**TIER I**

 

 

 

 

**EXECUTIVE SEVERANCE AGREEMENT**

**Cobalt Corporation**

 

**TABLEOF CONTENTS**

 

| ARTICLE 1  | ESTABLISHMENT, TERM,  AND PURPOSE         |
|------------|-------------------------------------------|
|       |                                      |
| ARTICLE 2  | DEFINITIONS                               |
|       |                                      |
| ARTICLE 3  | LOSS OF  ELIGIBILITY UNDER THIS AGREEMENT |
|       |                                      |
| ARTICLE 4  | SEVERANCE  BENEFITS                       |
|       |                                      |
| ARTICLE 5  | FORM AND TIMING  OF SEVERANCE BENEFITS    |
|       |                                      |
| ARTICLE 6  | EXCISE TAX EQUALIZATION  PAYMENT          |
|       |                                      |
| ARTICLE 7  | THE COMPANY’S PAYMENT  OBLIGATION    |
|       |                                      |
| ARTICLE 8  | LEGAL REMEDIES                            |
|       |                                      |
| ARTICLE  9 | OUTPLACEMENT  ASSISTANCE                  |
|       |                                      |
| ARTICLE 10 | SUCCESSORS AND ASSIGNMENT                 |
|       |                                      |
| ARTICLE 11 | MISCELLANEOUS                             |

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**Cobalt CorporationExecutive Severance Agreement**

             THISAGREEMENT is made and entered into as of the 1st day of June, 2001, by andbetween Cobalt Corporation (hereinafter referred to as the “Company”) andThomas R. Hefty (hereinafter referred to as the “Executive”).

             WHEREAS,the Executive is a key executive of the Company;

             WHEREAS,should the possibility of a Change in Control of the Company (as defined inSection 2.6 hereof) arise, the Board believes it is imperative that the Companyand the Board should be able to rely upon the Executive to continue in his orher position, and that the Company should be able to receive and rely upon theExecutive’s advice, if requested, as to the best interests of the Companywithout concern that the Executive might be distracted by the personaluncertainties and risks created by the possibility of a Change in Control;

             WHEREAS,should the possibility of a Change in Control arise, in addition to his or herregular duties, the Executive may be called upon to assist in the assessment ofsuch possible Change in Control, advise management and the Board as to whethersuch Change in Control would be in the best interests of the Company, and totake such other actions as the Board might determine to be appropriate;

             WHEREAS,the Executive previously entered into an executive severance agreement (the“Prior Agreement”) with Blue Cross & Blue Shield United of Wisconsin(“BCBSUW”) which is substantially similar to this Agreement;

             WHEREAS,through a reorganization, BCBSUW has become a subsidiary of the Company;

             WHEREAS,the Prior Agreement would have covered a Change in Control of the Company andimposed the financial obligations of the Prior Agreement on BCBSUW which is nowa subsidiary of the Company;

             WHEREAS,the Board of Directors of the Company believes that the Executive SeveranceAgreement and the obligations thereunder should be between the Company and theExecutive now that the Company has become BCBSUW’s parent; and

             WHEREAS,the Board of Directors of the Company desires to substitute this Agreement forthe Prior Agreement.

             NOW,THEREFORE, to assure the Company that it will have the continued dedication ofthe Executive and the availability of his or her advice and counselnotwithstanding the possibility, threat, or occurrence of a Change in Controlof the Company, and to induce the Executive to remain in the employ of theCompany, and for other good and valuable consideration, the Company and theExecutive agree as follows:

**Article 1   **ESTABLISHMENT, TERM, AND PURPOSE

             ThisAgreement will commence on the Effective Date and, subject to Article 3, shallcontinue in effect for three (3) full years. However, at the end of such three (3) year period and, if extended, atthe end of each additional year thereafter, the term of this Agreement shall beextended automatically for one (1) additional year, unless the Committeedelivers written notice six (6) months prior to the end of such term, orextended term, to the Executive, that the Agreement will not be extended.  In the latter case, the Agreement willterminate at the end of the term, or extended term, then in progress, or asprovided in Article 3.

             However,in the event a Change in Control occurs during the original or any extendedterm, this Agreement will remain in effect for the longer of:  (i) twenty-four (24) months beyond the monthin which such Change in Control occurred; or (ii) until all obligations of theCompany hereunder have been fulfilled, and until all benefits requiredhereunder have been paid to the Executive.

