by Christopher Graham and Joseph Kelly

William Beaumont Hospital v. Federal Ins. Co., Case No. 13-1468 (6th Cir. Jan. 16, 2014) is the latest of numerous cases over many years addressing Loss under a D&O policy. It addresses “disgorgement” under a Loss definition and a narrow Michigan public-policy exception for uninsurable loss.

It involves two nurses purporting to represent a class suing William Beaumont Hospital and other hospitals under the Sherman Act, alleging a conspiracy to hold their wages down. Beaumont paid $11.3 million to settle. Its management liability insurer agreed to pay 80%; but with the right to get it back. After it sued insurer, the Eastern District of Michigan decided there was coverage. So did the Sixth Circuit: The settlement was neither disgorgement nor uninsurable under Michigan public policy, as insurer argued.

The policy included the following Antitrust Claim coverage: “[Insurer] shall pay on behalf of the Insured the Covered Percentage [(80%)] . . . of Loss, including Defense Expenses, from each Antitrust Claim first made against an Insured during the Policy Period.”

As typical, Loss included: “[T]he total amount which any Insured becomes legally obligated to pay on account of each Claim and for all Claims in each Policy Period . . . made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments, settlements, costs and Defense Costs.” As is common, “Loss” also included “the multiple portion of any multiplied damage award.” As not-as-common: “Solely with respect to any Claim based upon, arising from or in consequence of profit, remuneration or advantage to which an Insured was not legally entitled, the term Loss . . . shall not include disgorgement by any Insured or any amount reimbursed by any Insured Person.”

Compensatory damages versus disgorgement: Insurer argued nurses’ suit “arose from Beaumont’s gaining of profit, remuneration, or advantage to which it was not entitled and the settlement was a disgorgement of that advantage.” Citing Level 3 Commc’ns, Inc. v. Federal Ins. Co., 272 F.3d 908 (7th Cir. 2001), it argued further that “coverage may not exist if payment represents the return of something to which the insured was not entitled, even where the underlying plaintiffs specifically requested damages.”

Beaumont argued “money unlawfully retained is not the same in its legal character as money wrongfully acquired,” and “money paid to resolve a legal dispute is not necessarily a return of something to which the payor was not legally entitled in the first place.”

The Appeals Court stressed: the Loss exception was for “disgorgement,” not “restitution;” and restitution was used elsewhere in the policy–so insurer “should be aware of the difference between the two terms.”

But that distinction didn’t appear to factor in the court’s decision. The decision instead focused largely on the fact that the nurses sought as damages for the “class” the difference between what the hospitals paid as “artificially depressed” compensation and what should have been paid.

As the Court explained: “Disgorgement and compensatory damages are closely related but not interchangeable.” Per Black’s Law Dictionary, disgorgement is “'[t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.’” Per Webster’s: disgorge means “to give up illicit or ill-gotten gains;” illicit means “not permitted, not allowed, unlawful” and Ill-gotten means “obtains dishonestly or otherwise unlawfully or unjustly.” Gain means “an increase in or addition to what is of profit, advantage, or benefit . . . resources or advantage acquired or increased.” Obtain means “to gain or attain possession or disposal of usually by some planned action or method.”

And per Black’s “actual damages,” in contrast, is “'[a]n amount awarded to a complainant to compensate for a proven injury or loss; damages that repay actual losses. — Also termed compensatory damages.’”

And per the Court: “[Beaumont] never gained possession of (or obtained or acquired) the nurses’ wages illicitly, unlawfully, or unjustly. Rather, according to the nurses’ complaint, Beaumont retained the due, but unpaid, wages unlawfully.” “Retaining or withholding differs from obtaining or acquiring. [Beaumont] could not have taken money from the nurses because it was never in their hands in the first place.” And: “While [its] alleged actions are still illicit, there is no way for [Beaumont] to give up its ill-gotten gains if they were never obtained from the nurses.”

Nurses sought purely compensatory damages based on a “classic damages calculation” to put them where they would’ve been but for the wrongdoing. In fact: “‘the antitrust private action was created primarily as a remedy for the victims of antitrust violations.'”

No public policy against insurance for these damages: According to insurer: “[I]f it has to insure Beaumont, [Beaumont] will profit from its own wrongdoing and transfer the cost of returning money wrongfully withheld to the insurer;” and providing coverage “would encourage moral hazards because it would incentivize wrongful behavior.”

But per the Court: “Michigan’s public policy bar . . . is implicated only when the insured is induced to engage in the unlawful conduct by reliance upon the insurability of any claims arising from that conduct.”

AS the Court explained, Beaumont’s D&O coverage couldn’t have caused it to participate in the conspiracy to hold down wages:

[I]n addition to the damage to the reputation of Beaumont, [it] also faced up to $1.8 billion in damages. The Policy limit for anti-trust claims is $25 million – far less than the threatened $1.8 billion which [nurses] sought jointly and severally from Beaumont. No insured is likely to bet on a gain of $25 million against a loss of $1.8 billion.

“'[C]ommon sense suggests that the prospect of escalating insurance costs and the trauma of litigation, to say nothing of the risk of uninsurable punitive damages, would normally neutralize any stimulative tendency the insurance might have.’”

“[T]he doctrine that an insured may not profit from its own wrongdoing relates to intentional tortious or criminal acts.” And, as Beaumont argues, “if intentional discrimination claims are insurable under Michigan law, there can be no overriding public policy concerns in providing coverage for business injury under antitrust laws.”

Moral of the story for insurers: If you don’t want to cover a payment like this, for in effect making up the difference between what your insured paid and should have paid, you can’t rely on a disgorgement exception to a Loss definition. You also can’t rely on a public policy exception. And if you don’t want to insure “restitution,” you better add a restitution exception to your Loss definition; a disgorgement exception may not work; nor can you necessarily count on a public policy to avoid liability.

Tags: Michigan, D&O insurance, Loss, disgorgement, restitution, public policy