Merkens v. Federal Insurance

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

ANGELA MERKENS, an Arizona resident,
Plaintiff/Appellant/Cross-Appellee,

v.

FEDERAL INSURANCE COMPANY, a foreign insurer,
Defendant/Appellee/Cross-Appellant.

No. 1 CA-CV 13-0510
FILED 5-21-2015

Appeal from the Superior Court in Maricopa County
No. CV2011-006767
The Honorable Randall H. Warner, Judge

AFFIRMED

COUNSEL

Surrano Law Offices, Scottsdale
By Charles J. Surrano, III, John N. Wilborn
Counsel for Plaintiff/Appellant/Cross-Appellee

Broening, Oberg, Woods & Wilson, PC, Phoenix
By James R. Broening, Robert T. Sullivan, Kevin R. Myer
Counsel for Defendant/Appellee/Cross-Appellant

OPINION

Judge Maurice Portley delivered the Opinion of the Court, in which
Presiding Judge Patricia A. Orozco and Judge Randall M. Howe joined.
 MERKENS v. FEDERAL
Opinion of the Court

PORTLEY, Judge:

¶1 This is a bad faith case. We are asked to decide whether an
injured worker who was receiving medical treatment expenses and
temporary total disability workers’ compensation benefits can sue the
insurance company for bad faith and recover any unpaid benefits and
related damages without first challenging the carrier’s decision to terminate
those benefits with the Industrial Commission. Because we find that the
superior court properly granted summary judgment for the carrier and did
not abuse its discretion by denying the carrier’s request for attorneys’ fees,
we affirm the judgment.

FACTS AND PROCEDURAL HISTORY

¶2 Angela Merkens was injured in 2010 when she accidentally
inhaled vinyl cyclo-hexene diepoxide, a toxic substance, while working as
a laboratory research associate for Senestech, Inc. She filed a workers’
compensation claim and Federal Insurance Company (“Federal”),
Senestech’s workers’ compensation carrier, accepted the claim and paid her
medical expenses and temporary total disability benefits.

¶3 Merkens was treated by Dr. David Baratz for six months
without any improvement and he then recommended an open lung biopsy.
Because Merkens was going to be in California, Federal sent her to Dr. Ajit
Arora for an independent medical examination (“IME”). It turned out that
although Merkens could not attend the appointment, Dr. Arora prepared a
report recognizing that the inhaled substance was toxic, but questioning
whether any injury occurred.

¶4 Merkens attended an IME that Federal scheduled in Phoenix
with Dr. Amy Silverthorn. After the examination, Dr. Silverthorn found
that Merkens suffered from chronic airway disease because of the exposure
and recommended further testing. The third IME was with Dr. Lawrence
Repsher, who reported that Merkens did not suffer from asthma or any
other pulmonary or respiratory conditions or diseases, but suggested she
be evaluated by a mental health provider.

¶5 After receiving Repsher’s report, Federal filed a notice of
claim status terminating Merkens’s temporary total disability
compensation and medical expenses because she did not have a permanent
disability. Merkens did not challenge Federal’s decision with the Industrial

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Opinion of the Court

Commission. Instead, she sued Federal for breach of contract and bad
faith.1

¶6 Claiming that Merkens had failed to exhaust her
administrative remedies or establish bad faith or damages, Federal moved
for summary judgment. The superior court found that Merkens’s bad faith
claim was not barred by her failure to challenge the denial of benefits with
the Industrial Commission, but concluded that she failed to establish that
any damages she suffered were separate from her workplace injury or
denial of benefits. The court also denied Federal’s request for attorneys’
fees. After the entry of the judgment, Merkens appealed and Federal cross-
appealed. We have jurisdiction under Arizona Revised Statutes (“A.R.S.”)
section 12-2101(A)(1).2

DISCUSSION

¶7 Merkens contends that the superior court erred in granting
Federal’s summary judgment motion. She specifically argues that the court
failed to recognize that she could claim and recover the unpaid
compensation benefits for her workplace injury as damages for Federal’s
bad faith denial of her compensation benefits without first presenting the
claim to the Industrial Commission.

¶8 We review the grant of summary judgment de novo. Acosta
v. Phoenix Indem. Ins. Co., 214 Ariz. 380, 381, ¶ 2, 153 P.3d 401, 402 (App.
2007) (citation omitted). Summary judgment is appropriate where no
genuine dispute of material fact exists and the moving party is entitled to
judgment as a matter of law. Id.; Ariz. R. Civ. P. 56(a). We view the facts in
a light most favorable to the non-moving party. State Comp. Fund v. Yellow
Cab Co. of Phoenix, 197 Ariz. 120, 122, ¶ 5, 3 P.3d 1040, 1042 (App. 1999).