**Article 2   **DEFINITIONS

             Wheneverused in this Agreement, the following terms shall have the meanings set forthbelow and, when the meaning is intended, the initial letter of the word iscapitalized.

**             2.1 **“Base Salary” means the salary of record paid to anExecutive by the Company, or by Blue Cross & Blue Shield United ofWisconsin or any other subsidiary of the Company as annual salary, excludingamounts received under incentive or other bonus plans, whether or not deferred**.**

**             2.2 **“Beneficial Owner” shall have the meaning ascribedto such term in Rule 13d-3 of the General Rules and Regulations under theExchange Act, but excluding those whose status arises from the holding ofproxies and including option holders on a fully diluted basis.

**             2.3 **“Beneficiary” means the persons or entitiesdesignated or deemed designated by the Executive pursuant to Section 11.2herein.

**             2.4**  “Board”means the Board of Directors of the Company.

**             2.5 **“Cause” means: (a) the Executive’s willful and continued failure to substantiallyperform his or her duties with the Company (other than any such failureresulting from Disability or occurring after issuance by the Executive of aNotice of Termination for Good Reason), after a written demand for substantialperformance is delivered to the Executive that specifically identifies themanner in which the Company believes that the Executive has willfully failed tosubstantially perform his or her duties, and after the Executive has failed toresume substantial performance of his or her duties on a continuous basiswithin thirty (30) calendar days of receiving such demand; (b) the Executivewillfully engaging in conduct (other than conduct covered under (a) above)which is demonstrably and materially injurious to the Company, monetarily orotherwise; or (c) the Executive having been convicted of a felony (as evidencedby binding and final judgment, order or decree of a court of competentjurisdiction, in effect after exhaustion of all rights of appeal) whichsubstantially impairs the Executive’s ability to perform his or her duties orresponsibilities.  For purposes of thisSection 2.5, the Executive’s actions or failures to act will be deemed“willful” only if done or omitted in bad faith and without reasonable beliefthat the action or omission was in the best interests of the Company.

**             2.6**  “Change inControl” shall mean:

             (i)          Anyindividual, entity or group (within the meaning of Section 13(d)(3) of theExchange Act) (a “Person”), other than the Wisconsin United for HealthFoundation, Inc. (the “Foundation”) becoming the beneficial owner(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% ormore of the either (x) the then outstanding shares of common stock of theCompany (the “Outstanding CompanyCommon Stock”) or (y) thecombined voting power of the then outstanding voting securities of the Companyentitled to vote generally in an election of directors (the “OutstandingCompany Voting Securities”); provided, however, that for purposes of thisSection 2.6, the following acquisitions shall not constitute a Change inControl: (A) any acquisition directly from the Company, (B) any acquisition bythe Company, (C) any acquisition by any employee benefit plan (or relatedtrust) sponsored by or maintained by the Company or any corporation controlledby the Company, (D) any acquisition by any corporation controlled by theCompany, or (E) any acquisition by any corporation pursuant to a transactionthat complies with clauses (A), (B) and (C) of Section 2.6 (iii); or (F) anyacquisition where the Person owns, after the acquisition, less of theOutstanding Company Voting Securities or Outstanding Company Common Stock thanthe Foundation then owns after such acquisition.

             (ii)         Individuals who, as of the date of this Agreement,constitute the Board (the “Incumbent Board”) cease for any reason to constituteat least a majority of the Board; provided, however, that any individualbecoming a director subsequent to the date hereof whose election, or nominationfor election by the Company’s shareholders, was approved by a vote of at leasta majority of the directors then comprising the Incumbent Board shall beconsidered as though such individual were a member of the Incumbent Board, butexcluding, for this purpose, any such individual whose initial assumption ofoffice occurs as a result of an actual or threatened election contest withrespect to the election or removal of directors or other actual or threatenedsolicitation of proxies or consents by or on behalf of a Person other than theBoard; or

