Could the NCDOT Employee Insurance Committee execute a contract with American Franklin Life Insurance Company to offer variable life insurance to NCDOT employees, given that Statewide Benefits, Inc. claimed an exclusive marketing right for 'universal' life insurance products?
Plain-English summary
Anthony Blalock, chairman of the NCDOT Employee Insurance Committee, asked the Attorney General about legal issues arising from the proposed contract between the Committee and American Franklin Life Insurance Company. The contract would offer variable life insurance to NCDOT employees. The wrinkle was that Statewide Benefits, Inc. (the incumbent universal life insurance provider) claimed a contractual exclusive right to offer "universal" life products to NCDOT employees under their June 22, 1992 contract.
The procurement history was tangled. A first request for proposals had been issued for "variable universal life insurance" and was withdrawn in February 1994 after Statewide Benefits objected. A February 7, 1994 letter from Senior Deputy AG Eugene A. Smith and Chief Counsel John R. McArthur recommended rejecting the proposals and issuing a new solicitation. A second request for proposals went out on March 10, 1994 for variable life insurance coverage. American Franklin's proposal was the selected response.
Chief Deputy Attorney General Andrew A. Vanore, Jr. and Special Deputy Attorney General Grayson G. Kelley concluded the Committee could proceed with the American Franklin contract. The key facts came from the NC Department of Insurance:
- Ted A. Hamby (Life & Health Section Supervisor, DOI) stated in a May 24, 1994 letter that the American Franklin product had been DOI-approved and was a "flexible premium variable life insurance policy product."
- Hamby's follow-up letter on June 14, 1994 confirmed that the American Franklin product was not a universal life product as DOI viewed it.
- Rodney Finger (Assistant Deputy Commissioner, DOI) had previously advised the AG that "variable" life insurance and "universal" life insurance are two distinct products.
Given the DOI's clear position that variable and universal are distinct products, and given that American Franklin offered variable (not universal), the Statewide Benefits exclusive-marketing clause (which by its terms covered universal life) did not block the American Franklin contract. The AG expressly did not opine on the validity of Statewide Benefits' exclusive-marketing claim under the 1992 contract; the answer turned on the product-classification distinction, not the underlying contract dispute.
Currency note
This opinion was issued in 1994. 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.
Insurance products and DOI classifications have evolved significantly since 1994. The categories of variable life, universal life, variable universal life, and indexed universal life have all expanded and been recombined under different regulatory treatments. Anyone with a current public-procurement question about life insurance products for state employees should consult current DOI classifications and current product filings, not this 1994 opinion's snapshot of the regulatory categories.
Common questions
Q: What is variable life insurance?
A: A permanent life insurance product where the cash value is invested in subaccounts (similar to mutual funds) that the policyholder chooses. The death benefit and cash value fluctuate with the investment performance. Because the insurer is taking on investment risk only indirectly, variable life is regulated as both an insurance product and a security.
Q: What is universal life insurance?
A: A permanent life insurance product with flexible premiums and adjustable death benefits, where the cash value grows at an interest rate the insurer credits (often tied to current market rates with a guaranteed floor). Universal life is regulated only as insurance, not as a security.
Q: Why does the distinction matter?
A: For Statewide Benefits' exclusive-marketing claim, the answer turned on product classification. The 1992 contract gave Statewide Benefits exclusive rights to market universal life products to NCDOT employees. If American Franklin's product was universal, the contract was blocked. If it was variable, the contract was fine. The DOI's classification ruled the contract in.
Q: Did the AG decide whether Statewide Benefits actually had exclusive rights?
A: No. The AG explicitly declined to "express an opinion as to the validity of this contention." The opinion sidestepped the contract-interpretation question by relying on the product-classification distinction. Even if Statewide Benefits did have exclusive universal-life rights, those rights did not reach variable products.
Q: What was the role of the DOI?
A: The Department of Insurance is the state agency responsible for classifying insurance products and approving them for sale in NC. The AG treated the DOI's classification as authoritative for purposes of this procurement question. The DOI had reviewed American Franklin's filing and determined it was a flexible-premium variable life product, not a universal life product.
Q: What is "flexible premium" variable life?
A: A variable life policy where the policyholder can vary the timing and amount of premium payments, similar to how a universal life policyholder can. The "flexible premium" feature is what blurs the line with universal life in casual conversation. The DOI nonetheless classified it as variable life for regulatory purposes.
