In Kentucky, may a defense lawyer contract with an insurer to handle all its defense work for a set fee, or agree to absorb all litigation expenses without reimbursement?

Plain-English summary

The Committee took up two insurer cost-control proposals. The first was a contract under which a lawyer or firm would do all of an insurer's defense work for a set fee. The second was an agreement to accept the insurer's cases with the lawyer responsible for all litigation expenses (experts, court reporters, and the like) with no expectation of reimbursement. The Committee answered no to both.

Starting from its prior view that the insured, not the insurer, is defense counsel's client (KBA E-331 and E-340), the opinion reasoned that the lawyer's duty arises from the attorney-client relationship and is not governed by the insurance contract. A blanket set-fee arrangement made without the insured's consent puts the lawyer in a position of conflict under Rule 1.7(b): the lawyer to some extent becomes the insurer and stands to gain by limiting the services rendered to the client, while the insured has no control over those choices. Rule 1.8(f)(2) likewise bars accepting third-party compensation that interferes with the lawyer's independent judgment or the lawyer-client relationship.

On the second question, the opinion concluded that requiring the lawyer to advance litigation expenses in every case with no right to repayment is, in effect, requiring the lawyer to buy the client's legal work and a position adverse to the client's interests, because the lawyer's fee depends on cutting costs. The Committee tied this to the same concern it had raised in E-331 about limited defense budgets, and to E-342 (1990), where it refused to let a lawyer take a creditor's collection cases on a contingent basis while absorbing all litigation expenses, contrary to Rules 1.8(e) and (j). It declined to make an exception for insurance companies.

Currency note

This opinion was issued in 1994 and predates the Kentucky Supreme Court's substantial 2009 revisions to the Rules of Professional Conduct (SCR 3.130), which amended and renumbered Rule 1.7 and its comments. The Kentucky Bar Association notes the rules are amended periodically and that lawyers should consult the current version before relying on this opinion. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a lawyer agree to handle all of an insurer's defense work for a single set fee?

A: No. The opinion concluded such a blanket arrangement, made without the insured's consent, creates a conflict under Rule 1.7(b) because the lawyer stands to gain by limiting services to the insured client.

Q: Could a lawyer agree to pay all litigation expenses out of pocket with no reimbursement?

A: No. The opinion held that absorbing all litigation expenses with no right to repayment gives the lawyer a prohibited interest in the litigation, contrary to Rules 1.8(e) and (j), analogous to E-342.

Q: Who did the opinion treat as the lawyer's client in an insurance defense?

A: The insured. The opinion reiterated, citing E-331 and E-340, that the insured is defense counsel's client, not the insurer, and that the duty arises from the attorney-client relationship rather than the insurance contract.

Background and rules framework

The opinion interprets KRPC 1.7(b) (material limitation conflicts; Model Rule 1.7), KRPC 1.8(e) (advancing litigation expenses), 1.8(f) (compensation from a third party), and 1.8(j) (proprietary interest in litigation), all corresponding to Model Rule 1.8. The analysis treats the insured as the client and measures the proposed arrangements against the lawyer's duties of independent judgment and undivided loyalty to that client.

Citations and references

Rules of Professional Conduct:

• MR 1.7(b) / KRPC 1.7(b) (representation materially limited by responsibilities to a third person or the lawyer's own interests)
• MR 1.8(e) / KRPC 1.8(e) (advancing litigation expenses)
• MR 1.8(f) / KRPC 1.8(f) (accepting compensation from someone other than the client)
• MR 1.8(j) / KRPC 1.8(j) (acquiring a proprietary interest in the litigation)

Cases:

• Gardner v. North Carolina State Bar, 341 S.E.2d 517 (N.C. 1986), unauthorized-practice limits on insurer-employed defense
• Grimes v. Nationwide, 705 S.W.2d 926 (Ky. App. 1985), insurer's independent duty to defend
• Bevevino v. Saydjari, 76 F.R.D. 88 (S.D.N.Y. 1977), aff'd 574 F.2d 676 (2d Cir. 1978)

Other opinions cited:

• KBA E-331 (1988): limited defense budgets and ethical concerns for insured's counsel
• KBA E-340 and E-342 (1990): insured as client; prohibited absorption of collection-case expenses
• KBA E-359: contingent fees for defense counsel in civil cases
• Tennessee Op. 93-F-132

See also

• KBA Ethics Op. E-378: Defending the Insured but Not the Insurer on UCSPA Claims
• KBA Ethics Op. E-393: Contacting an Insured Tortfeasor Over the Insurer's Objection
• KBA Ethics Op. E-383: Duty to Pay Third-Party Providers From Client Funds

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-368.pdf

Original opinion text

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

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-368
Issued: July 1994

Since the adoption of the Rules of Professional Conduct in 1990, the Kentucky Supreme
Court has adopted various amendments, and made substantial revisions in 2009. For
example, this opinion refers to Rule 1.7 and the comments, which were amended and
renumbered. Lawyers should consult the current version of the rules and comments, SCR
3.130 (available at http://www.kybar.org), before relying on this opinion.

