Can a Montana lawyer agree to indemnify the defendant's insurer against Medicare and other liens in a settlement?

Plain-English summary

The opinion addresses a personal-injury settlement in which the defendant's release required the plaintiff's law firm to "hold harmless and indemnify" the insurer for any future liability from any lien holder, including Medicare. The committee concludes that a lawyer should not agree to such a provision. It distinguishes holding disputed funds in the client's trust account, which it treats as ethical, from the lawyer personally guaranteeing the insurer against lien claims, which it does not.

The committee joins what it describes as the majority position (it lists twelve states plus New York City) that the indemnification language is improper. It grounds the conclusion in four Montana rules: Rule 1.2(a) (a lawyer must abide by the client's decision whether to settle, and the lawyer's own financial exposure could distort that decision), Rule 1.7(a)(2) (a significant risk that the representation is materially limited by the lawyer's personal interest), Rule 1.8(e) (the prohibition on providing financial assistance to a client in connection with litigation), and Rule 2.1 (the duty to render independent, candid advice, which a personal financial stake compromises).

The committee recognizes that the demand often functions as a defense-side bargaining chip and that Medicare's statutory reimbursement right strains both bars, but it states the proposed indemnification "is not a bargaining chip available for use in Montana."

In practice

Under this opinion, agreeing to a release provision that personally indemnifies the insurer against lien claims is treated as improper under Montana's Rules 1.2, 1.7, 1.8(e), and 2.1 as those rules stood in 2013. The opinion identifies holding the disputed amount in the client's trust account, pending resolution with the lienholder, as the ethical alternative to indemnification.

Common questions

Q: Can a Montana lawyer agree to indemnify the defendant's insurer against Medicare or other liens as part of a settlement?

A: No. The opinion concludes a lawyer should not personally agree to hold harmless and indemnify the releasee from any lien claims, finding the provision conflicts with Montana Rules 1.2, 1.7, 1.8(e), and 2.1.

Q: Is it ethical to hold disputed settlement funds in trust until a lien is resolved?

A: Yes. The opinion states it is ethical for counsel to hold money in trust to secure funds subject to a third party's lien, and treats that as distinct from indemnification.

Q: Why does the indemnification provision create a conflict?

A: Per the opinion, injecting the lawyer's own financial exposure into the settlement risks materially limiting the representation: the lawyer might dissuade a client from a settlement the client wants, or accept undue personal risk, to the client's detriment.

Q: Which rules does the committee rely on?

A: Rule 1.2(a) (the client's decision to settle), Rule 1.7(a)(2) (personal-interest conflict), Rule 1.8(e) (financial assistance to a client in litigation), and Rule 2.1 (independent professional judgment).

Background and rules framework

The opinion interprets Montana Rules of Professional Conduct 1.2 (Scope of Representation; Model Rule 1.2), 1.7 (Conflict of Interest: Current Clients; Model Rule 1.7), 1.8(e) (financial assistance to a client in connection with contemplated or pending litigation; Model Rule 1.8(e)), and 2.1 (Advisor; Model Rule 2.1). Montana adopted the Model Rules with certain exceptions and does not adopt the ABA comments.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.2(a) / Mont. R. Prof. Cond. 1.2(a) (abiding by the client's decision to settle)
• Model Rule 1.7(a)(2) / Mont. R. Prof. Cond. 1.7(a)(2) (personal-interest conflict)
• Model Rule 1.8(e) / Mont. R. Prof. Cond. 1.8(e) (financial assistance to a client)
• Model Rule 2.1 / Mont. R. Prof. Cond. 2.1 (advisor; independent judgment)

Regulations:

• 42 C.F.R. 411.37 (Medicare's share of recovery costs)

Other opinions cited:

• North Carolina Ethics Op. 2000-4; Arizona Ethics Op. 2003-05; South Carolina Ethics Op. 08-07; New York City Ethics Op. 2010-3; Maryland Ethics Op. 2012-03 (and others): lawyer should not personally indemnify the releasee against lien claims

