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The following provides an overview of the latest ethics opinion to address concerns with lien indemnification by plaintiff attorneys. The Garretson Firm Resolution Group closely monitors ethics trends related to tort settlements to keep you informed and on the forefront of prudent practice. We will continue to update you with similar developments as they arise.
Attorneys on Both Sides of Tort Settlements Should Take Caution of a Growing Trend in Ethics
Abstract: A new ethics opinion from the State of Tennessee makes it the twelfth jurisdiction to address the impropriety of an attorney indemnifying a tortfeasor from being responsible for unpaid medical bills. On September 10, 2010 the Board of Professional Responsibility of the Supreme Court of Tennessee issued Formal Ethics Opinion No. 2010-F-154 providing the latest commentary on a mounting trend that makes it impermissible for an attorney to provide indemnification in a settlement agreement due to the conflict of interest it creates between the attorney and client. This Practice Tip lists the related opinions from other jurisdictions, outlines the key issues addressed in the Tennessee opinion, and then makes recommendations on avoiding these conflicts that are important to settling parties.
Formal Ethics Opinion No. 2010-F-154 of the Board of Professional Responsibility of the Supreme Court of Tennessee concluded that it creates a conflict of interest for a plaintiff's attorney to enter into agreements requiring the attorney to indemnify a party or subrogation interest holder from medical expenses or liens.
The common scenario:
An injured party's medical expenses normally represent a significant portion of the recovery in settlement. Statutory or common law liens often require most or all of a claimant's medical expenses be repaid to a health insurer, government agency, or health care provider out of a certain portion of that recovery. It is the claimant's responsibility to satisfy all proper liens, but should the claimant fail to do so, most jurisdictions allow certain statutory lien holders to seek recovery from the party liable for the injuries. These parties can then normally seek recourse against the claimants pursuant to the signed release. However, in an effort to avoid involvement in subsequent litigation over liens, attorney indemnification as a condition of such settlements has become commonplace.
The states addressing the indemnification issue:
• Arizona Opinion 03-05 (2003) (attorney's refusal to indemnify could affect reaching a settlement, while agreeing to indemnification compromises independent judgment).
• California Eth. Op. 1981-55 (1981) (situations exist where a lawyer's concern that the client maintain the wherewithal to meet his or her bond obligations might interfere with the attorney's judgment with respect both to the particular case for which the bond is required, and to other matters).
• Florida Eth. Op. 70-8 (1970) (an attorney cannot become a surety on any bond of his client).
• Indiana Opinion No. 1 of 2005 (indemnity agreement would force attorney to weigh client's benefits as against his own interests).
• Illinois Adv. Op. 06-01 (2006) (attorney's personal guarantee to pay liens and subrogation claims against his client constitutes "financial assistance" in violation of Rule 1.8(d)).
• Kansas Op. 01-05 (2001) (an agreement to indemnify places the lawyer in a position where he or she creates a conflict of interest between the client and the insurance company and insured, and/or the lawyer's own interests).
• Missouri Formal Op.125 (2008) (any type of guarantee to cover a client's debts constitutes improper financial assistance and requesting an attorney to enter into such an agreement is thereby also a violation).
• North Carolina State Bar Ethics Op. RPC 228 (1996) (a lawyer for a personal injury victim may not execute an agreement to indemnify the tortfeasor's liability insurance carrier against the unpaid liens of medical providers).
• South Carolina Ethics Adv. Op. 08-07 (2008) (an attorney may not serve as an indemnitor on behalf of her client to protect released parties in a settlement against lien claims asserted by third parties regarding settlement proceeds).
• Tennessee Formal Op. 2010-F-154 (2010) (entering into agreements requiring the plaintiff's attorney to indemnify a party or subrogation interest holder from medical expenses or liens creates a conflict of interest between attorney and client, and an attorney cannot be required to sign an agreement regarding the disposition of settlement funds subject to dispute prior to the resolution of the dispute).
• Vermont Ethics Op. 96-05 (1996) (interests of client may be in conflict with the lawyer's agreement to protect the interests of the health care provider if indemnified).
• Wisconsin Formal Op. E-87-11 (1987) (indemnity agreement would constitute a prohibited acquisition of a financial interest in the cause of action or subject matter of the litigation the lawyer is controlling).
A Summary of Tennessee Formal Op. 2010-F-154:
- Dual Inquiries:
(1) May a plaintiff's attorney be required to execute a Release requiring that attorney to ensure medical expenses and liens involving the plaintiff are paid from the settlement proceeds, when the representation has been made during settlement negotiations that an agreement with the medical lien holder has been reached for repayment from the proceeds?
No.
(2) May an attorney representing a plaintiff in a personal injury litigation be required to indemnify and hold harmless any party being released as a result of the settlement negotiations from any medical expenses and/or liens which that attorney has represented will be satisfied and/or settled from applicable settlement proceeds, or which the law requires to be satisfied from settlement?
No.
