Can the General Assembly pass a law that lets state employee insurance committees void existing payroll-deduction insurance contracts whenever they want, or would that violate the U.S. Constitution's contract clause?
Plain-English summary
State employee payroll units in North Carolina typically had limited "slots" for voluntary payroll-deduction insurance products: a slot for life insurance, a slot for supplemental health, and so on. Insurance companies competed for those slots through committee selection processes under N.C.G.S. § 58-31-60. Winning a slot gave the insurance company the right to market its product to that payroll unit's employees, with premiums deducted from their paychecks. Losing a slot meant the company was shut out of that payroll unit's employees, often a substantial population.
House DHR1162 proposed amendments to § 58-31-60 that included a provision saying "Any current agreement shall be null and void at the discretion of the Department Committee." The bill would have given employee insurance committees the power to wipe out existing contracts at will. Representative George W. Miller, Jr., co-chairman of the House Finance Committee, asked the AG whether that provision was constitutional.
Chief Counsel John R. McArthur answered with a constitutional analysis grounded in the contract clause.
Article I, Section 10 of the U.S. Constitution prohibits any state from passing a law impairing the obligation of contracts. The North Carolina courts recognize and enforce that prohibition (Hood, Comm'r of Banks v. Richardson Realty), including against state contracts (Oglesby v. Adams; Smith v. Board of Road Comm'rs). A statute that impairs vested contractual rights lawfully entered into with the state will normally be invalidated or, in appropriate cases, the state will be required to pay just compensation.
The proposed bill's "null and void at the discretion of the Department Committee" language was a textbook example of what the contract clause was meant to prevent. If existing payroll-deduction agreements had been properly entered into under § 58-31-60, the insurance companies that had won the slots had vested rights to provide the products and receive the deduction stream. The proposed language let committees void those vested rights based on nothing more than the committee's preference. That was impairment.
McArthur did not have access to the existing agreements and could not say definitively whether they had been lawfully entered. He left open the possibility that some current agreements might not have followed the proper procedure, and that voiding those non-compliant agreements would be permissible. Whether an agreement was lawfully entered is a fact-bound question that depends on the procedures actually followed at the time.
To meet the contract clause concern while preserving the General Assembly's intent to give committees some voiding authority, McArthur offered a drafting alternative: "Any current agreement shall be voidable at the discretion of the Committee upon a determination by the Committee that the agreement was not lawfully entered into as provided by this section." That language tied voidability to an actual procedural defect in the original contract, which is precisely the kind of voidability that the contract clause permits. Contracts entered through invalid procedure are voidable by their nature; the statute would just be explicit about the committee's role in making that determination.
The opinion did not address what would happen if a committee made a finding that an agreement was not lawfully entered when in fact it had been. Presumably the affected insurance company could challenge the finding in court and, if it prevailed, would have the contract restored.
Currency note
This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. N.C.G.S. § 58-31-60 has been amended since 1993, and the broader landscape of state employee benefits and payroll-deduction insurance has shifted with state health plan reforms and the federal Affordable Care Act. Anyone advising on a current insurance committee or payroll deduction matter should verify the present statute.
Background and statutory framework
The U.S. Constitution's contract clause has been one of the most heavily litigated provisions affecting state statutory drafting. The Supreme Court's modern interpretation, refined in cases like U.S. Trust Co. v. New Jersey (1977) and Energy Reserves Group v. Kansas Power & Light (1983), distinguishes between impairment of public and private contracts. For public contracts (where the state is a party), the courts apply heightened scrutiny because the state has an interest in the contracts it has signed. For private contracts (where the state is not a party but a state law affects the contract), the courts apply less rigorous scrutiny.
The proposed amendment was a public-contract impairment. The state, through its employee insurance committees, had signed the existing payroll-deduction agreements. The proposed statute would let the state unilaterally void those agreements. That falls squarely within the heightened-scrutiny zone.
The McArthur opinion did not perform a full impairment analysis (asking whether the impairment was substantial, whether it served a legitimate public purpose, whether it was reasonable and necessary). The opinion simply identified the constitutional concern and offered a drafting fix. The fix worked because tying voidability to a finding of original procedural defect addressed the constitutional issue at the root: a contract that was not lawfully entered was never a binding contract in the first place, so voiding it is not impairment.
The Oglesby v. Adams case McArthur cited is the leading NC authority for the proposition that the contract clause applies to contracts the state has signed. The earlier Smith v. Board of Road Comm'rs case from 1922 made the same point in the road contracting context. Both cases established that the state is a private contracting party for contract clause purposes, not a sovereign immune from its own promises.
