MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2012-03
As part of the settlement of an automobile accident claim, the insurer requires that the lawyer for the plaintiff hold harmless and indemnify both the carrier and the defendant from any claim for any of plaintiff’s medical bills, or from medical liens or workers compensation liens, arising out of the accident or the action filed by plaintiff. The question is whether this violates the Maryland Rules of Professional Conduct.
Summary of Opinion
We believe that lawyers ethically may not execute hold harmless and indemnification agreements like the one described in this Opinion, and that it is unethical for one lawyer to require another lawyer to execute such an agreement as a condition of settlement.
This question arises from the settlement of an automobile liability claim against the defendant insurance company. After reaching agreement on the settlement amount, and as a condition of settlement, the carrier demanded that the plaintiff’s attorney sign an agreement holding harmless and indemnifying both the carrier and the defendant for medical bills, medical liens (apparently including Medicare and Medicaid liens), and workers compensation liens arising out of the accident and the litigation (“Indemnification Agreement”). By executing the Indemnification Agreement, plaintiff’s attorney would personally guarantee payment of all such claims, including possibly claims that the attorney, acting reasonably and in good faith, did not know about. The plaintiff’s attorney refused to sign the Indemnification Agreement and has asked the Maryland State Bar Association’s Ethics Committee for an opinion about this practice.
Before a case is settled or adjudicated, a plaintiff may have unpaid medical bills or may seek and obtain financial assistance from Medicare, Medicaid, and the Worker’s Compensation Commission, among other agencies. As a result, the entities that administer these programs may have liens or the right to assert liens against the settlement fund and/or may have rights of subrogation. To recover Medicare payments, for example, Congress enacted the Medicare as Secondary Payor Act, 42 U.S.C. § 1395y (b) (3) (A) (“MSPA”). MSPA is a means of recouping any payments Medicare has paid out for injuries that were caused by the negligence of others. MSPA authorizes the government to place a lien against a plaintiff’s judgment or settlement for payments Medicare has made to the plaintiff.
Through the Indemnification Agreement, the insurance carrier seeks to place on Plaintiff’s attorney personally, as a condition of settlement with the attorney’s client, the risk that plaintiff did not make or will not make payments of medical bills, medical liens or workers compensation liens arising out of the accident or the action filed by plaintiff.
We believe the Indemnification Agreement violates several provisions of the Maryland Rules of Professional Conduct.
First, it violates MRPC 1.8(e), which provides:
(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
(1) A lawyer may advance court costs and expenses of litigation, including medical evaluation of a client, the repayment of which may be contingent on the outcome of the matter; and
(2) A lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
MRPC Rule 1.8(e) prohibits a lawyer from providing to a client “financial assistance” which is not expressly exempted. The only exemptions are for “court costs” and “expenses of litigation.” The potential financial assistance, in the form of indemnification liability, covered by the Indemnification Agreement is for “medical bills, medical liens and workers’ compensation liens,” which plainly are not court costs and are far broader than litigation expenses. In short, the Indemnification Agreement contains the lawyer’s guarantee to pay a client’s debts after settlement of a case. Court costs and litigation expenses are far more limited sets of costs associated with filing the action and preparing for and trying cases, e.g., filing fees, deposition expenses, and expert witness fees. The indemnification agreement is ancillary to the settlement and separate from the preparation and trial of the case. Because an attorney may not directly provide such financial assistance to a client, it follows that the attorney may not promise to provide such assistance indirectly.
The ethics opinions from state ethics committees that have considered this issue support our conclusion. For example, the Illinois State Bar Association, in Advisory Opinion No. 06-01 (July, 2006) (Appendix 1), found that a lawyer indemnification agreement violated Rule 1.8, stating:
Providing a personal guarantee that lien/subrogation claims will be paid does not fall within the exception to Rule 1.8(d) that “a lawyer may advance or guarantee the expenses of litigation.” The Rule's reference to such expenses relates to those costs which are important to ensure that the litigation can be pursued. Providing a guarantee that liens or subrogation claims will be paid would be done in resolution of the litigation and has nothing to do with ensuring that the litigation may be properly prosecuted. Therefore, such claims are not “expenses of litigation.”
Ill. State Bar Ass'n Comm. on Prof'l Conduct, Adv. Op. 06-01 at 4 (Appendix 1)
The ethics committees in Indiana and Missouri echoed the Illinois opinion. The Indiana committee said: “A promise of indemnity may effectively make the attorney a guarantor of the client’s legal obligation, which is not the type of assistance permitted by the rule.” Ind. State Bar Ass'n Legal Ethics Comm., Op. No. 1. at 1 (2005) (Appendix 2). The Missouri Supreme Court Advisory Committee agreed:
Financial assistance can take many forms. It includes gifts, loans, and loan guarantees. Any type of guarantee to cover a client's debts constitutes financial assistance. If a client owes a debt to a third party who expects payment from the client's recovery by settlement or judgment, an attorney may not agree to pay the third party from the attorney's own funds, if the client does not pay the third party.