Q: Why did NCDOT want both variable and universal life products available?
A: To give employees a broader choice. Different employees have different risk tolerances and financial planning needs. Some want the guaranteed minimum return of universal life; others want the upside potential of variable life. Offering both products through different carriers diversified the menu.
Background and statutory framework
State employee insurance programs in NC operate at the agency level (with NCDOT's Employee Insurance Committee handling NCDOT employees) as well as at the State Health Plan level. Each program selects vendors through requests for proposals. Contracts with existing vendors often contain protective clauses such as exclusive marketing rights for specific product categories.
The 1992 NCDOT contract with Statewide Benefits is not described in detail, but it apparently included an exclusive-marketing-for-universal-life clause. When a new procurement opened the door to a variable life product, Statewide Benefits objected on the ground that the new product was effectively universal. The initial RFP's use of "variable universal life insurance" terminology gave Statewide Benefits some ground to stand on; that is why the initial RFP was withdrawn and a new RFP for "variable life insurance" was issued.
The legal answer turned on product classification, which is a DOI function. The AG's deference to DOI classification is a recurring NC pattern: the AG treats specialized agency classifications as authoritative on questions that fall within the agency's expertise. The DOI had the classification authority, the DOI made the call, and the AG used the call to answer NCDOT's procurement question.
Citations
No statutory or case citations appear in this advisory opinion. The analysis rests on Department of Insurance product classifications and the language of the 1992 Statewide Benefits exclusive-marketing contract.
Source
Original opinion text
July 5, 1994
Mr. Anthony Blalock, Chairman NCDOT Employee Insurance Committee Transportation Building Raleigh, North Carolina
Re: Advisory Opinion; Proposal of American Franklin Life Insurance Company
Dear Mr. Blalock:
By memorandum dated May 25, 1994 you have requested an opinion regarding legal issues which may arise as a result of the execution of a contract between the NCDOT Employee Insurance Committee and American Franklin Life Insurance Company under which "variable life insurance" will be made available to NCDOT employees. In conjunction with your request you have provided the proposal submitted by American Franklin Life Insurance Company and a letter dated May 24, 1994, from Ted A. Hamby, Life & Health Section Supervisor with the North Carolina Department of Insurance.
The American Franklin proposal was submitted and selected in response to a request for proposals dated March 10, 1994 for variable life insurance coverage. A previous request for proposals was withdrawn in February, 1994 as a result of questions raised by Statewide Benefits, Inc., which currently provides "universal" life insurance to NCDOT employees. Statewide Benefits Inc. alleged that the product requested, "variable universal life insurance," violated their contract dated June 22, 1992, which purportedly reserved to them the exclusive right to provide "universal" life insurance.
By letter dated February 7, 1994 to Mr. J. Bradley Wilson, General Counsel for the Governor, from Eugene A. Smith, Senior Deputy Attorney General, and John R. McArthur, Chief Counsel to the Attorney General, we advised that the product requested through the solicitation could have been misconstrued. We therefore recommended that the proposals be rejected and a new solicitation initiated. We further recommended that the Department of Insurance be consulted in connection with any future solicitation.
In connection with your review of the current proposals you have solicited the opinion of the Department of Insurance as to the type of product proposed by American Franklin. Mr. Hamby states in his letter of May 24, 1994, that the product offered by American Franklin has been approved for use in North Carolina and is a "flexible premium variable life insurance policy product." In a subsequent letter to this office dated June 14, 1994, Mr. Hamby has advised that the product offered is not a universal life product, as viewed by the Department of Insurance. We have previously been advised by Mr. Rodney Finger, Assistant Deputy Commissioner for the Department of Insurance, that "variable" life insurance and "universal" life insurance are two distinct products.
Statewide Benefits, Inc. contends that the previously referenced contract dated June 22, 1992 reserves to them the exclusive right to market "universal" life insurance products. Without expressing an opinion as to the validity of this contention, the correspondence from the Department of Insurance is clear that "universal" and "variable" life insurance are distinct products, and that American Franklin has offered "variable" life insurance. Based on this determination, we find no legal impediment should your committee decide to proceed to accept the proposal submitted by American Franklin.
Andrew A. Vanore, Jr.
Chief Deputy Attorney General
Grayson G. Kelley
Special Deputy Attorney General