             (iii)        Consummation of a reorganization, merger or consolidation orsale or other disposition of all or substantially all of the assets of theCompany (a “Business Combination”), in each case, unless, following suchBusiness Combination: (A) all or substantially all of the individuals andentities who were the beneficial owners, respectively, of the OutstandingCompany Common Stock and Outstanding Company Voting Securities immediatelyprior to such Business Combination beneficially own, directly or indirectly,more than 50% of, respectively, the then Outstanding shares of common stock andthe combined voting power of the then Outstanding voting Company Securitiesentitled to vote generally in the election of directors, as the case may be, ofthe corporation resulting from such Business Combination (including, withoutlimitation, a corporation that as a result of such transaction owns the Companyor all or substantially all of the Company’s assets either directly or throughone or more subsidiaries) in substantially the same proportions as theirownership, immediately prior to such Business Combination of the OutstandingCompany Common Stock and Outstanding Company Voting Securities, as the case maybe, (B) no Person (excluding any corporation resulting from such BusinessCombination or any employee benefit plan (or related trust) of the Company orsuch corporation resulting from such Business Combination) beneficially owns,directly or indirectly, 20% or more of, respectively, the then outstandingshares of common stock of the corporation resulting from such BusinessCombination or the combined voting power of the then outstanding votingsecurities of such corporation except to the extent that such ownership existedprior to the Business Combination and (C) at least a majority of the members ofthe board of directors of the corporation resulting from such BusinessCombination were members of the Incumbent Board at the time of the execution ofthe initial agreement, or of the action of the Board providing for suchBusiness Combination; or

             (iv)       Approval by the shareholders of theCompany of a complete liquidation or dissolution of the Company.

**             2.7**  “Code”means the United States Internal Revenue Code of 1986, as amended, and anysuccessors thereto.

**             2.8**  “Committee”means the Management Review Committee of the Board or any other committeeappointed by the Board to perform the functions of the Management ReviewCommittee or any successor committee which performs the functions of theManagement Review Committee or, in the absence of one, by the Board.

**             2.9 **“Company”means Cobalt Corporation, a Wisconsin corporation, or any successor thereto asprovided in Article 10 herein.

**             2.10**  “Disability” means a complete and permanentdisability as determined by the Committee in accordance with the Company Long-Term Disability Plan, asin effect on the Effective Date.

**             2.11**  “Effective Date” means the date of thisAgreement set forth above.

**             2.12**  “Effective Date of Termination” means thedate on which a Qualifying Termination occurs.

**             2.13**  “Exchange Act” means the United StatesSecurities Exchange Act of 1934, as amended.

**             2.14**  “Good Reason” shall mean, without theExecutive’s express written consent, the occurrence of any one or more of the following:

|   | (a)    | The  assignment of the Executive to duties materially inconsistent with the  Executive’s authorities, duties, responsibilities, and status (including  offices and reporting requirements) as an employee of the Company, or a  reduction or alteration in the nature or status of the Executive’s  authorities, duties, or responsibilities from the greater of those in effect  (i) on the Effective Date; (ii) during the fiscal year immediately preceding  the year of the Change in Control; or (iii) immediately preceding the Change  in Control; |
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|   | (b)    | Any  breach of this Agreement by the Company, other than an isolated,  insubstantial or inadvertent failure which is not taken in bad faith and  which the Company or any successor remedies promptly after notice from the  Executive;                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (c)    | The  Executive’s principal office is moved to a location that is more than fifty  (50) miles farther from the Executive’s home than the principal office  location immediately prior to the Change in Control;                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (d)    | A  reduction by the Company in the Executive’s Base Salary as in effect on the  Effective Date or as the same shall be increased from time to time;                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (e)    | A  material reduction in the Executive’s level of participation in any of the  Company’s short- and/or long-term incentive compensation plans, or employee  benefit or retirement plans, policies, practices, or arrangements in which  the Executive participates from the greater of the levels in place on:  (i) the Effective Date; (ii) the fiscal  year immediately preceding the Change in Control; or (iii) immediately preceding  the Change in Control;                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (f)    | The  failure of the Company to obtain a satisfactory agreement from any successor  to the Company to assume and agree to perform this Agreement, as contemplated  in Article 10 herein; or                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (g)    | Any  termination of Executive’s employment by the Company that is not effected  pursuant to a Notice of Termination.                                                                                                                                                                                                                                                                                                                                                                                                                                           |

             Theexistence of Good Reason shall not be affected by the Executive’s temporaryincapacity due to physical or mental illness not constituting aDisability.  The Executive’s continuedemployment shall not constitute a waiver of the Executive’s rights with respectto any circumstance constituting Good Reason.