Missouri S. Ct. Adv. Com., Formal Op. 125 at 1 (2008) (Appendix 3)
This is the apparently universal position of ethics committees that have considered the issue. See e.g., Florida Bar Staff Opinion 30310 at 3 (April 4, 2011) (Appendix 4) (“A plaintiff’s counsel’s agreement to hold harmless and indemnify a defendant from third party claims arising out of the defendant’s settlement payments to the plaintiff is not a court cost or expense of litigation. Therefore, it is prohibited by [the Florida version of Rule 1.8(e)]”); New York City Bar Association Committee on Professional and Judicial Ethics, Formal Opinion 2010-3 at 2 (Appendix 5) (“A lawyer’s agreement to guarantee a client’s obligations to third party insurers to induce a defendant to settle thus amounts to ‘guaranteeing financial assistance to the client’ in violation of Rule 1.8(e).”); Ohio Board of Commissioners on Grievances and Discipline of Ohio Opinion 2011-1 at 3 (Feb. 11, 2011) (Appendix 6) (“A personal agreement by a lawyer to indemnify the opposing party from any and all claims is ….in essence an agreement by the lawyer to provide financial assistance to the client. The lawyer is undertaking an obligation to pay the client’s bills.”). The Ohio opinion, Appendix 6 at pp. 4-6, cites and quotes from ethics opinions in Arizona, Illinois, Kansas, North Carolina, South Carolina, Tennessee, and Wisconsin, all of which found that indemnification agreements like the one that is the subject of this opinion violate various ethical rules, most frequently their versions of Rule 1.8(e).
Second, the Indemnification Agreement violates MRPC 1.7(a) (2). Rule 1.7 provides (emphasis added):
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a conflict of interest. A conflict of interest exists if:
(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a conflict of interest under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
Ethics committees in other states have concluded that lawyer indemnification provisions pose conflicts of interest for attorneys under provisions like or identical to MRPC 1.7(a) (2). For example, the Arizona Bar Association’s Committee on the Rules of Professional Conduct said:
“The mere request that an attorney agree to indemnify Releasees against lien claims creates a potential conflict of interest between the claimant and the claimant's attorney. The attorney's refusal, for ethical reasons, to accede to such a demand as a condition of settlement could prevent the client from effectuating a settlement that the client otherwise desires.
The insistence upon an attorney's agreement to indemnify as a condition of settlement could, for example, cause the lawyer to recommend that the client reject an offer that would be in the client's best interest because it would potentially expose the lawyer to the payment of hundreds of thousands of dollars in lien expenses, or litigation over such lien expenses.
The attorney's acceptance of such a condition would also create a conflict of interest with an existing client under ER 1.7 because the client's failure or refusal to repay a lien could make the client's lawyer its guarantor.
Ariz. State Bar Comm. on the Rules of Prof'l Conduct, Op. 03-05 at 3 (2003) (Appendix 7)
In Florida Bar Staff Opinion 30310 at 3 (April 4, 2011) (Appendix 4), the Florida Bar Staff concluded that a lawyer indemnification agreement “would result in a conflict of interest between the plaintiff’s counsel and the counsel’s client under [the Florida version of rule 1.7(a) (2)] because it creates a substantial risk that the representation of the client would be materially limited by the lawyer’s personal interest in not having to pay the client’s debts.” The Indiana Ethics Committee in Opinion 1 at 1 (2005) (Appendix 2), agreed that lawyer indemnification agreements pose conflicts of interests issues, saying:
It is possible all terms of the offered may be acceptable to the client and yet the settlement is lost solely because his attorney refuses to assume the [personal indemnification] risk. The attorney may believe the offer is otherwise fair and in the client’s best interests but recommend that it be rejected only to avoid his own exposure for unpaid liens. In some cases the lien or unpaid claim may be substantial in amount but be unknown to the attorney.
The Indiana Ethics Committee concluded for these reasons that attorney indemnification agreements violate Indiana’s version of Rule 1.7(a) (2). (Appendix 2) Accord, New York City Bar Association Committee on Professional and Judicial Ethics, Formal Opinion 2010-3 (Appendix 5). The Ohio Board of Commissioners on Grievances and Discipline, in Opinion 2011-1 at 4 (Feb. 11, 2011) (Appendix 6), came to the same conclusion. A lawyer indemnification agreement “creates a conflict of interest for a lawyer because there would be substantial risk that the lawyer’s representation of the client would be materially limited by the lawyer’s concerns about having personal financial responsibility for known and unknown claims against the client.” The Ohio ethics opinion, Appendix 6 at pp. 4-6, cites and quotes from ethics opinions in other states that find similar conflicts issues with lawyer indemnification agreements, e.g., ethics opinions in Arizona, Illinois, Kansas, and Tennessee.