¶9 Generally, a claim for bad faith “arises when the insurance
company intentionally denies, fails to process or pay a claim without a
reasonable basis for such action.” Noble v. Nat’l Am. Life Ins. Co., 128 Ariz.
188, 190, 624 P.2d 866, 868 (1981). We have recognized that a workers’
compensation carrier can be liable for the tort because the bad faith is
separate and not a direct or natural consequence of the compensable
industrial injury. See Franks v. U.S. Fidelity & Guarantee Co., 149 Ariz. 291,
718 P.2d 193 (App. 1985); Boy v. Fremont Indem. Co., 154 Ariz. 334, 338, 742

1 Merkens subsequently dismissed the breach of contract claim.
2 We cite to the current version of the statute unless otherwise noted.

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Opinion of the Court

P.2d 835, 839 (App. 1987); Mendoza v. McDonald’s Corp., 222 Ariz. 139, 149,
¶ 32, 213 P.3d 288, 298 (App. 2009).

¶10 In the workers’ compensation context, the tort of bad faith
was first alluded to in Sandoval v. Salt River Project Agric. Improvement &
Power Dist., 117 Ariz. 209, 571 P.2d 706 (App. 1977). In reviewing the
injured worker’s allegations about the handling and processing of his
workers’ compensation claim, we stated that where the claim is for the
deprivation of benefits, the Industrial Commission has exclusive
jurisdiction to adjudicate the controversy, but recognized that “an
actionable tort within the jurisdiction of the superior court might be
committed by a self-insured employer or compensation carrier while
engaged in the processing of a [workers’] compensation claim.” Id. at 214,
571 P.2d at 711.

¶11 Eight years later in Franks, we recognized the intentional tort
of bad faith in the workers’ compensation context. 149 Ariz. at 293-94, 718
P.2d at 195-96. There, the carrier accepted the claim for benefits, but
continually changed its position to find a way to avoid paying benefits even
after an administrative law judge ordered it to pay and found it acted in
bad faith. Id. Franks then sued the carrier in superior court and sought
damages for “loss of use of compensation and medical benefits, damages
for mental and emotional distress, and for punitive damages.” Id. at 293,
718 P.2d at 195. In reversing the superior court’s dismissal, we stated three
important precepts. First, the “Workers’ Compensation Act does not bar a
common law tort action that is independent of the workers’ benefit claim
process if the conduct does not fall within the coverage of the Act.” Id. at
295, 718 P.2d at 197. Second, intentional acts that constitute “bad faith by a
carrier in the handling of a workers’ compensation claim do[ ] not arise out
of and in the course of employment[,]” and, as a result, the exclusive
remedy of the Workers’ Compensation Act could not address Franks’
alleged tort injuries. Id. at 296, 718 P.2d at 198. Finally, the lawsuit could
proceed because Franks was only seeking damages due to the carrier’s bad
faith. Id. at 296-97, 718 P.2d at 198-99; see also Mendoza, 222 Ariz. at 149,
¶ 32, 213 P.3d at 298 (stating that “the insured is entitled to recover ordinary
tort damages. Rawlings v. Apodaca, 151 Ariz. 149, 161, 726 P.2d 565, 577
(1986) (bad faith claimant [‘]may recover all the losses caused by [the]
defendant’s conduct, including damages for pain, humiliation and
inconvenience, as well as for pecuniary losses [‘])”).

¶12 Nearly two years later in Boy, we found that an “action for
bad faith may arise on the basis of conduct on the part of a carrier that
precedes a final award.” 154 Ariz. at 338, 742 P.2d at 839 (citing Travelers

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Opinion of the Court

Ins. Co. v. Savio, 706 P.2d 1258, 1267 (Colo. 1985)). After noting the facts in
Savio where “the carrier repeatedly refused to process a claimant’s request
for vocational rehabilitation benefits,” we recognized and adopted the Savio
court’s conclusion that the Workers’ Compensation Act did not bar the bad
faith action because “the duty of good faith precedes official intervention
and permeates all of the dealings between the parties.” Id. (internal
quotation marks and citations omitted); see Savio, 706 P.2d at 1266 (“bad
faith handling of a claim . . . is . . . not a risk contemplated by the [Workers’
Compensation] Act”).