**             2.15** “Notice of Termination” means a writtennotice which shall indicate the specific provision in this Agreement governingthe Executive’s termination of employment and shall set forth in reasonabledetail the facts and circumstances claimed to provide a basis for terminationof the Executive’s employment under the provision so indicated.

**             2.16** “Person” shall have the meaning ascribed tosuch term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and14(d) thereof, including a “group” as provided in Section 13(d).

**             2.17** “Profit Sharing Plan” means the CompanyProfit Sharing Plan.

**             2.18** “Qualifying Termination” means termination ofthe Executive’s employment under one of the circumstances described in Section4.2 below.

**             2.19** “Retirement” shall mean termination ofemployment after the Executive has attained Age 55 and completed 10 “Years of Service” (as such term is definedin the Company’s tax-qualified defined benefit pension plan.)  “Retirement” shall be deemed to occur onlyif it is pursuant to a mandatory retirement provision in such plan or if theExecutive and the Company agree in writing that “Retirement” has occurred forpurposes of this Agreement.  (Retirementpursuant to a mandatory retirement provision added on or after a date sixmonths prior to a Change in Control will not be treated as mandatory retirementfor purposes of this Agreement.)

             **2.20**  “SeveranceBenefits” means the payment of severance compensation as provided in Section4.3 herein.

**Article 3**    LOSS OF ELIGIBILITY UNDER THISAGREEMENT

             Inthe event Executive’s job classification is reduced, the Committee, in its solediscretion, may cancel this Agreement by written notice delivered to theExecutive.  A cancellation occurringlater than six (6) months prior to a Change in Control shall be null and void.

**Article 4**    SEVERANCE BENEFITS

**             4.1        Rightto Severance Benefits. **The Executive shall be entitled to receive from theCompany Severance Benefits, as described in Section 4.3 herein, if theExecutive incurs a Qualifying Termination during the six (6) month periodimmediately prior to a Change in Control or within twenty-four (24) calendarmonths following a Change in Control.

             The Executive shall not be entitledto receive Severance Benefits if he orshe is terminated for Cause, or if his or her employment with the Company endsdue to death, Disability, or Retirement or due to termination of employment bythe Executive without Good Reason.

**             4.2  Qualifying Termination of Employment.** Upon theoccurrence of any one or more of the following events the Company shall paySeverance Benefits to the Executive under this Agreement:

                           (a)  Terminationof the Executive’s employment by the Company for reasons other than Cause.

                           (b)  Termination by the Executive for Good Reasonpursuant to a Notice of Termination delivered to the Company by the Executive.

**             4.3  Description of Severance Benefits. **In the event the Executive becomes entitled toreceive Severance Benefits as provided in Sections 4.1 and 4.2 herein, theCompany shall pay to the Executive and provide him or her with the following:

