Arizona Court of Appeals Division One holds that failure to challenge denial of workers’ compensation benefits through Industrial Commission bars recovery of unpaid benefits in bad faith action against workers’ compensation insurer.

Angela Merkens inhaled a toxic substance while on the job as a researcher in a laboratory.  She filed a workers’ compensation claim with her employer’s insurance company, which initially accepted the claim and paid benefits.

After her treating physician recommended an invasive procedure, the insurer sent her to multiple independent medical examiners.  The third independent medical examiner reported that she did not suffer from any respiratory conditions, but instead suffered from mental health issues.  Based on that report, the insurer terminated all benefits for Merkens.  Merkens did not challenge that decision with the Industrial Commission.

Merkens brought a bad faith action against the insurer.  In Franks v. U.S. Fidelity & Guar. Co., 149 Ariz. 291 (App. 1985), the Court of Appeals held that the exclusive administrative regime for workers’ compensation claims does not bar jurisdiction or relief from the superior court under the independent tort of bad faith.  Despite that decision, the insurer successfully moved for summary judgment based on Merkens’s failure to challenge the denial before the Industrial Commission. 

The Court of Appeals agreed, holding that an injured worker may not bring a bad faith action based on denial of benefits unless she first proceeded under the administrative scheme in the Industrial Commission.  The court reasoned that the Industrial Commission has exclusive jurisdiction to determine the entitlement and amount of benefits, which would be the measure of damages in a bad faith action.  The court relied on Sandoval v. SRP, 117 Ariz. 209 (App. 1977), which predated Franks and Arizona’s recognition of the independent tort of bad faith, for the proposition that the Industrial Commission has exclusive jurisdiction for determining benefits.