Vega v. National Life Ins. Services, Inc.

• Decision Date: 30 June 1998
• Docket Number: No. 97-20645,97-20645
• Citation: 145 F.3d 673
• Parties: 22 Employee Benefits Cas. 1921 Vilma Lissette VEGA and Jose Vega, Plaintiffs-Appellants, v. NATIONAL LIFE INSURANCE SERVICES, INC., et al., Defendants, Pan-American Life Insurance Company, Defendant-Appellee. Fifth Circuit
• Court: U.S. Court of Appeals — Fifth Circuit

Page 673

145 F.3d 673

22 Employee Benefits Cas. 1921

Vilma Lissette VEGA and Jose Vega, Plaintiffs-Appellants, v. NATIONAL LIFE INSURANCE SERVICES, INC., et al., Defendants Pan-American Life Insurance Company, Defendant-Appellee.

No. 97-20645.

United States Court of Appeals,Fifth Circuit.

June 30, 1998.

Ivar Nelson Heggen, Houston, Texas for Plaintiffs-Appellants.

Reagan Mark Brown, David Jack Levy, Fulbright & Jaworski, Houston, TX, for Pan-American Life Ins. Co.

Appeal from the United States District Court for the Southern District of Texas.

Before POLITZ, Chief Judge, and REYNALDO G. GARZA and DENNIS, Circuit Judges.

POLITZ, Chief Judge:

Vilma Lissette Vega and her husband Jose Vega filed the instant action against Pan-American Life Insurance Company after the insurer denied coverage for surgical costs for Mrs. Vega. Finding and concluding that Pan-American acted under a conflict of interest and after an inadequate investigation of material facts, we reverse the grant of summary judgment in favor of the insurer.

BACKGROUND

Jose Vega owns and operates Corona Paint & Body, Inc. d/b/a Corona Paint and Body Shop, structured as a Subchapter S corporation under the Internal Revenue Code. In March of 1995 he applied for an employer-sponsored group medical plan with Pan-American, covering himself as an employee and his wife as a dependent.

In August of 1995 Mrs. Vega underwent surgery at Twelve Oaks Hospital in Houston. Pan-American, through its subsidiary National Insurance Services, Inc., ¹ refused coverage, claiming that the insurance application made false statements about Mrs. Vega's pre-existing medical condition, and it rescinded all coverage for her. The Vegas filed suit in state court alleging state law causes of action. Pan-American removed the action to federal court.

Each side sought summary judgment. The district court granted same to Pan-American after concluding that the Employee Retirement Income Security Act, popularly known as "ERISA," ² applied and that Pan-American had not abused its discretion in denying the medical claim.

ANALYSIS

Summary judgment is appropriate if the record discloses "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." ³ In determining whether a summary judgment motion properly was granted, we review the record, viewing all fact questions in a light most favorable to the nonmovant. ⁴ In our analysis we apply the same standard as that used by the trial court. ⁵

A. ERISA coverage

The Vegas contend that the trial court erred in concluding that ERISA covers this dispute. Unless ERISA applies there is no preemption of the state law claims and this matter was not properly removed to federal court. ⁶ The preemption provision, § 514(a), ⁷ is "construed extremely broadly." ⁸ State law claims are preempted if they "relate to" an ERISA plan. ⁹ A state cause of action relates to an ERISA plan whenever it has "a connection with or reference to such a plan." ¹⁰ A state law claim addressing the right to receive benefits under the terms of an ERISA plan necessarily relates to an ERISA plan. ¹¹ The claims at bar are therefore subject to ERISA preemption if there exists a valid ERISA plan.