|   | (a)    | An amount equal to three  (3) times the highest rate of the Executive’s annualized Base Salary in  effect at any time up to and including the Effective Date of Termination.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
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|   | (b)    | An  amount equal to three (3) times the Executive’s target award under the annual  bonus plan and the Profit Sharing Plan established for the plan year in which  the Executive’s Effective Date of Termination occurs, or the prior plan year  if a target award has not been established for the plan year in which the  Executive’s Effective Date of Termination occurs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (c)    | A  continuation of the welfare benefits of health care, life and accidental  death and dismemberment, and disability insurance coverage (collectively,  “Supplemental Benefits”) for three (3) full years after the Effective Date of  Termination.  These benefits shall be  provided at the same cost to the Executive (if any), and at the same coverage  level, as in effect as of the Executive’s Effective Date of Termination.  However, in the event the premium cost  and/or level of coverage shall change for all management employees with  respect to Supplemental Benefits, the cost and/or coverage level, likewise,  shall change for the Executive in a corresponding manner.  COBRA-related benefits will begin as of  the end of the three year period (or upon earlier discontinuance described  below).                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | The  continuation of any or all of the Supplemental Benefits shall be discontinued  prior to the end of the three (3) year period in the event the Executive has  available substantially similar benefits at a comparable cost from a  subsequent employer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   | The  Executive must supply all information reasonably requested by the Company  pursuant to this subsection.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (d)    | An  amount equal to the Executive’s unpaid targeted annual bonus, established for  the plan year in which the Executive’s Effective Date of Termination occurs,  multiplied by a fraction, the numerator of which is the number of days  completed in the then-existing fiscal year through the Effective Date of  Termination, and the denominator of which is three hundred sixty-five (365).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (e)    | An  amount equal to the Executive’s unpaid allocation from the Profit Sharing  Plan, established for the plan year in which the Executive’s Effective Date  of Termination occurs, multiplied by a fraction, the numerator of which is  the number of days completed in the then-existing fiscal year through the  Effective Date of Termination, and the denominator of which is three hundred  sixty-five (365).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (f)    | The  Executive shall be eligible for benefits under the Company Retiree Medical  Plan (the “Retiree Medical Plan”) beginning at age 55 regardless of whether  the Executive: (i) is an employee of the Company on the date he attains age  55; or (ii) has completed 10 years of service with the Company.  Executive shall be subject to all of the  other terms and provisions of the Retiree Medical Plan (including the  provisions limiting the cost of the Retiree Medical Plan which the Company  will pay) except: (i) in the event that the Retiree Medical Plan is  terminated, the Company shall obtain substitute coverage providing similar  benefits for the Executive and shall make the same Company contributions  toward the cost of such substitute coverage; (ii) in the event the Executive  has available, from a subsequent employer, similar medical coverage at a  similar employee cost, coverage under the Retiree Medical Plan shall be  suspended until such similar coverage (other than COBRA continuation of such  coverage) terminates; and (iii) the Executive may elect to terminate Retiree  Medical Plan participation, or reenter the Retiree Medical Plan, at any time. |

             Incentiveawards granted under the Company Equity Incentive Plan and other incentivearrangements adopted by the Company shall be governed by the terms of theapplicable plan.

             Theaggregate benefits accrued by the Executive as of the Effective Date ofTermination under the Company Pension Plan, the UGS Pension Plan, the Company401(k) Plan, and other qualified savings and retirement plans sponsored by theCompany shall be governed by the terms of the applicable plan.  For purposes of the Company SupplementalExecutive Retirement Plan, such benefits shall be calculated under theassumption that the minimum service requirement under Section 4.1 of theCompany Supplemental Executive Retirement Plan (vesting requirement) shall bedeemed to have been satisfied as of the date of a Qualifying Termination andthe Executive’s employment continued following the Effective Date ofTermination for three (3) full years (i.e., three (3) additional years ofservice credits shall be added); provided, however, that for purposes ofdetermining “final average pay” under such program, the Executive’s actual payhistory as of the Effective Date of Termination shall be used.

             Compensationwhich has been deferred under the Company Deferred Compensation Plan or otherplans sponsored by the Company, as applicable, together with all interest thathas been credited with respect to any such deferred compensation balances,shall be governed by the terms of the applicable plan.

**             4.4        Terminationfor Disability. **In the event the Executive’s employment isterminated due to Disability, the Executive shall not be entitled to theSeverance Benefits described in Section 4.3. The terms and conditions of the Executive’s employment rights under thatcircumstance shall be determined without regard to this Agreement.

**             4.5        Terminationfor Retirement or Death.**  If the Executive’s employment isterminated by reason of his or her Retirement or death, the Executive shall notbe entitled to the Severance Benefits described in Section 4.3.  The terms and conditions of the Executive’semployment rights under those circumstances are to be determined without regardto this Agreement.

**             4.6        Terminationfor Cause or by the Executive Other Than for Good Reason.**  If theExecutive’s employment is terminated either: (a) by the Company for Cause; or (b) by the Executive other than forGood Reason, the Company shall pay the Executive the amounts specified inSection 4.8 and the Company shall have no further obligations to the Executiveunder this Agreement.

             **4.7        Noticeof Termination.**  Anytermination of employment by the Company or by the Executive for Good Reasonshall be communicated by a Notice of Termination.  If the Executive is providing the notice, it should be deliveredto a member of the Committee.  If theCompany is providing notice, it should be delivered to the Executive.