¶13 To date, the Arizona cases addressing a bad faith claim in the
workers’ compensation context have involved injured workers who had or
were pursuing a compensability determination before the Industrial
Commission. See Hayes v. Continental Ins. Co., 178 Ariz. 264, 266, 872 P.2d
668, 670 (1994) (injured worker could proceed with bad faith action in
superior court after seeking workers’ compensation benefits that the carrier
improperly denied without justification at the Industrial Commission);3
Franks, 149 Ariz. at 292-93, 718 P.2d at 194-95 (injured worker filed bad faith
lawsuit after continually and successfully challenging the carrier’s attempt
to terminate temporary disability and medical expense benefits); Boy, 154
Ariz. at 335-38, 742 P.2d at 836-39 (injured worker who received
compensation benefits could not challenge the carrier’s refusal to reduce its
lien as he tried to settle his products liability lawsuit with a third party, but
was allowed to prosecute his claim for bad faith handling of the claim to
increase his benefits because the carrier terminated its supportive medical
maintenance benefits after he requested a hearing to secure additional
benefits); Mendoza, 222 Ariz. at 149, 213 P.3d at 298 (injured worker received
compensation benefits from the Industrial Commission and successfully
sued carrier for bad faith after having to repeatedly, and successfully,
challenge the carrier’s decisions to terminate temporary total disability
benefits and its refusal to provide various medical benefits). Here,
however, Merkens did not seek a determination from the Industrial
Commission that she was entitled to continuing benefits. Instead, she
claims she is entitled, in her superior court action, to recover the unpaid

3 Our supreme court also recognized that if the Industrial Commission
found that an insurance carrier or claims processing representative had
acted in bad faith, the finding “does not divest Arizona’s courts of
jurisdiction over worker’s compensation bad faith actions.” Id. at 275, 872
P.2d at 679.

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Opinion of the Court

compensation and medical benefits related to her injury caused by Federal’s
termination of her benefits, as well as related tort damages.4

¶14 Although we have not comprehensively addressed the ways
a carrier can commit bad faith, it has been recognized that a workers’
compensation carrier can commit the tort in two distinct ways: (1) the
intentional and unreasonable denial of a claim (“bad faith denial of
benefits”); or (2) the intentional and unreasonable failure to process, handle,
or pay the claim (“bad faith handling of the claim”). See generally Michael
A. Rosenhouse, Tort Liability of Worker’s Compensation Insurer for Wrongful
Delay or Refusal to Make Payments Due, 8 A.L.R. 4th 902 (1981); George L.
Blum, What Constitutes Bad Faith on Part of Insurer Rendering It Liable for
Statutory Penalty Imposed for Bad Faith in Failure To Pay, or Delay in Paying,
Insured’s Claim—Particular Conduct of Insurer, 115 A.L.R. 5th 589 (2004).

¶15 Throughout the trial court proceedings and on appeal,
Merkens has repeatedly asserted that she was seeking damages for
Federal’s bad faith termination of her benefits. As a result, we confine our
review to bad faith denial of benefits.5

¶16 To prove a bad faith denial of workers’ compensation
benefits, a plaintiff must demonstrate: (1) the carrier and the injured worker
had an insurer-insured relationship, or the worker is a third-party
beneficiary of the policy, see Franks, 149 Ariz. at 295, 718 P.2d at 197

4 In Merkens’s complaint and statement of facts opposing Federal’s motion
for summary judgment, she asserts that she “is entitled to reasonable
benefits including reasonable medical care and total disability income
benefits.”
5 Although the superior court reviewed both the bad faith denial of benefits

and bad faith handling of the claim, Merkens asserts on appeal the superior
court erred by considering a bad faith handling of the claim because the
gravamen of her case was for the bad faith denial of benefits. In fact, in her
objection to Federal’s statement of facts, she asserts that she “is tying all of
her damages to the denial of benefits.” Again, in her motion for new trial
or in the alternative motion for reconsideration, she states that her claim for
damages arises “out of a bad faith denial of benefits.” Consequently, we
consider any claim arising from the bad faith handling of the claim and any
resulting damages as abandoned. See Ritchie v. Krasner, 221 Ariz. 288, 211
P.3d 1272 (App. 2009) (noting that a failure to raise an issue and provide
citations to the authorities, statutes and parts of the record can constitute
abandonment and waiver of claim).

