Why it matters

The Sixth U.S. Circuit Court of Appeals held that a settlement for the recovery of unpaid wages in an antitrust case was simply payment of wages and not disgorgement – meaning the insurer had to indemnify the deal. Taking a look at the allegations in the complaint brought by two nurses against several hospitals, including William Beaumont, the federal appellate court said the hospital never gained possession of the wages illegally because the nurses never had the wages in the first place; instead, the hospital simply retained them and the settlement constituted damages.

Detailed Discussion

Two nurses instituted a class-action suit against eight hospitals in the Detroit area, including William Beaumont Hospital. The class alleged that the hospitals violated the federal Sherman Act by exchanging information regarding the nurses’ compensation and conspiring to depress their wages. The case later settled for $11.3 million.

Beaumont sought indemnification from Federal Insurance Company for the settlement pursuant to a policy that expressly provided coverage for loss from antitrust claims. As defined by the policy, “loss” included “the multiple portion of any multiplied damage award” but excluded disgorgement. The insurer advanced Beaumont $9 million of the settlement, but reserved its right to reimbursement.

Federal took the position that it was not obligated to indemnify Beaumont because the settlement constituted disgorgement, which was not covered, rather than compensation, which was covered. The hospital gained a profit to which it was not entitled by engaging in the antitrust activities, Federal argued, and the settlement reflects disgorgement of the value of the advantage of paying below-market compensation to its nurses.

Beaumont told the court the nurses had requested compensatory damages and that money unlawfully retained is different from money wrongfully acquired.

The court agreed, noting that the policy specifically states that only disgorgement is not a covered loss and explicitly covers treble damages as an insurable loss. “Federal wrote the policy using the term disgorgement without mentioning reimbursement; a court construes policies strictly in favor of the insured,” the panel wrote. “Moreover, as Beaumont points out, Federal used the term restitution elsewhere in the policy, so it should be aware of the difference between the two terms.”

The Sixth Circuit concluded that the damages paid in settlement of the nurses’ claim did not constitute disgorgement.

“[W]e find the hospital 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,” the court said. “This is not mere semantics. Retaining or withholding differs from obtaining or acquiring. The hospital could not have taken money from the nurses because it was never in their hands in the first place. While the hospital’s alleged actions are still illicit, there is no way for the hospital to give up its ill-gotten gains if they were never obtained from the nurses.”

Federal’s fallback position, that Michigan public policy should prohibit Beaumont from benefiting from its own wrongdoing, also failed to persuade the court. Insurance coverage for the hospital would not encourage moral hazards, the court said. The conduct at issue was not per se illegal and Beaumont “did not unlawfully obtain anything from the nurses,” the panel wrote. “Rather, it allegedly unlawfully withheld compensation from them.”

To read the decision in William Beaumont Hospital v. Federal Insurance Company, click here.