             **4.8        Payment of Accrued Compensation andBenefits.**  In all events,Executive shall, upon termination of employment with the Company, be paid anamount equal to Executive’s unpaid Base Salary, accrued vacation pay and anyother accrued but unpaid compensation in cash or cash equivalents within ten(10) days of the termination except where the terms of the compensationarrangement or plan govern instead of this Agreement and specifically providefor later payment.

             **4.9        Coordinationwith Other Agreements.**  TheSeverance Benefits described in Section 4.3 shall be reduced by any severancebenefits paid pursuant to either: (i) other agreements between the Company andthe Executive or (ii) any plan adopted by the Company, unless such planor agreement expressly provides that the benefits under such plan or agreementare in addition to the benefits payable under this Agreement.  The Severance Benefits described in Section4.3 shall not be reduced by payments pursuant to the Supplemental RetirementAgreement dated ___________, 2001 between the Executive and the Company.

**Article 5   **FORM AND TIMING OF SEVERANCE BENEFITS

**             5.1        Form and Timing ofSeverance Benefits.**  The Severance Benefits described in Sections4.3(a), 4.3(b), 4.3(d), and 4.3(e) herein shall be paid in cash or cashequivalents to the Executive in a single lump sum as soon as practicablefollowing the Effective Date of Termination, (or, if later, the date of theChange in Control) but in no event beyond ten (10) days from such date.  The Supplemental Benefits described inSection 4.3(c) shall be paid at the times due under each applicable plan.

**             5.2        Withholding of Taxes.**  The Company shall be entitled to withholdfrom any amounts payable under this Agreement the minimum taxes legallyrequired to be withheld (including, without limitation, any United StatesFederal taxes and any other state, city, or local taxes).

**Article 6**    EXCISETAX EQUALIZATION PAYMENT

             **6.1        Excise Tax Equalization Payment.**  Notwithstanding anything contained in thisAgreement or any other agreement between Executive and the Company to thecontrary, or termination of this Agreement following a Change in Control, inthe event that the Executive becomes entitled to Severance Benefits or anyother payment or benefit under this Agreement, or under any other agreementwith or plan or compensation arrangement with the Company, its subsidiaries oraffiliates (in the aggregate, the “Total Payments”), if all or any part of theTotal Payments will be subject to the tax (the “Excise Tax”) imposed by Section4999 of the Code (or any similar tax that may hereafter be imposed), theCompany shall pay to the Executive in cash an additional amount (the “Gross-UpPayment”) such that the net amount retained by the Executive after deduction ofany Excise Tax upon the Total Payments and any federal, state, and local incomeor employment tax, penalties, interest, and Excise Tax upon the Gross-UpPayment provided for by this Section 6.1 (including FICA and FUTA), shall beequal to the Total Payments.  Suchpayment shall be made by the Company to the Executive as soon as practicalfollowing the Effective Date of Termination, but in no event beyond thirty (30)days from such date.

**             6.2        Tax Computation.**  For purposes of determining whether any ofthe Total Payments will be subject to the Excise Tax and the amounts of suchExcise Tax:

|   | (a)    | The  Severance Benefits and any other payments or benefits received or to be  received by the Executive in connection with a Change in Control of the  Company or the Executive’s termination of employment (whether pursuant to the  terms of this Agreement or any other plan, arrangement, or agreement with the  Company and subsidiaries or affiliates, or with any Person whose actions  result in a Change in Control of the Company or any Person affiliated with  the Company or such Persons) shall be treated as “parachute payments” within  the meaning of Section 280G(b)(2) of the Code, and all “excess parachute payments”  within the meaning of Section 280G(b)(l) shall be treated as subject to the  Excise Tax, unless in the opinion of a nationally recognized tax counsel  selected by the Company’s independent auditors and reasonably acceptable to  the Executive:  (i) the Severance  Benefits and such other payments or benefits (in whole or in part) do not  constitute parachute payments; (ii) such excess parachute payments (in whole  or in part) represent reasonable compensation for services actually rendered  within the meaning of Section 280G(b)(4) of the Code in excess of the base  amount within the meaning of Section 280G(b)(3) of the Code; or (iii) are  otherwise not subject to the Excise Tax; |
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|   | (b)    | The  amount of the Total Payments which shall be treated as subject to the Excise  Tax shall be equal to the lesser of:   (i) the total amount of the Total Payments; or (ii) the amount of  excess parachute payments within the meaning of Section 280G(b)( 1) (after  applying clause (a) above); and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
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|   | (c)    | The  value of any noncash benefits or any deferred payment or benefit shall be  determined by the Company’s independent auditors in accordance with the  principles of Sections 280G(d)(3) and (4) of the Code.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