The opinion's brevity reflects the fact that the question was a clear contract clause matter and the fix was straightforward. McArthur provided exactly what the legislator needed: identification of the constitutional risk and proposed language to mitigate it.
Common questions
Did the AG say the proposed bill was unconstitutional?
The AG said the at-will voiding language would "appear to violate" the contract clause if applied to lawfully entered existing contracts. The exact phrasing was cautious, not categorical, because the office had not been provided with the existing contracts to verify their lawful entry.
What's the difference between voiding contracts at the committee's discretion and voiding contracts that were not lawfully entered?
A lot, constitutionally. Voiding lawfully entered contracts at the state's discretion is contract impairment. Voiding contracts that were not lawfully entered is not impairment, because they were not binding contracts to start with. The same word ("voiding") describes very different acts depending on the trigger.
Could the committee just terminate contracts going forward without affecting past performance?
A no-fault prospective termination might survive contract clause analysis depending on the terms of the original contract. Many contracts include termination clauses; exercising a contractual termination right is not impairment. The proposed language was broader, however, and would have allowed termination even of contracts that did not include such clauses.
What if the committee made a bad-faith finding that a contract was not lawfully entered?
The insurance company would presumably have a remedy in court, including review of the committee's finding. The opinion did not specify the procedure, but standard administrative review would be available.
Did the bill become law?
The opinion did not say what happened to House DHR1162. The opinion was offered as advisory input on the bill's constitutionality during the drafting process.
Citations
- N.C. Gen. Stat. § 58-31-60 (employee insurance committees)
- U.S. Const. art. I, § 10 (contract clause)
- Hood, Comm'r of Banks v. Richardson Realty, Inc., 211 N.C. 582 (1937)
- Oglesby v. Adams, 268 N.C. 272 (1966)
- Smith v. Board of Road Comm'rs, 182 N.C. 149 (1922)
Source
Original opinion text
July 20, 1993
BY HAND
Honorable George W. Miller, Jr.
Co-Chairman House Finance Committee
House of Representatives
Raleigh, N.C.
Re: Advisory Opinion; House DHR1162, Employee Insurance Committees, G.S. §58-31-60
Dear Chairman Miller:
The bill referenced above (copy attached) proposes certain amendments to G.S. §58-31-60 concerning employee insurance committees. That section provides for the appointment of an employee insurance committee for State employee payroll units, the competitive selection of insurance products, and the award of a payroll deduction slot to an insurance company. Page two, lines 43 and 44 of the bill provides, in part, as follows: "Any current agreement shall be null and void at the discretion of the Department Committee." You have asked whether this provision is constitutional.
The United States Constitution expressly prohibits the states from passing laws impairing the obligation of contracts. U.S. Const. Art. I, Sec. 10. The North Carolina courts recognize this prohibition, Hood, Comm'r of Banks v. Richardson Realty, Inc., 211 N.C. 582, 191 S.E. 410 (1937), and have applied it to contracts of the State as well as contracts between individuals. Oglesby v. Adams, 268 N.C. 272, 150 S.E.2d 383 (1966); Smith v. Board of Road Comm'rs, 182 N.C. 149, 108 S.E. 443 (1922). The court will normally attempt to interpret a statute so as not to impair a contract and will give legislative enactments a presumption of constitutionality. See generally, 16A C.J.S. § 278. However, where a statute impairs vested contractual rights lawfully entered into with the State, a court will normally invalidate the statute or require just compensation. Oglesby v. Adams, supra.
Under G.S. §58-31-60, employee committees are state agencies authorized to select insurance products and award payroll deduction slots. Although we have not been provided with any existing agreements, assuming that current agreements have been properly entered into under this section, they would involve vested rights of private parties under which the private party provides insurance products and is entitled to a payroll deduction slot. The language at issue in the proposed bill authorizes employee committees to void existing agreements in their discretion. Assuming those contracts were lawfully entered into, the attempt to void the contracts would appear to violate Article I, Section 10 of the U.S. Constitution.
This office has not been provided with facts concerning whether the current payroll insurance agreements entered into by existing employee committees under G.S. §58-31-60 followed lawful procedure or otherwise provide vested, enforceable rights to those parties contracting with the employee committees. If the General Assembly wishes to insure that such contracts followed lawful procedure, inclusion of language to that effect in the bill would be appropriate. We suggest that the following language would accomplish this purpose:
"Any current agreement shall be voidable at the discretion of the Committee upon a determination by the Committee that the agreement was not lawfully entered into as provided by this section."
I trust this answers your inquiry. Should you have additional questions, please let me know.
John R. McArthur
Chief Counsel