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(citations omitted); (2) the absence of a reasonable basis for denying benefits
of the policy, see id.; (3) “the [carrier’s] knowledge or reckless disregard of
the lack of a reasonable basis for denying the claim,” see Noble, 128 Ariz. at
189, 624 P.2d at 867; and (4) traditional tort damages proximately caused by
the denial of workers’ compensation benefits rather than the damages
resulting from the workplace injury, e.g., damages for pain, humiliation
and inconvenience, and pecuniary losses, see Mendoza, 222 Ariz. at 149,
¶¶ 32-33, 213 P.3d at 298.

¶17 Relying on Franks, Boy and Savio, Merkens contends that she
can pursue her bad faith denial of benefits without pursuing her
administrative remedies and obtaining a final award from the Industrial
Commission. We disagree.

¶18 Even though an injured worker may file a suit alleging bad
faith handling of the claim before a final award, in a bad faith denial of
benefits lawsuit, the worker must first have at least sought a compensability
determination from the Industrial Commission.6 The reason is simple —
once an injured worker makes a claim for workers’ compensation, the
Industrial Commission has the exclusive jurisdiction to determine whether
the injured worker is entitled to benefits and the amount of those benefits.
See Ariz. Const. art. 18, § 8; A.R.S. §§ 23-901 to -1104; -1022(A) (“The right
to recover compensation pursuant to this chapter for injuries sustained by
an employee . . . is the exclusive remedy against the employer . . ., and
against the employer’s workers’ compensation insurance carrier . . ., except
as provided by § 23-906 . . . .”); see also Gibbons v. Indus. Comm’n of Ariz., 197
Ariz. 108, 111, ¶ 9, 3 P.3d 1028, 1031 (App. 1999); Regnier v. Indus. Comm’n,
146 Ariz. 535, 539, 707 P.2d 333, 337 (App. 1985) (whether a benefit is
reasonably required under the workers’ compensation statutes is a question
for the Industrial Commission).

¶19 Even if we assume the evidence would show that Federal
(through its employees) acted in bad faith by denying Merkens’s claim, the
finder of fact would have to make a compensability determination to find
that Federal unreasonably terminated Merkens’s benefits. See Franks, 149
Ariz. at 295, 718 P.2d at 197 (citations omitted). Moreover, without a

6We note that although there can be simultaneous proceedings in both the
Industrial Commission and superior court, the superior court, as it did in
Sandoval, should wait to resolve any dispositive motions, or allow the case
to proceed to a jury, until after the Industrial Commission has resolved the
challenges to the denial or termination of benefits. 117 Ariz. at 212, 571 P.2d
at 709.

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compensability determination, the finder of fact could not award as
damages any unpaid policy benefits due from the industrial injury because
only the Industrial Commission can determine whether benefits are due
and order payment. See Gibbons, 197 Ariz. at 111, ¶ 9, 3 P.3d at 1032 (“The
[Industrial Commission] has exclusive jurisdiction to adjudicate claims for
workers’ compensation.”) (citations omitted); Sandoval, 117 Ariz. at 214, 571
P.2d at 711 (“[Workers’] Compensation law provides the exclusive remedy
for review of any administrative decision made by a carrier . . . in which the
basic contention of the claimant is that [she] has been wrongfully deprived
of benefits[.]”). As a result, to allow a plaintiff to seek damages based on a
denial of benefits from the carrier without pursuing benefits through the
workers’ compensation system would be akin to ordering that the benefits
be paid for, thereby circumventing the Industrial Commission’s exclusive
jurisdiction to decide the issue.

¶20 Merkens contends that she did not need to pursue the
carrier’s denial of her compensation benefits through the Industrial
Commission because Franks recognized that a claimant could state a claim
for bad faith against a workers’ compensation carrier. But Franks did not
overrule Sandoval; it recognized the factual differences and built on the
Sandoval language noting that there could be a tort claim. Franks, 149 Ariz.
at 294-96, 718 P.2d at 196-98. Moreover, Franks could not overrule Sandoval
because the constitution and statutory framework give the Industrial
Commission the exclusive jurisdiction to resolve compensation claims and
benefits. Id. at 296, 718 P.2d at 198. More importantly, in Franks, Hays and
Mendoza, the cases that Merkens relies on, the Industrial Commission had
already determined that the claimants were entitled to compensation
benefits; as a result, those plaintiffs could assert their claims for damages
based on the carrier’s bad faith denial of benefits. See Hayes, 178 Ariz. at
266, 872 P.2d at 670; Franks, 149 Ariz. at 292, 718 P.2d at 194; Mendoza, 222
Ariz. at 146-47, ¶ 23, 213 P.3d at 295-96. The trial court in those cases, unlike
here, did not have to determine whether the claimant was entitled to or the
amount of the benefits.7