             Forpurposes of determining the amount of the Gross-Up Payment, the Executive shallbe deemed to pay federal income taxes at the highest marginal rate of federalincome taxation in the calendar year in which the Gross-Up Payment is to bemade, and state and local income taxes at the highest marginal rate of taxationin the state and locality of the Executive’s residence on the Effective Date ofTermination, net of the maximum reduction in federal income taxes which couldbe obtained from deduction of such state and local taxes.

**             6.3        SubsequentRecalculation.**  In the event the InternalRevenue Service adjusts the computation of the Company under Section 6.2 hereinso that the Executive did not receive the greatest net benefit, the Companyshall reimburse the Executive for the full amount necessary to make theExecutive whole, plus a market rate of interest, as determined by the nationaltax counsel referred to above.

**             6.4        Costsof Calculations.**  The Company agrees to bear allcosts associated with, and to indemnify and hold harmless, the national taxcounsel of and from any and all claims, damages, and expenses resulting from orrelating to its determination pursuant to this Article 6, except for claims,damages, or expenses resulting from the gross negligence or willful misconductof such firm.

**Article 7**    THE COMPANY’S PAYMENT OBLIGATION

**             7.1        PaymentObligations Absolute.**  The Company’s obligation to makethe payments and the arrangements provided for herein shall be absolute andunconditional, and shall not be affected by any circumstances, including,without limitation, any offset, counterclaim, recoupment, defense, or otherright which the Company may have against the Executive or anyone else.  All amounts payable by the Company hereundershall be paid without notice or demand. Subject to the provision set forth in Section 8.1 and 8.2, each andevery payment made hereunder by the Company shall be final, and the Companyshall not seek to recover all or any part of such payment from the Executive orfrom whomsoever may be entitled thereto, for any reasons whatsoever.

             TheExecutive shall not be obligated to seek other employment in mitigation of theamounts payable or arrangements made under any provision of this Agreement, andthe obtaining of any such other employment shall in no event effect anyreduction of the Company’s obligations to make the payments and arrangementsrequired to be made under this Agreement, except to the extent provided inSection 4.3(c) herein.

**             7.2        ContractualRights to Benefits.**  This Agreement establishes andvests in each Executive a contractual right to the benefits to which he or sheis entitled hereunder.  However, nothingherein contained shall require or be deemed to require, or prohibit or bedeemed to prohibit, the Company to segregate, earmark, or otherwise set asideany funds or other assets, in trust or otherwise, to provide for any paymentsto be made or required hereunder.

**Article 8**    LEGAL REMEDIES

**             8.1  Payment of Legal Fees.**  To theextent permitted by law, the Company shall pay all legal fees, costs oflitigation, prejudgment interest, and other expenses incurred in good faith bythe Executive as a result of the Company’s refusal to provide the SeveranceBenefits, the Gross-Up Payment and/or any other benefits under this Agreementto which the Executive becomes entitled under this Agreement, or as a result ofthe Company’s contesting the validity, enforceability, or interpretation ofthis Agreement, or as a result of any conflict (including conflicts related tothe calculation of parachute payments) between the parties pertaining to thisAgreement; provided, however, that the Company shall be reimbursed by theExecutive for all such fees and expenses in the event the Executive fails toprevail with respect to any one (1) material issue of dispute in connectionwith such legal action.  The Executiveshall not be liable for the Company’s fees or costs related to any suchlitigation.

             **8.2  Arbitration.**  Executiveshall have the right and option to elect (in lieu of litigation) to have anydispute or controversy arising under or in connection with this Agreementsettled by arbitration, conducted before a panel of three (3) arbitratorssitting in a location selected by the Executive within fifty (50) miles fromthe location of his or her employment with the Company, in accordance with therules of the American Arbitration Association then in effect.