See also

• ABA Formal Op. 04-432: Posting Bail for a Client
• AK Bar Ethics Op. 96-5: Lawyer Attesting to a Release

Source

• Landing page: https://www.montanabar.org/For-Attorneys/State-Bar-Resources/Ethics-Opinions
• Original PDF: https://www.montanabar.org/Portals/MONTANA/Site Resources/Ethics Opinions/131224.pdf

Original opinion text

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

ETHICS OPINION 131224
Facts:

A previously disabled plaintiff is seriously injured in an accident. The previous
disability is based on bipolar disorder and the injured party has been on social
security disability and Medicare for a decade prior to the accident. Medicare pays
a number of medical bills related to the orthopedic injuries sustained in the car
accident. The insurance company for the at-fault driver also pays some of the
medical bills related to the car accident.

Approximately two years after the wreck and one year after the suit is filed, the
injured plaintiff and the insurance company for the defendant driver agree to settle
the case for $200,000. For three months prior to reaching the settlement, the
insurance company and the plaintiff’s attorney have written letters to Medicare,
requesting a final conditional payment amount. Medicare has not responded.
However, Medicare did send a preliminary conditional payment letter six months
prior to settlement, showing it had paid $25,000 in medical bills since the accident.
Medicare’s ledger of bills, however, shows payments to the injured plaintiff’s
psychiatrist, payment for an unrelated podiatric surgery and a flu shot. In addition
to these disputed bills, Medicare is required to share in the costs of recovery
(proportionate attorney fees and costs) by virtue of 42. C.F.R. 411.37. The
plaintiff’s attorney believes the correct conditional payment amount is $14,500.

The plaintiff’s attorney and the defense attorney discuss these issues and to be safe,
agree the plaintiff will keep the full $25,000 in her attorney’s trust account while
working through the conditional payment issues with Medicare. The case settles
and the parties go home. One week later, the release arrives, but contains the
following provision that was not discussed at the mediation:

  Attorney to Indemnify.
  In addition to retaining $25,000 in its trust account, as set forth in [section
  omitted] above, the plaintiff’s law firm of Smith & Jones, P.C. agrees that it
  will hold harmless and indemnify Insurer for any future liability that may
  arise from any lien holder, including Medicare.

The plaintiff’s attorney believes the $200,000 settlement is to his client’s
advantage, but is concerned about the provision in the proposed release that would
require his law firm to indemnify the insurer. The plaintiff’s attorney knows that
the conditional payments need to be paid back to Medicare and will do so. The
lawyer has heard that attorney indemnification agreements have been found to
1

violate the Rules of Profession Conduct in other states and has concerns about his
ethical obligations. Additionally, the plaintiff’s attorney is worried that Medicare
may, at some point in the future, clarify or issue new guidance regarding
Medicare’s rights regarding a liability set-aside. At present, his client’s orthopedic
injuries have healed, but there is some residual pain and reduced range of motion
in a joint. The treating physician would not opine on future medical needs, saying
it is impossible to predict the future. Thus, there was no medical basis at the
settlement conference to seek damages for future medical needs. However, the
plaintiff’s attorney knows from other cases he has handled that the compromised
joint may lead to other orthopedic problems down the road. Thus, Medicare may
or may not have to pay for additional medical care potentially related to the
accident at some point in the future.

The plaintiff’s lawyer contacts the defense lawyer about the unexpected provision
in the settlement agreement. The defense attorney is sympathetic, but states the
insurance company is insistent that the attorney indemnification provision be
included. The injured client is desperate for her money and instructs her lawyer to
do whatever he can to expedite the settlement.

Question Presented:

May an attorney sign a Release or Settlement Agreement that requires the attorney
to hold harmless and indemnify the insurer for any future liability that may arise
from any lien holder, including Medicare?

Short Answer:

No. A lawyer should not agree to personally indemnify the Releasee from any lien
claims.

