth in methodology by William Cutlip, FSA in his report dated December 7, 2009 and attached to the Memorandum in Support of Motion for Final Approval of Class Action Settlement. The funds for those individuals who excluded themselves from the Class shall be included in the monetary relief to be distributed to the Class members based on the allocation methodology established by William Cutlip, FSA.

- Addendum 28 -

For those Class members who are deceased or have died and for whom there is no open estate, the Settlement Administrator is hereby directed to make distributions to the Class member’s heir(s) or beneficiary(ies) upon receiving proof of their entitlement. For purposes of the distribution, satisfactory proof includes one or more of the following: Application for Letters Testamentary or Application for Letters of Administration; Application for Probate and Petition for Summary Administration; and/or letter from attorney confirming rights as heir [*47] or beneficiary of the estate. The Settlement Administrator upon receiving this proof shall distribute the Class member’s share of the monetary relief directly to the heir(s) or beneficiary(ies) according to the proof provided. 12. Cost of Administering the Settlement. MedAmerica shall pay to the Settlement Administrator expenses, up to the amount set forth in the Settlement Agreement, established by invoices submitted to Class Counsel and MedAmerica’s counsel, Poyner & Spruill. Such payment shall be paid within thirty (30) days following the submission of such invoice from the Settlement Administrator. 13. Release. The following Release, which is transcribed from Paragraphs 8 and 12 of the Settlement Agreement, is expressly incorporated herein in all respects, is effective as of the date of this Final Order and Judgment and forever discharges the Releasees from any and all claims and liabilities within the scope of the Release: Plaintiffs and the members of the Class and all of their respective heirs, assigns and successors shall be deemed: (a) to have unconditionally released any Released Claim, as defined by the Settlement Agreement, against any Released Person, as defined by the Settlement [*48] Agreement; (b) covenanted and agreed that they shall be forever barred from instituting, assigning or prosecuting any Released Claim against any Released Person; and (c) enjoined from opposing or commenting negatively upon any rate increase request filed by MedAmerica that is in compliance with the terms of Settlement. Released Claim means any claim, demand, action, cause of action, suit, damage, loss, expense or liability or whatever nature, including attorneys’ fees, without regard to whether such is contingent or absolute, known or unknown, at law or equity, which any Class Plaintiff or member of

- Addendum 29 -

the Class ever had or now has arising from or relating in any manner to any claim which was or could have been asserted arising out of or related to any of the facts alleged in the Class Action complaint, whether based on federal or state law. Released person means the State of North Carolina and the North Carolina Teachers’ and State Employees’ Comprehensive Major Medical Plan (collectively referred to as the “State Defendants”) and MedAmerica Insurance Company (“MedAmerica”), and any of their past or present officers, directors, agents, employees, affiliates, groups, predecessors, shareholders, [*49] subsidiaries, divisions, parents, successors, assigns, indemnities and legal representatives. The State Defendants and MedAmerica each agree to the following mutual releases:

Release by State Defendants. Effective immediately upon this Agreement and the Settlement becoming final in accordance with Paragraph 5 of this Settlement Agreement, by operation of this paragraph (for the avoidance of doubt, without the need for any further steps or action to be taken by any party), the State Defendants, for themselves, their past and present parent companies and subsidiaries, successors, assigns, representatives, attorneys, agents, officers, members, directors and employees, hereby irrevocably release and fully discharge MedAmerica and its past and present parent companies and subsidiaries, successors, assigns, representatives, attorneys, agents, officers, directors and employees, from and against any and all rights, claims, demands, causes of actions, damages, claims for attorneys’ fees and costs, liabilities or loss (including any demands for indemnification and/or contribution), and actions of any kind or nature whatsoever, without regard to whether such is contingent or absolute, known, unknown [*50] or presently unknowable, whether asserted or not, now existing or which may subsequently accrue to them in the future arising out of or related to any claims, facts, circumstances, acts or omissions which were or could have been asserted in the Class Action complaint or the Cross Claims, whether based on federal or state law, that the State Defendants may have against MedAmerica. The State Defendants are the sole owners of each of the rights, claims, damages, demands, defenses and actions released by them pursuant to this Settlement Agreement and they have not, voluntarily, by