- In responding in the negative to both inquiries, the Board made the following notable findings:
o Whether the funds in the attorney's possession rightfully belong to the client or to a third person or entity may not be determined at the time that the release resolving the lawsuit is executed. Therefore, the attorney cannot be required to breach the ethical obligations imposed by Rule of Professional Conduct (RPC) 1.15(c) by signing an agreement regarding disposition of the funds prior to the resolution of the dispute.
• RPC 1.15(c) provides that when an attorney receives funds in which a third person has an interest, the attorney must deliver them to the third person if there exists a valid and perfected statutory, contractual, or judgment lien against the property (including hospital and Medicare claims).
• An attorney should not disburse funds in his possession to a third person if the client contests the issue. The attorney should safeguard them until the dispute is resolved.
• Ignoring a duty owed to a third person and paying a disputed amount directly to a client can result in the attorney being held civilly liable to the third person.
• An attorney that makes misrepresentations in settlement negotiations regarding payment of medical bills or liens is subject to discipline under RPC 4.1(a) and 8.4(c).
o Requiring a plaintiff's attorney to indemnify or hold harmless any party being released (or subrogation interest holder) from medical liens, creates a conflict between the interests of the plaintiff's attorney and the plaintiff.
• RPC 1.7 provides that a lawyer's own interests should not be permitted to have an adverse effect on the representation of a client.
• The mere request that an attorney agree to indemnify Releasees against lien claims creates a potential conflict of interest between the claimant and claimant's attorney.
• The acceptance of a request to indemnify by the claimant's attorney creates a conflict because the client's failure to repay a lien could make the client's lawyer its guarantor.
• In addition to the ethical issues involved with the lawyer as guarantor, an indemnification agreement could compromise the lawyer's exercise of independent professional judgment in violation of RPC 2.1.
• A settlement agreement that requires the attorney to indemnify Releasees violates RPC 1.8 because an attorney cannot agree, voluntarily or at anyone's insistence, to accept ultimate liability for the payment of lien expenses.
Practice Tips: What are the responsibilities of attorneys on both sides of settlement negotiation in light of the current trend?
1. Defense attorneys should not seek indemnification from plaintiff attorneys for a client's medical liens. Instead, they should ask to see that lien resolution process has started.
Defense attorneys must carefully consider the ethical implications of including indemnification agreements as conditions of settlement. Although most ethics opinions deal solely with the issues of conflict arising from such indemnification agreements from the claimant's attorney's perspective, it should be understood that demanding such agreements may create problems for defense counsel as well. Wisconsin Formal Opinion E-87-11 explicitly makes proposing, demanding, or entering into an indemnification agreement for medical liens violative conduct. Further, Rule 8.4(a) prohibits a lawyer from knowingly assisting or inducing another to violate the Rules of Professional Conduct. Thus, the inclusion of such an indemnification as a condition of settlement arguably violates this rule.
Defense attorneys seeking to avoid putting their clients through future lien litigation should look to alternative methods of resolving claims. At the very least, they can rely on a lawyer's duty to deliver funds to a third person when there is a valid and perfected statutory, contractual, or judgment lien against the property. Defense attorneys should inform their clients that indemnification must be sought from the claimants themselves and that seeking attorney indemnification is problematic. A practical solution is to make proof that a lien resolution process has started a condition precedent to payment, with proof of satisfaction as a condition subsequent. This prevents the settling parties to focus on the core issue - that statutory liens (such as Medicare liens) or reimbursement claims (e.g. Medicare) are properly reimbursed as part of a formalized process of verifying, resolving and satisfying such reimbursement claims and/or liens.
2. What is the appropriate response to a client's insistence of accepting a settlement offer that requires an indemnification agreement from the attorney?
When faced with a settlement offer that requires the attorney's indemnification of the claimant's medical liens as a condition to settlement, prudent action must be taken. The mere existence of such a condition pushes an attorney into the realm of conflict. Refusing the offer due to ethical concerns could harm your client's chance to effectuate a settlement. Alternatively, accepting the offer and providing indemnity creates the impermissible situation of an attorney acting as its client's guarantor. Dangers also exist with efforts to persuade the tortfeasor from including such a condition in settlement negotiations. This is because unsubstantiated statements by an attorney in settlement negotiations regarding the status of medical bills or liens can result in scrutiny under rules involving misrepresentations to third parties. Such misrepresentations can also result in civil liability.
Few ethics opinions provide advice on how an attorney should conduct oneself when faced with an ethical dilemma. Most of the opinions dealing with entering into indemnification agreements on behalf of a client simply conclude with a decision that such agreements violate the rules. However, Arizona Opinion 03-05 directs that an attorney whose client insists that such an agreement be entered into is required to withdraw under Rule 1.16(a). An attorney may also be required to report their adversary's inclusion of an indemnification agreement in the settlement offer to the state's ethics board under Rule 8.3(a).
The Garretson Firm Resolution Group will continue to closely monitor how this trend in ethics affects tort settlements going forward for both plaintiffs and defendants. We will also investigate and report on any similar developments in other jurisdictions.
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