It is ethical for plaintiff’s counsel to hold money in a trust account to resolve the
lawyer’s obligation to secure funds that are subject to a lien by a third party, but
that is not indemnification.

General Discussion:

                                                                                    2

The question presented has been addressed in 12 State’s Ethics Committees and by
New York City’s Ethics Committee.1 Each of the 13 agree that lawyers should not
personally indemnify the Releasee from any lien claims, but they reach it under a
mix of several rules of conduct.

This Committee agrees that Montana should join the majority in holding that the
indemnification language as set forth is not appropriate under Montana’s Rules of
Professional Conduct. But the Committee also recognizes that the problem is not
solely a plaintiff’s bar issue. Medicare set-asides also strain the defense bar. The
indemnification language is being requested because Medicare is legally entitled to
seek repayment of its benefits from a multitude of parties, including defendants,
defense counsel and defendant’s liability insurer. The default solution for defense
counsel has been to include everyone connected to the claim as a responsible party
for reimbursement purposes. In some cases, defense counsel opt to include the
lienholder on the settlement check. Defense counsel explains that if plaintiff’s
counsel does not want the lienholder on the settlement check, then plaintiff’s
counsel needs to indemnify the release so defense counsel’s client isn’t
compromised. Most defense counsel do not use the indemnification language as a
condition of settlement, but it has served as a bargaining chip. It is this
Committee’s opinion that some other solution will have to be developed, as the
language proposed in the facts would violate Montana’s Rule 1.2(a) allocating
authority between a lawyer and client, Montana’s Rule 2.1 delineating the lawyer’s
role as advisor, and Montana’s conflict Rules 1.7 and 1.8(e).

The Rule 1.2 Violation:

The first difficulty confronting the indemnification language proposed is
Montana’s Rule 1.2—Scope of Representation and Allocation of Authority
Between Client and Lawyer which provides, in pertinent part:

   (a) Subject to paragraphs (c) and (d), a lawyer shall abide by a client’s
   decisions concerning the objectives of representation and, as required by
   Rule 1.4, shall consult with the client as to the means by which they are to
   be pursued. A lawyer may take such action on behalf of the client as is

1
See Wisconsin Formal Ethics Op. E-87-11 (1987); North Carolina Ethics Op. 2000-4 (2001); Arizona
Ethics Op. 2003-05 (2003); Indiana Ethics Op. 1 of 2005; Illinois Ethics Op. 06-01 (2006); Missouri
Formal Ethics Op. 125 (2008); South Carolina Ethics Op. 08-07 (2008); New York City Ethics Op.
2010-3 (2010); Tennessee Formal Ethics Op. 2010-F-154 (2010); Ohio Supreme Court Ethics Op. 2011-1
(2011); Kansas Ethics Op. 11-02 (2011); New York State Ethics Op. 852 (2011); Maryland Ethics Op.
2012-03 (2012).

                                                                                              3

  impliedly authorized to carry out the representation. A lawyer shall abide by
  a client’s decision whether to settle a matter… [emphasis supplied].

If a lawyer is required to abide by the client’s decision on settlement, and the client
chooses to settle and chooses to agree to the proposed indemnification language,
the indemnification demand could cause the lawyer to refuse the settlement offer
or try to dissuade the client from settling in order to protect the lawyer's own
personal, financial or business interests. Put another way by Arizona’s Ethics
Committee, the attorney’s obligation to abide by the client’s decision whether to
settle can be compromised by an offer “that injects the attorney’s own financial
exposure into the process.” Arizona Ethics Opinion 03-05, at 3. South Carolina’s
Ethics Committee opined that the lawyer'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.” Insistence upon a
lawyer'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.”
South Carolina Ethics Op. 08-07, at 1. In short, while a client may have no
problem agreeing to the lawyer’s future liability, the proposed indemnification asks
too much of lawyers in service to their clients.

