Can a lawyer take a subrogation case on a contingent fee from an insurer that is financially able to pay by the hour?

Plain-English summary

The Committee was asked whether a lawyer may ethically accept a subrogation case on a contingent fee from a subrogated insurer that prefers that arrangement but is capable of paying by the hour. The opinion concluded the lawyer may do so, provided the client has been fully informed of all relevant fee alternatives and the proposed contingent fee is reasonable and not excessive.

The opinion explained that, although EC 2-20 of the former Code says a lawyer generally should decline contingent-fee employment from one able to pay a reasonable fixed fee, it permits a contingent fee where the particular circumstances justify it and the fully informed client desires it; DR 2-106 separately requires any fee to be reasonable and not excessive. It noted that the Model Rules (1.5(c) and (d)) permit contingent fees in all but criminal and domestic-relations matters and omit EC 2-20's cautionary language, and that courts have not limited contingent fees to indigent clients, recognizing the contingent fee as an efficient way for a client to share the risk of nonrecovery.

Reaffirming Alaska Ethics Opinion 74-3, which addressed the same question for a personal-injury client able to pay hourly, the opinion concluded a subrogation claim is a typical tort claim traditionally pursued on contingency, and that even a financially capable insurer may choose a contingent fee regardless of the lawyer's preference; if the lawyer does not wish to work on contingency, the lawyer may decline. The opinion declined to treat the alleged Civil Rule 81 violations by out-of-state counsel or the effect of contingent fees on settlement as ethics issues, noting the ethics rules do not balance the economic forces between litigants.

Currency note

This opinion was issued in 1992, before Alaska's adoption of the 2009 revisions to the Alaska Rules of Professional Conduct (and before Alaska adopted the Rules of Professional Conduct at all; it applies the former Code of Professional Responsibility while noting the then-pending Model Rules). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a lawyer charge a financially able insurer a contingent fee?

A: Yes. The opinion concluded there is no ethical reason a subrogated insurer cannot choose a contingent fee even though it could pay hourly, so long as it was fully informed of alternatives and the fee is reasonable.

Q: Did the client's ability to pay hourly make a contingent fee improper?

A: No. The opinion concluded contingent fees are not limited to those who cannot afford counsel, because they let a client share the risk of nonrecovery.

Q: Was the lawyer required to take the case on contingency?

A: No. The opinion stated that if the lawyer does not wish to work on a contingent fee basis, the lawyer is free to decline the work.

Background and rules framework

The opinion was decided under the former Alaska Code of Professional Responsibility, the analog to today's fee rule (Model Rule 1.5). It applied EC 2-20 (the general caution against contingent fees for clients able to pay a fixed fee) and DR 2-106 (fees must be reasonable and not excessive), and noted the then-pending Model Rules 1.5(c) and (d). It reaffirmed Alaska Ethics Opinion 74-3.

Citations and references

Rules of Professional Conduct (former Code; cf. Model Rules):

• EC 2-20 (caution on contingent fees where the client can pay a fixed fee)
• DR 2-106 (fees must be reasonable and not excessive) (cf. Model Rule 1.5)

Other opinions cited:

• Alaska Ethics Opinion 74-3: contingent fee where a personal-injury client can pay hourly

See also

• Alaska Ethics Op. 2008-2: Subrogated Insurer Is Not a Client
• Alaska Ethics Op. 2009-1: Nonrefundable Fee Misleading
• Alaska Ethics Op. 2017-1: Lump-Sum Settlement Inclusive of Fees

Source

• Landing page: https://alaskabar.org/ethics-discipline/ethics-opinions/adopted-ethics-opinions-chronological/
• Original PDF: https://alaskabar.org/wp-content/uploads/92-4.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

ALASKA BAR ASSOCIATION
ETHICS OPINION NO. 92-4
Acceptance of Subrogation Case on a
Contingent Fee Basis Where Client is
Able to Pay on an Hourly Basis
QUESTION PRESENTED
Is it ethical under the Code of Professional Responsibility for a lawyer to
accept a subrogation case on a contingent fee basis from a subrogated insurer
who desires such an arrangement but is capable of paying on an hourly basis?
CONCLUSION
A lawyer may ethically accept a subrogation case on a contingent fee basis
from a client who desires such an arrangement even though the client is able
to pay on an hourly basis, provided that the client has been fully informed of
all relevant fee arrangement alternatives and the proposed contingent fee
arrangement is reasonable and not excessive.
STATEMENT OF FACTS PRESENTED
On larger property damage losses, particularly fires, the owner of the
property is usually reimbursed by insurance for the loss. The paying insurer
then becomes subrogated to the rights of the insured either by virtue of the
insurance policy provisions or by common law. Subrogated insurers on large
losses typically bring an action against a third party to recover part or all of
their payment where they believe the third party was responsible for causing or
contributing to the loss.
Most subrogated insurers have adequate financial resources to pay a
lawyer on an hourly basis. Some of these subrogation cases are handled on an
hourly basis by counsel who normally do defense work for such insurers.
Other subrogation cases are handled on a modified contingent fee basis with
the insurer paying a reduced hourly rate plus an additional contingent fee if
there is a recovery.
In the past few years, however, the practice has arisen of large insurers
refusing to pay any hourly fee for subrogation work but instead insisting on a
pure contingent fee arrangement. Some insurers have engaged in lawyer
shopping based on who will agree to the lowest fee, including lead counsel from
outside Alaska. It is alleged that such counsel from outside Alaska routinely
violate the requirements of Civil Rule 81(a)(3). Further, it is contended that
because

