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Sixth Circuit Finds Settlement Of Antitrust Lawsuit Constitutes Compensatory Damages, Not Disgorgement

Blogs, Insurance Coverage

The United States Court of Appeals for the Sixth Circuit ruled recently that an insurance company was obligated to indemnify its insured for amounts paid in settlement of an antitrust lawsuit, which the Court found constituted compensatory damages, rather than disgorgement, under the policy at issue. See William Beaumont Hospital v. Federal Ins. Co., No. 13-1468, 2014 WL 185388 (6th Cir. Jan. 16, 2014).

In the underlying insurance coverage dispute, Federal Insurance Company (“Federal”)argued that, under the specific terms of the Executive Protection Policy (the “Policy) issued to William Beaumont Hospital (the “Hospital”), Federal owed no duty to indemnify Beaumont for amounts paid to settle an antitrust class action brought by two nurses against Beaumont and other local hospitals. Alternatively, Federal argued that the public policy of the State of Michigan barred any indemnification obligations that might be found under the Policy. The United States District Court for the Eastern District of Michigan rejected Federal’s arguments, finding that Federal was required to provide coverage under the Policy and that Michigan’s public policy did not bar coverage, and the Sixth Circuit affirmed.

On appeal, “Federal’s principal argument [was] that the nurses’ claims arose from Beaumont’s gaining of profit, remuneration, or advantage to which it was not entitled and the settlement was disgorgement of that advantage.” Since the policy expressly excluded coverage for disgorgements, Federal argued, there was no coverage for what the Beaumont nurses received as a result of the settlement of the class-action lawsuit. 

The Sixth Circuit rejected Federal’s argument, however, finding that disgorgement and restitution are distinct remedies and that the Policy only explicitly excluded disgorgement. The Court noted that “Federal used the term restitution elsewhere in the Policy, so it should be aware of the difference between the two terms.” Focusing on this difference, the Court further noted that “the hospital never gained possession of (or obtained or acquired) the nurses’ wages illicitly, unlawfully, or unjustly,” but rather “retained the due, but unpaid, wages unlawfully.” Thus, the Court concluded that the damages Beaumont paid in settlement of the class action did not constitute disgorgement and, instead, constituted compensatory damages.

The Court also rejected Federal’s public policy argument, finding that “the doctrine that an insured may not profit from its own wrongdoing relates to intentional tortious or criminal acts,” which were not present in this case. Moreover, the Court noted, Federal failed to identify any cases in the Sixth Circuit holding that disgorgement is uninsurable and/or that all wrongful acts alleged to involve a statutory violation are uninsurable.

For a complete copy of the decision click here