188 F.3d 287 (5th Cir. 1999), 97-20645, Vega v Nat'l Life Ins. Serv.

Docket Nº:97-20645
Citation:188 F.3d 287
Case Date:September 01, 1999
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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188 F.3d 287 (5th Cir. 1999)

VILMA LISSETTE VEGA; JOSE VEGA, Plaintiffs-Appellants,




No. 97-20645


September 1, 1999

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Appeal from the United States District Court for the Southern District of Texas, Houston


E. GRADY JOLLY, Circuit Judge:

This case involves a denial of health benefits claimed by Jose Vega and his wife, Vilma Vega, under a health benefits plan they established for themselves and the employees of their business, the Corona Paint & Body Shop, Inc. ("Corona"). The Vegas sued the insurance companies responsible for insuring and maintaining the plan, Pan-American Life Insurance Co. ("Pan-American") and National Life Insurance Services, Inc. ("National Life")--a subsidiary of Pan-American. The district court granted summary judgment for the insurance companies, relying in part on its holding that it could not consider additional evidence submitted by the Vegas to the district court when that evidence was not available to the plan administrator at the time it reached its decision. On appeal, a panel reversed the district court, holding that the district court erred in not considering the evidence presented by the Vegas.

We heard this case en banc to address three issues. First, the Vegas argue that we do not have jurisdiction under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., because the Vegas, as the sole owners of Corona, were not employees as that term is defined by the statute and related Department of Labor regulations. This issue has divided the Circuits and we recognize the need to clarify the scope of ERISA in this context. We hold today that where a husband and wife are sole owners of a corporation that has created an employee benefits plan covered by ERISA, and the

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husband and wife are also enrolled under the plan as employees of the corporation, they are employees for ERISA purposes and so our courts have jurisdiction under ERISA to review a denial of their claims.

The second issue we address is the panel's approach to reviewing a decision of an administrator operating under a conflict of interest, which in this case is that the corporation deciding the claim will have to pay the claim. Although in the past we have repeatedly stated that the district court may not engage in additional fact finding, the panel here sought to carve out an exception for conflicted administrators. The panel held that, when the administrator has a conflict of interest in denying a claim, it must meet a duty to conduct a good faith, reasonable investigation. In determining whether the administrator has met this duty, the panel elected to consider evidence that it believed such an investigation would have uncovered. We hold today that no such specific and uniform duty exists. We further hold that evidence may not be admitted in the district court that is not in the administrative record when that evidence is offered to allow the district court to resolve a disputed issue of material fact regarding the claim--i.e., a fact the administrator relies on to resolve the merits of the claim.

Finally, we turn to the merit of the summary judgment ruling by the district court. Even though the district court correctly refused to consider the additional evidence proffered by the Vegas, the district court nonetheless erred in upholding the administrator's denial of the claim. After reviewing the administrative record, we find no rational basis is contained therein for denying the Vegas' claim and therefore conclude that National Life abused its discretion.


The Vegas are the sole owners of Corona, a corporation structured as a Subchapter S corporation under the Internal Revenue Code. On March 20, 1995, Mr. Vega, on behalf of Corona, applied for an employer-sponsored group medical plan with Pan-American. Pan-American issued the policy, which covered Mr. Vega as an employee and his wife as a dependent. Under the plan, Pan-American was the insurer and National Life, a subsidiary of Pan-American, acted as the claims administrator of the plan. The plan granted National Life discretion in deciding claims.

In filling out the form for his wife, Mr. Vega denied that she had received any advice, consultation, or test for any medical condition (other than a recovered bladder infection) during the previous six months. Less than two months after Pan-American approved coverage for Mrs. Vega, she saw Dr. Bueso, who recommended surgery for posterior repair of the vagina. Mrs. Vega underwent the surgery and processed her claim for coverage under the plan.