7 Moreover, Cincinnati Ins. Companies v. Kirk, 801 N.W.2d 856, 860 (Iowa
2011), does not support Merkens’s argument. In recognizing that the
plaintiff could pursue an independent action for fraud against the carrier,
an action akin to bad faith, the Iowa Supreme Court found that the Iowa
Industrial Commission had determined that Kirk was entitled to benefits
and the amount of benefits. Id. Consequently, Kirk supports the analysis in
Franks, Hays and Mendoza that allows a bad faith denial of benefits claim to

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¶21 Merkens, however, argues that she is entitled to have a jury
decide her damages, which would require the jury to first make a
determination that she was entitled to continuing benefits resulting from
her workplace injury and then decide the amount of those benefits. Because
she did not opt out of the workers’ compensation system and sue her
employer directly for her industrial injury, see A.R.S. § 23-906(A), only the
Industrial Commission can determine whether she was entitled to
compensation for any disability resulting from the workplace accident.
And, because Merkens did not challenge Federal’s decision with the
Industrial Commission, she cannot maintain an action against Federal for
bad faith denial of benefits in the superior court because the trial court
finder of fact would have to make a determination that only the Industrial
Commission can make — whether she is entitled to continuing benefits for
injuries suffered as a result of the workplace accident. Sandoval, 117 Ariz.
at 214, 571 P.2d at 711 (“[Workers’] Compensation law provides the
exclusive remedy for review of any administrative decision made by a
carrier . . . in which the basic contention of the claimant is that [she] has
been wrongfully deprived of benefits[.]”). As a result, the superior court
appropriately granted summary judgment. See Sanchez v. Tucson
Orthopaedic Inst., 220 Ariz. 37, 39, ¶ 7, 202 P.3d 502, 504 (App. 2008) (noting
that we may uphold the trial court’s entry of summary judgment if it was
correct for any reason supported by the record).

CROSS-APPEAL REGARDING DENIAL OF ATTORNEYS’ FEES

¶22 Federal challenges the denial of its request for attorneys’ fees
under A.R.S. § 12-341.01. We review the ruling for an abuse of discretion
and will affirm unless the evidence, which we view in the light most
favorable to sustaining the court’s decision, does not support the ruling.
Rowland v. Great States Ins. Co., 199 Ariz. 577, 587, ¶ 31, 20 P.3d 1158, 1168
(App. 2001) (citations omitted).

¶23 The superior court has discretion to award attorneys’ fees to
the successful party in a contested contract action under § 12-341.01(A). In
determining whether to award fees, the court may consider all the factors
outlined in Associated Indem. Corp. v. Warner, but is not required to award
fees to the prevailing party. 143 Ariz. 567, 570, 694 P.2d 1181, 1184 (1985).

go forward after the Industrial Commission determined the worker was
entitled to benefits.

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¶24 Here, the court considered all the factors outlined in
Associated Indemnity. We will not reweigh evidence on appeal. See id. at
571, 694 P.2d at 1185 (citations omitted).

¶25 Federal, however, contends that the court erred by finding the
extreme hardship factor outweighed the remaining factors. Although
Merkens should have challenged the denial of her benefits with the
Industrial Commission before suing Federal, the record is clear about the
hardship caused by Federal’s decision. Because Merkens demonstrated
that she cannot work due to her workplace injury and is, as a result,
financially destitute and unable to pay any award, the court did not abuse
its discretion by denying Federal’s request for fees.

ATTORNEYS’ FEES AND COSTS ON APPEAL

¶26 Both parties request attorneys’ fees on appeal under A.R.S. §
12-341.01. Because Merkens was not the successful party, she is not entitled
to attorneys’ fees.

¶27 We have also considered the Associated Indemnity factors,
including Federal’s success on appeal. Id. at 570, 694 P.2d at 1184.
However, given Merkens’s financial condition, we exercise our discretion
and deny Federal’s request for attorneys’ fees on appeal.

CONCLUSION

¶28 We affirm the judgment of the superior court.

:ama

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