Question about Nyssa's Nine Lives ability in co-op

By carolina_bryan, in Runebound

We finished a co-op game of Runebound this weekend, and I am now wondering if we played something wrong. I'll get straight to my question: How does Nyssa's Nine Lives ability work during the players' final confrontation with Margath? Lyssa was defeated, and we let her exert to heal and stay in the final battle. Was that correct or should she have been eliminated from the game immediately after her defeat?

Immediately defeated