ERISA covers employee welfare benefits plans, defined to mean "any plan, fund or program ... established or maintained by an employer ... to the extent that such plan, fund or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise ... medical, surgical, or hospital care or benefits...." ¹²

The district court correctly ruled as a matter of law that an ERISA plan existed and that the claims were therefore governed by the federal statute. ¹³ "By its express terms, ERISA encompasses welfare plans provided through the purchase of insurance. Moreover, it is a common practice for employers to provide health care benefits to their employees through the purchase of a group health policy from a commercial insurance company." ¹⁴ An ERISA plan exists "if from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits." ¹⁵ Pan-American issued a group health insurance policy and a document titled "Summary Plan Description Supplement and ERISA rights." These, together with the employee enrollment cards and application and subscription agreement, set out the essential elements of the plan. In the application, Jose Vega acknowledges that "this plan constitutes an employee welfare benefit plan" under ERISA. Plan participants and beneficiaries are identified in the enrollment cards. The application states that the plan applies to all full-time employees of Corona. The shop is a three-person shop and the other employee, Fidel Beltran, was enrolled in the plan. The policy and plan summary indicate that premiums are to be paid by the employer or the employee as determined by the employer. A company check for the first month's premiums was included with the application and monthly premium billings were sent to Corona. The policy sets out the covered medical benefits and the method of filing a claim.

In Meredith v. Time Ins. Co., ¹⁶ we explained that an essential element of an ERISA employee welfare benefit plan is the "establishment or maintenance [of a plan] by an employer intending to benefit employees." ¹⁷ The Vegas point out that they are the sole owners of Corona Paint & Body Shop. This fact alone, however, does not negate the existence of an ERISA plan. In Meredith, we held that an insurance plan covering only a sole proprietor and her spouse was not an ERISA employee welfare benefit plan. ¹⁸ We relied therein on 29 C.F.R. § 2510.3-3 (1992). Under this regulation, an employee benefit plan does not include one in which no employees are participants, and for purposes of this regulation, "[a]n individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse." ¹⁹ As noted above, however, the instant plan involves at least one other employee.

The Vegas contend that Pan-American failed to establish compliance with various requirements of ERISA, including the requirement that the plan "be established and maintained pursuant to a written instrument." ²⁰ Even if the Vegas are correct, the dispute is governed by ERISA provided an employee welfare plan exists, and without regard to whether other requirements imposed by ERISA on the employer and others are met. For example, we have held that "[a] formal document designated as 'the Plan' is not required to establish that an ERISA plan exists; otherwise, employers could avoid federal regulation merely by failing to memorialize their employee benefit programs in a separate document so designated." ²¹

B. Whether Summary Judgment Was Appropriate Under the Abuse of Discretion Standard

Benefit determinations by ERISA plan administrators or fiduciaries are reviewed under a de novo standard, "unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan." ²² Where the administrator has discretionary authority, we review determinations of eligibility for plan benefits under the abuse of discretion standard. ²³ The record abundantly establishes that Pan-American was the administrator and fiduciary with respect to paying insurance claims. It had discretionary authority in deciding such claims, and accordingly the abuse of discretion standard applies. ²⁴

Under the abuse of discretion standard we will give due deference to an administrator's factual conclusions that reflect a reasonable and impartial judgment, ²⁵ looking to see whether the plan administrator "acted arbitrarily or capriciously." ²⁶ We have stated that "[a]n arbitrary decision is one made without a rational connection between the known facts and the decision or between the found facts and the evidence." ²⁷

Before reviewing the evidence, we note that this case presents the apparently not uncommon circumstance where the insurer, whose policy provides the ERISA plan benefits, is itself the administrator of the plan, and is authorized by the plan to decide coverage questions. When an insurer is vested with sole and complete discretion to decide whether it will pay a claim, it necessarily operates under a conflict of interest. The Supreme Court has made clear that "if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a 'facto[r] in determining whether there is an abuse of discretion.' " ²⁸ We repeatedly have stated that a conflict of interest does not alter the standard of review, but is a factor to be considered in deciding whether the plan administrator abused its discretion. ²⁹ We adhere to our precedents and take this opportunity to underscore that when presented with such a conflict of interest the court must carefully consider the administrator's actions. A close examination of those actions is mandated.

Pan-American denied coverage because it concluded that Jose Vega had misrepresented his wife's medical condition on his enrollment card. Under the policy, application and subscription agreement, and enrollment card, material misstatements and omissions gave Pan-American the right to rescind coverage. On the enrollment card Vega answered "no" to questions asking whether he and his dependents within the last two years had been "disabled, had surgery and/or testing considered, recommended or performed," and whether he and his dependents had ever "been advised to have any diagnostic test, hospitalization or surgery which was not completed."

The enrollment card...