In reviewing the medical records related to the claim, National Life discovered a notation by Mrs. Vega's gynecologist, Dr. Galvan, dated October 5, 1994, that stated "posterior repair." A representative of National Life then called Dr. Galvan's office and asked about the notation. National Life kept phone logs of two phone calls related to the inquiry. In the first phone call, the representative spoke to an assistant of Dr. Galvan's, Ramone, who told the representative that she would ask Dr. Galvan and call back. The second log states:

S/W Ramone

Last 2 entries were from phone conversations

Last pc was when patient called Dr. Galvan back and Ms. Vega had some questions regarding a surgical procedure. Dr. Galvan answered her questions about the procedure and wrote note in pt chart because they talked about it.

Was she anticipating surgery? He (Dr. Galvan) said she had questions and he answered them. Doesn't recall what prompted conversation.

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On the basis of this information, National Life decided to deny Vega's claim.

National Life sent a letter to the Vegas explaining to them that it was denying the Vegas' claim. The letter stated:

During processing of your claims we learned that the information contained on your GEC regarding your health history was not accurate. Specifically, medical records received and reviewed from Dr. Pineda and Dr. Galvan indicate that your response to question number 3 was incorrect. Dr. Galvan's medical records indicate that on September 29, 1994 he consulted Ms. Vega for a check up and relaxation of tissue with breast tenderness. The records further state that on October 5, 1994, he recommended a posterior repair. Dr. Pineda's records indicate that on May 10, 1995 Ms. Vega obtained a consultation complaining of galactorrhea and a cytology was recommended. Had you advised us of Ms. Vega's medical history as you were obligated to do, coverage would have been denied at initial underwriting.1

The letter went on to state:

The URB [Underwriting Review Board] remains willing to review and consider any additional information you may have which you feel would impact on our decision to rescind coverage. If you wish to appeal this decision, please do so in writing and send it to the attention of the Underwriting Review Board at the company address listed below.

The Vegas did not submit a request for review of the decision2 but instead hired an attorney who sent a letter on their behalf indicating that if Pan-American did not pay the claim, the Vegas would sue. Pan-American sent a reply indicating that it was prepared to go to court.

Shortly thereafter, the Vegas filed suit in state court alleging state law causes of action. Pan-American removed the action to federal court and each side sought summary judgment. In the pleadings filed in district court, the Vegas attempted to introduce testimony from Mrs. Vega's physicians (Dr. Galvan and Dr. Bueso) contradicting Pan-American's claim that, at the time the Vegas enrolled in the plan, Mrs. Vega contemplated posterior repair surgery. Pan-American then attempted to introduce expert testimony supporting its conclusion as a fair reading of the medical records.

The district court granted summary judgment to Pan-American after concluding that ERISA applied to the dispute and that Pan-American had not abused its discretion in denying the medical claim and rescinding coverage. The district court concluded that it could not consider the testimony introduced by the Vegas as it was not available to the plan administrator. On appeal, the panel held that such testimony could be considered, as there was evidence that Pan-American had violated its duty to conduct a "reasonable, good faith investigation of the claim." In reaching this conclusion, the panel relied heavily on the affidavits prepared by Dr. Galvan and Dr. Bueso. Vega v. National Life Ins. Services, Inc., 145 F.3d 673, 678-79 & 680-81 (5th Cir. 1998)(quoting full text of affidavits and treating testimony as relevant evidence for summary judgment

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purposes), reh'g en banc granted and vacated, 167 F.3d 197 (5th Cir. 1999).


The first issue we must address is whether the federal courts have jurisdiction under ERISA to hear this appeal. The Vegas contend that the trial court and the panel erred in concluding that ERISA covers this dispute. According to the Vegas, their status as sole shareholders of Corona renders Mrs. Vega neither a participant nor a beneficiary for ERISA purposes, so ERISA does not govern their claims. They urge that their suit belongs in state court.

ERISA preempts all state claims that "relate to any employee benefit plan." 29 U.S.C. § 1144(a).3 In order for ERISA to govern the Vegas' claims, two criteria must be met: (1) an employee benefit plan must exist, and (2) Mrs. Vega...

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