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subrogated insurers on a contingent fee basis have no investment in the
litigation other than costs, they are more likely to take a case to trial rather
than settle it.
DISCUSSION
Ethical Consideration 2-20 of the Code of Professional Responsibility
states in pertinent part:
Although a lawyer generally should decline to accept
employment on a contingent fee basis by one who is
able to pay a reasonable fixed fee, it is not necessarily
improper for a lawyer, where justified by the particular
circumstances of a case, to enter into a contingent fee
contract in a civil case with any client who, after being
fully informed of all relevant factors, desires that
arrangement.
Disciplinary Rule 2-106 of the Code separately requires that any fee
arrangement must be reasonable and not excessive.
The Model Rules of Professional Conduct1 similarly permit the use of
contingent fee arrangements in all types of cases except for criminal and
domestic relations matters. See Model Rules 1.5(c) and (d). Significantly, the
cautionary language of EC 2-20 quoted above has been omitted from the Model
Rules.
Although the contingent fee has gained acceptance largely as a means of
providing legal services to those who otherwise could not afford them, courts
have not restricted contingent fee arrangements solely to indigent clients. See
DeGraff v. McKesson & Robbins, Inc., 31 N.Y.2d 862, 292 N.E.2d 310, 315,
340 N.Y.S.2d 171, 177 (1972) (Breitel, J., dissenting). Apart from the need to
provide legal services to those who cannot afford them, there is also an
important economic reason to support the use of contingent fees. In many
instances a contingent fee arrangement provides a client with an efficient way
to share or spread the risk of nonrecovery. If a client, fully advised of
alternative fee arrangements, prefers to have the lawyer share the risk of
nonrecovery in return for a potentially higher fee, there is no logical reason why
such an

/1/ A version of the Model Rules of Professional Conduct has been

approved by the Board of Governors of the Alaska Bar Association and is under
consideration for adoption by the Alaska Supreme Court.
arrangement should be limited to indigent clients. See generally Note, The
Contingent Fee: Disciplinary Rules, Ethical Considerations, or Free
Competition?, 1979 Utah L. Rev. 547, 550; Comment, Are Contingent Fees
Ethical Where Client Is Able to Pay a Retainer?, 20 Ohio St. L.J. 329 (1959).
In Alaska Ethics Opinion No. 74-3, the Committee addressed substantially
the same question of whether it was unethical for an attorney to insist on a
contingent fee in a personal injury case where the client had the ability to pay
1 A version of the Model Rules of Professional Conduct has been approved by the Board of Governors
of the Alaska Bar Association and is under consideration for adoption by the Alaska Supreme Court.
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on an hourly basis. The Committee found that such a practice was not
unethical as long as the fee charged was not excessive and the lawyer fully
explained to the client all possible fee arrangements so that the client could
make an informed decision uninfluenced by the lawyer's personal preference.
The Committee hereby reaffirms the views expressed in Ethics Opinion No.
74-3 and specifically applies them to the facts presented here. A subrogation
claim arising out of a personal injury or property damage is typical of the kinds
of tort claims that traditionally have been pursued on a contingent fee basis.
Even though a subrogated insurer may be financially capable of paying a
lawyer on an hourly basis, there is no ethical reason why the insurer should
not be permitted to choose payment on a contingent fee basis regardless of the
lawyer's preferred form of payment. If the lawyer does not wish to perform the
work on a contingent fee basis, he or she is free to decline the work.
Regarding the alleged violations of Civil Rule 81 by counsel outside
Alaska, such complaints are beyond this Committee's authority and should be
referred to the court or to the bar disciplinary process. Furthermore, the
concern regarding the impact of contingent fees on an insurer's willingness to
settle subrogation claims does not raise an ethical issue. It is not the purpose
of the ethics rules to balance the economic forces between parties in litigation.
Given the sophistication and financial resources of most insurers, the
negotiation of a fee arrangement in subrogation cases would appear to involve
two equally knowledgeable parties. Nonetheless, before entering into a
contingent fee arrangement with any client, a lawyer should ensure that the
client is fully informed of alternative fee arrangements and that any proposed
contingent fee is reasonable and not excessive.
Approved by the Alaska Bar Association Ethics Committee on
April 2, 1992.
Adopted by the Board of Governors on June 1, 1992.
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