- Addendum 30 -

operation of law, or otherwise, assigned or transferred or purported to assign or transfer, to any person whomsoever, any interest or right to assert any such right, claim, damage, demand or action. Release by MedAmerica. Effective immediately upon this Agreement and the Settlement becoming final in accordance with Paragraph 5 of this Settlement Agreement, by operation of this paragraph (for the avoidance of doubt, without the need for any further steps or action to be taken by any party), MedAmerica, for itself, its past and present parent companies and subsidiaries, successors, assigns, representatives, attorneys, [*51] agents, officers, members, directors and employees, hereby irrevocably release and fully discharge the State Defendants and their past and present parent companies and subsidiaries, successors, assigns, representatives, attorneys, agents, officers, directors and employees, from and against any and all rights, claims, demands, causes of actions, damages, claims for attorneys’ fees and costs, liabilities or loss (including any demands for indemnification and/or contribution), and actions of any kind or nature whatsoever, without regard to whether such is contingent or absolute, known, unknown or presently unknowable, whether asserted or not, now existing or which may subsequently accrue to it in the future arising out of or related to any claims, facts, circumstances, acts or omissions which were or could have been asserted in the Class Action complaint or the Cross Claims, whether based on federal or state law, that MedAmerica may have against the State Defendants. MedAmerica is the sole owner of each of the rights, claims, damages, demands, defenses and actions released by it pursuant to this Settlement Agreement and it has not, voluntarily, by operation of law, or otherwise, assigned [*52] or transferred or purported to assign or transfer, to any person whomsoever, any interest or right to assert any such right, claim, damage, demand or action.

14. Enforcement of the Settlement. Nothing in this Final Order and Judgment shall preclude any action to enforce the terms of the Settlement Agreement. 15. Attorneys’ Fees and Expenses. Class Counsel are hereby awarded attorneys’ fees in the amount of $ 2,677,266 00 and reimbursement of their

- Addendum 31 -

disbursements and expenses in the amount of $ 112, 733 00 to be paid by the State of North Carolina from the monetary relief paid by Defendants. This amount covers any and all claims for attorneys’ fees and expenses incurred by any and all counsel for Plaintiffs and the Class in connection with the settlement of this action and the administration of such settlement. The award of attorneys’ fees and expenses shall be allocated among plaintiffs’ counsel in a fashion which, in the opinion and sole discretion of Class Counsel, fairly compensates plaintiffs’ counsel for their respective contributions in the prosecution of the Action. The amount of attorney’s fees and expenses as awarded herein shall be paid directly by the State of North Carolina [*53] to Class Counsel per the terms of the Settlement Agreement. The remainder of the monetary relief under the Settlement shall be paid by the State of North Carolina and MedAmerica Insurance Company to the Settlement Administrator, which will make disbursements according to the plan of allocation by William Cutlip, FSA. 16. Other Payments. The Court awards additional payments to Linda Carl and Charles Eilber in the amount of $5000 00 each, which shall be paid from the cash component of the relief to the Class and distributed by the Settlement Administrator. 17. Modification of Settlement Agreement. The parties are hereby authorized, without needing further approval from the Court, to agree to and adopt such amendments to, and modifications and expansions of, the Settlement Agreement as are not materially inconsistent with this Order and do not unreasonably limit the rights of the Class members under the Settlement Agreement. 18. Retention of Jurisdiction. The Court has jurisdiction to enter this Final Order and Judgment. Without in any way affecting the finality of this Final Order and Judgment, the Court expressly retains the jurisdiction as to all matters relating to the administration, [*54] consummation, enforcement and interpretation of the Settlement Agreement and of this Final Order and Judgment and for any other necessary purpose, including, without limitation,

- Addendum 32 -

a. enforcing the terms and conditions of the Settlement Agreement and resolving any disputes, claims or causes of action that, in whole or in part, are related to or arise out of the Settlement Agreement, this Final Order and Judgment, including determining whether or not a person or entity is or is not a Class member and determining whether claims or causes of action allegedly related to this case or are not barred by this Final Order and Judgment. b. entering such additional orders as may be necessary or appropriate to protect or effectuate this Final Order and Judgment, or to ensure the fair and orderly administration of the Settlement; and c. entering any other necessary or appropriate order to protect and effectuate the Court’s retention of continuing jurisdiction; provided however that nothing in this paragraph is intended to restrict the ability of the parties to exercise their rights under the Settlement Agreement that are not in conflict with this Final Order and Judgment.

19. Dismissal of Action. The [*55] Class Action and all claims and cross claims asserted in this litigation are dismissed on the merits with prejudice, without fees or costs to any party except as otherwise provided in the Settlement Agreement and/or this Final Order and Judgment. SO ORDERED this 15 day of December, 2009. /s/ Catherine C. Eagles Catherine C. Eagles