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

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

2

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 
MERKENS v. FEDERAL

Opinion of the Court

3

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 crossappealed. 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.
MERKENS v. FEDERAL

Opinion of the Court

4

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 
MERKENS v. FEDERAL

Opinion of the Court

5

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.
MERKENS v. FEDERAL

Opinion of the Court

6

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).
MERKENS v. FEDERAL

Opinion of the Court

7

(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

 

6 We 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.
MERKENS v. FEDERAL

Opinion of the Court

8

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 
MERKENS v. FEDERAL

Opinion of the Court

9

¶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.
MERKENS v. FEDERAL

Opinion of the Court

10

¶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.