In sum, we believe that agreements like the Indemnification Agreement that is the subject of this Opinion may substantially affect whether a lawyer agrees to represent a client and if so, how that lawyer represents the client and what the lawyers recommends with respect to trial and settlement. The lawyer’s “personal interests” may well influence these decisions, thus undermining the duties of independence and zealousness that the lawyer owes a client.
Third, the Indemnification Agreement may be inconsistent with MRPC 1.2(a), which provides that “[a] lawyer shall abide by a client's decision whether to settle a matter.” If, as a condition of settlement, the attorney is forced to sign an agreement that could impose substantial liability on the lawyer, the attorney may either advise the client not to accept it or refuse to accept it even though the client wants to and should accept the offer. The New York City Bar Association’s Committee on Professional and Judicial Ethics said:
A lawyer may not be willing, however, to assume responsibility for indemnifying and holding harmless defendants for a potentially significant sum of money for an indefinite period of time, an obligation encompassing not only known liens, but also presently unknown claims, including possible payment of defendants' legal fees. A lawyer's reluctance to incur such personal liability may conflict with the client's direction to resolve the case. Despite the client's instruction to settle, the lawyer's own “financial” “business” and “personal” interests not to incur such liability could conflict directly with the lawyer's duty to complete the settlement as the client has directed.
N.Y.C. Bar Assn. Comm. Prof. and Jud. Ethics, Op. 2010-3 at 2 (2010) (Appendix 5)
The Indiana Ethics Committee, in Opinion 1, at 1 (2005), also concluded that the attorney’s obligation under Rule 1.2(a) “to abide by the client’s decision whether to settle a matter,” could “be compromised by an offer,” conditioned on an attorney indemnification agreement, “that injects the attorney’s own financial exposure into the process.” Accord, South Carolina Bar Ethics Advisory Committee, Ethics Advisory Opinion 08-07at 2 (Aug. 22, 2008) (Appendix 8) (“The insistence upon an attorney’s agreement to indemnify as a condition of settlement could…cause the lawyer to recommend that the client reject an offer that would be in the client’s best interest because it would potentially expose the lawyer to the payment of hundreds of thousands of dollars in lien expenses, or litigation over such lien expenses.”); Ariz. State Bar Comm. on the Rules of Prof'l Conduct, Op. 03-05 at 3 (2003) (Appendix 7) (“Rule 1.2(a) obligates the attorney to abide by the client’s decision whether to settle a matter. That obligation can be compromised by an offer that injects the attorney’s own financial exposure into the process.”)
Fourth, the indemnification agreement violates MRPC 1.15, which provides (emphasis added):
(a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation.
(d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this Rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.
(e) When a lawyer in the course of representing a client is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall distribute promptly all portions of the property as to which the interests are not in dispute.
All lawyers must hold and disperse funds in accordance with this Rule, which requires lawyers to protect funds of clients and third persons. This rule applies to settlement funds as well as other funds. This Rule states both what lawyers must do and what they need not do to protect third parties. As the South Carolina Bar Ethics Advisory Committee said about its similar Rule 1.15, “Rule 1.15…and Comment 4 set forth the ethical requirements for lawyers when handling the disbursement of disputed funds subject to claims of third parties such as medical providers. Case law addresses the legal liability of attorneys for failing to properly account for and disburse settlement funds.” South Carolina Bar Ethics advisory Committee, Ethics Advisory Opinion 08-07at 2(Aug. 22, 2008) (Appendix 8). If lawyers follow this rule, which includes obligations to third parties under federal and state laws, they are ethically bound to disburse the remaining funds to their clients consistent with their retainer agreements and the governing substantive law. The broad provisions of the Indemnity Agreement, especially those that make the lawyer personally responsible for the client’s obligations, are inconsistent with the obligations lawyers have under Rule 1.15.
This opinion is further reiterated by this committee which opined that an indemnification agreement with a bank causes a conflict of interest for the lawyer and constitutes financial assistance to the client. Maryland State Bar Association, Inc. Committee on Ethics, Docket No. 2010-03 at 2 (2010) (Appendix 9). In its opinion the committee wrote:
“…we believe that the indemnity agreement raises a problem under Rules 1.8 to the extent that the attorney is asked to provide indemnity arising from conduct of others, including potentially conduct of the Bank itself, and that such indemnity raises concerns under Rule 1.7, as an attorney’s interest in avoiding personal liability or cost under the indemnification may affect the attorney’s independence of judgment to an extent that would be prohibited by the Rule. When considered together with the overbroad indemnification, these Rules and the comments thereto lead the Committee to conclude that a lawyer may not enter this Agreement.”
The Committee found that a lawyer would violate Rules 1.7 and 1.8(e). The indemnification agreement with the bank would constitute financial assistance because the attorney would be personally liable for the conduct of others, including the conduct of the bank or the client. It also constitutes a conflict of interest because a lawyer may alter its work in avoidance of future personal liabilities.
4838-8389-5567, v. 1