Background: Insurers have attempted to institute a number of measures to "control costs." In
some states insurers have attempted to provide defense services directly through
salaried lawyer-employees. This is not permitted in Kentucky, for in addition to
the obvious conflicts of interest that would be presented by such an arrangement,
the practice would violate the law governing unauthorized practice. See KBA U36; Tenn. Op. 93-F-132; Gardner v. NC State Bar, 341 S.E.2d 517 (1986).
Insurers have also attempted to "restrict the budget" for the defense of insured
clients. In E-331 (1988) we noted how such limitations could result in ethical
problems for the lawyer, and unfairly impact the insured. Compare Bevevino v.
Saydjari, 76 F.R.D. 88 (S.D.N.Y. 1977), aff'd 574 F.2d 676 (2d Cir. 1978). We
also discussed contingent fees for defense counsel in civil cases in E-359, and
approved of the concept with some caveats. This brings us to the latest question
of this genre, to-wit:
Questions:

(1) May a lawyer enter into a contract with a liability insurer in which the lawyer
or his firm agrees to do all of the insurer's defense work for a set fee. (2)
Regardless of the answer to the first question, may the lawyer agree to accept
cases from the insurer with the understanding that the attorney will be responsible
for all expenses of litigation (experts, court reporters, etc.) without expectation of
reimbursement from the insurer.

Answer:

No to both questions.

References: Rules 1.7(b) and 1.8(e), (f), and (j); KBA Es-331, 340 and 342.
OPINION
Rule 1.7(b) provides that "[a] lawyer shall not represent a client if the representation of
that client may be materially limited by the lawyer's responsibilities to another client or to a third
person, or by the lawyer's own interests, unless: (1) the lawyer reasonably believes the
representation will not be adversely affected; and (2) the client consents after consultation."
We reiterate our view that the insured is defense counsel's clients, and not the insurer.
See KBA Es-331 and 340. Cf. Rule 1.7 Comment (9). We emphasize the fact that this is not a
case in which a lawyer is striking a bargain or reaching an agreement with a particular client
regarding a particular case, cases or body of work. Furthermore, we start with the proposition
that the lawyer's duty to the insured client arises from the attorney-client relationship. It is not
governed by or limited by the terms of the insurance contract.
Rule 1.8(f)(2) provides that "[a] lawyer shall not accept compensation for representing a
client from one other than the client unless... [among other things, the client consents and]...there
is no interference with the lawyer's independence of professional judgment or with the lawyerclient relationship."
It is not clear from the question whether the lawyer is being asked to take all of an
"insurer's" cases in a given geographical area for a fixed sum, or whether the fixed fee is a
maximum amount payable for each case referred to the lawyer by the insurer regardless of its
complexity or the needs of the particular insured client. However, we need not chase after
possible variations, for in either case we gather that the arrangement between the lawyer and
insurer would be made without the consent of the insured and give rise to the following ethical
concerns.
The obligation to defend is an independent duty or promise of the insurer under the
insurance contract. See Grimes v. Nationwide, 705 S.W.2d 926 (Ky. APP 1985). Yet, here the
insurer wants to continue to promise the insured a defense in the contract of insurance, while
limiting the extent of its undertaking in a side contract between the insured's lawyer and the
insurer to which the insured is not a party. Compare E-331 (1988). Furthermore, the lawyer is
placed, by the insurer (a third person paying for the lawyer's services), in a position of conflict
vis-a-vis the insured client. To some extent the lawyer becomes the insurer; and lawyer stands to
gain by limiting the services rendered to the client. See Rules 1.1 and 1.2, as well Rule 1.7(b).
Admittedly, a potential for similar conflict is inherent in other lawyer-client arrangements; but
here the insured client will have no control over the choices that will be made.
The same concerns loom large when we consider the second question. The insurer
(purporting to stand in the shoes of the client insured) is requiring the lawyer to absorb litigation
expenses in every case, as a condition of employment - to advance litigation expenses without
the insurer having any liability to repay these advances under any circumstances. In a sense, the
insurer is requiring the lawyer to buy the client's legal work, and buy a position in the litigation
adverse to the interests of the client. The lawyer will earn a fee or not, or the size of the fee will
be affected, depending on the lawyers ability to cut costs. This is the same problem we
encountered in E-331 (limited budget for the defense presenting ethical concerns). Furthermore,
we have refused to approve of similar arrangements in other contexts under well understood
rules precluding the lawyer from obtaining a prohibited interest in a litigation. See, Rule 1.8 (e)
and (j), and E-342 (1990) (a lawyer may not agree to take a commercial creditor's collection
cases on a contingent fee basis with the understanding that the lawyer will absorb the litigation
expenses in every case, regardless of the outcome of the case, as this would violate Rules 1.8(e)
and (j)). We are unwilling to make an exception for insurance companies.

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the Kentucky
Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor
rule). The Rule provides that formal opinions are advisory only.