             Judgmentmay be entered on the award of the arbitrator in any court having properjurisdiction.  All expenses of sucharbitration, including the fees and expenses of the counsel for the Executive,shall be borne by the Company; provided, however, that the Company shall bereimbursed by the Executive for all such fees and expenses in the event theExecutive fails to prevail with respect to any one (1) material issue ofdispute in connection with such legal action. The Executive shall not be liable for the Company’s fees or costsrelated to any such arbitration.

**Article 9**    OUTPLACEMENT ASSISTANCE

             Followinga Qualifying Termination (as described in Section 4.2 herein), the Executiveshall be reimbursed by the Company for the costs of all outplacement servicesobtained by the Executive within the two (2) year period after the EffectiveDate of Termination; provided, however, that the total reimbursement shall belimited to an amount equal to fifteen percent (15%) of the Executive’s BaseSalary as of the Effective Date of Termination.

**Article 10**    SUCCESSORS AND ASSIGNMENT

**             10.1     Successorsto the Company.**  The Company will require anysuccessor (whether direct or indirect, by purchase, merger, consolidation, orotherwise) of all or substantially all of the business and/or assets of theCompany or of any division or subsidiary thereof to expressly assume and agreeto perform the Company’s obligations under this Agreement in the same mannerand to the same extent that the Company would be required to perform them if nosuch succession had taken place. Failure of the Company to obtain such assumption and agreement prior tothe effective date of any such succession shall be a breach of this Agreement andshall entitle Executives to compensation from the Company in the same amountand on the same terms as they would be entitled to hereunder if they hadterminated their employment with the Company voluntarily for Good Reason.  Except for the purposes of implementing theforegoing, the date on which any such succession becomes effective shall bedeemed the Effective Date of Termination.

**             10.2     Assignmentby the Executive.**  This Agreement shall inure tothe benefit of and be enforceable by the Executive’s personal or legalrepresentatives, executors, administrators, successors, heirs, distributees,devisees, and legatees.  If theExecutive dies (prior to receipt of all amounts due under Sections 4.3(a), (b),(d) or (e) and 4.8, all such amounts, unless otherwise provided herein, shallbe paid in accordance with the terms of this Agreement to the Executive’sBeneficiary.  If the Executive has notnamed a Beneficiary, then such amounts shall be paid to the Executive’s devisee,legatee, or other designee, or if there is no such designee, to the Executive’sestate.

**Article 11**    MISCELLANEOUS

**             11.1     EmploymentStatus.**  Except as may be provided underany other agreement between the Executive and the Company, the employment ofthe Executive by the Company is “at will,” and may be terminated by either theExecutive or the Company at any time, subject to applicable law.

**             11.2     Beneficiaries.**  TheExecutive may designate one or more persons or entities as the primary and/orcontingent Beneficiaries of any Severance Benefits owing to the Executive underthis Agreement.  Such designation mustbe in the form of a signed writing acceptable to the Committee.  The Executive may make or change suchdesignations at any time.

**             11.3     Severability.**  In theevent any provision of this Agreement shall be held illegal or invalid for anyreason, the illegality or invalidity shall not affect the remaining parts ofthe Agreement, and the Agreement shall be construed and enforced as if theillegal or invalid provision had not been included.  Further, the captions of this Agreement are not part of theprovisions hereof and shall have no force and effect.

**             11.4     Modification.**  Noprovision of this Agreement may be modified, waived, or discharged unless suchmodification, waiver, or discharge is agreed to in writing and signed by theExecutive and by the Company, or by the respective parties’ legalrepresentatives and successors.

**             11.5     EffectOn Prior Agreement**.  This Agreement shall completelysupercede the Prior Agreement between the Company and the Executive and thePrior Agreement shall have no further force or effect.  BCBSUW shall be a third party beneficiary ofthis Section 11.5.

**             11.6     ApplicableLaw.**  To the extent not preempted bythe laws of the United States, the laws of the state of Wisconsin shall be thecontrolling law in all matters relating to this Agreement.

             INWITNESS WHEREOF, the parties have executed this Agreement on this _____ day of___________________, 2001.

| Cobalt Corporation | Executive:      |
|--------------------|-----------------|
|               |            |  |
|               | Thomas R. Hefty |
| By:                |            |
|               |                 |   |
|               |            |   |
| Its:               |            |
|               |                 |   |
|               |            |   |
| Attest:            |            |
|               |                 |   |
|                    |                 |  |  |  |