N.C.App: No sovereign immunity for 3PB contract claims

The North Carolina Court of Appeals held that the state had waived its sovereign immunity for contract claims by third-party beneficiaries.

Though not squarely addressing the issue, the court also suggested that state employees were likely able to sue as third-party beneficiaries of the state’s contract for employee long-term care (LTC) insurance. Carl v. State, --- S.E.2d ---, 2008 WL 4005814 (N.C. App. Sep. 2, 2008) (No. 07-1288).

      

            The plaintiffs are a group of state employees who received LTC insurance under a contract between North Carolina and the insurer, MedAmerica. Plaintiffs sued both the state and the insurer.  They claimed they had a right under the contract to “level” premiums – i.e., not increased unless justified by the claims experience for the group – which was breached when the state switched them to new insurance carriers with recalculated premiums.

            The state asserted sovereign immunity, citing prior cases in which sovereign immunity barred claims by non-parties. The court distinguished these cases, each of which barred claims on behalf of subcontractors in public works projects, because they did not involve assertions of intended third-party beneficiary status. “Unlike the construction contracts in the above-cited cases which were entered into to satisfy needs of the State,” the court wrote, “the contract between [the state] and MedAmerica in this case was made to confer LTC Benefits directly upon state employees as consideration for their employment.” The court noted, however, that it was not (yet) deciding whether the plaintiffs actually were intended beneficiaries, only that if they were, sovereign immunity would not apply.

            Under state law, the state generally waived sovereign immunity for breach of contracts it entered. Treating the matter as one of first impression, the court held that this waiver extends to intended third-party beneficiaries. This is the same conclusion reached by South Dakota’s high court in Sisney v. Reich, -- N.W.2d ---, 2008 WL 2842057 (S.D. 2008) (summary here).

           

            By contrast, the court held that sovereign immunity did apply to cross-claims for indemnity by MedAmerica, because that claim was based on implied, rather than express, contract rights. While the state waives immunity for its express contract obligations, the court said, that waiver does not extend to obligations that are implied-in-fact. If MedAmerica had negotiated for an express indemnity provision, its claim would not be barred by immunity.

For more on third-party contract claims, see Rochelle Bobroff  & Harper Jean Tobin, Third-Party Beneficiary Claims: Recent Cases Against Private Parties and Local Agencies, Clearinghouse Review July/August 2008.