The Rule 1.7 Violation:

The second challenge flows straight from the first, in the potential for creation of
Rule 1.7(a)(2) conflicts between plaintiffs and their lawyers. Montana’s Rule 1.7-
Conflict of Interest: Current Clients provides in pertinent part:

  (a) Except as provided in paragraph (b), a lawyer shall not represent a client
      if the representation involves a concurrent conflict of interest. A
      concurrent conflict of interest exists if:
          ***
          (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 [emphasis supplied].

All 13 of the other states’ Ethics Committees held that the proposed
indemnification agreement pits a lawyer’s personal interests against the client and
materially limits the lawyer’s relationship with their client. This Committee
4

agrees. In the facts presented, the client wants to settle. Standing in the way is her
attorney, who does not want to absorb the responsibility and liability of known and
unknown potential liens. The conflict is real and the conflict is not one that a client
can waive. Rule 1.7(a)(2) directly prevents a Montana lawyer from agreeing to
indemnify a client’s future liabilities.

The Rule 1.8 Violation:

The third challenge to the proposed indemnification agreement is Rule 1.8-Conflict
of Interest: Current Clients: Specific Rules which provides, in pertinent part:
(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, the
repayment of which may be contingent on the outcome of the matter;
(2) a lawyer representing an indigent client may pay court costs and
expenses of litigation on behalf of the client;
(3) a lawyer may, for the sole purpose of providing basic living
expenses, guarantee a loan from a regulated financial institution
whose usual business involves making loans if such loan is reasonably
needed to enable the client to withstand delay in litigation that would
otherwise put substantial pressure on the client to settle a case because
of financial hardship rather than on the merits, provided the client
remains ultimately liable for repayment of the loan without regard to
the outcome of the litigation and, further provided that neither the
lawyer nor anyone on his/her behalf offers, promises or advertises
such financial assistance before being retained by the client [emphasis
supplied].

Comment [10] to Rule 1.8 explains that lawyers may not subsidize lawsuits on
behalf of their clients, “because to do so would encourage clients to pursue
lawsuits that might not otherwise be brought and because such assistance gives
lawyers too great a financial stake in the litigation.”

The potential financial assistance included in the proposed indemnity language is
for known and unknown future medical bills and liens. Medical liens are clearly
not court costs and are far broader than litigation expenses. The indemnification
language is the lawyer’s guarantee to pay the client’s debts after the case settles.
On this all of the other jurisdictions’ ethics committees agree: A guarantee to pay
a client’s debts falls squarely within the prohibition on direct financial assistance
of Rule 1.8(e). While Montana’s Rule 1.8(e) contains a mechanism allowing
5

attorneys to guarantee certain loans to provide financial assistance to clients (and
so differs from the ABA’s Model Rule and most other states’ rules on financial
assistance to clients), Montana’s mechanism does not allow direct indemnification
of medical liens.

The Rule 2.1 Violation:

Finally, the proposed indemnity language runs afoul of Montana’s Rule 2.1—
Advisor which provides:

  In representing a client, a lawyer shall exercise independent professional
  judgment and render candid advice. In rendering advice, a lawyer may refer
  not only to law but to other considerations such as moral, economic, social
  and political factors that may be relevant to the client’s situation.

Several of the other states’ ethics opinions explain that “even if the lawyer were
ethically permitted to provide such financial assistance [contrary to Rule 1.8(e)],
such an agreement might compromise the lawyer's exercise of independent
professional judgment and rendering candid advice in violation of Rule 2.1.”
Arizona Ethics Op. 2003-05, at 3; see also Indiana Ethics Op. 1 of 2005, at 14
stating that “[f]orcing the attorney to weigh the settlement's benefits to the client
with his own personal risk places an inappropriate burden on the essential element
of independence” and South Carolina Ethics Op. 08-07, at 2 “[E]ven if a lawyer
were permitted and willing to enter into such an agreement to accept such a
burden, acceptance of such a duty might compromise the lawyer's exercise of
independent professional judgment in violation of Rule 2.1”. Montana’s advisors
should not be placed in a position of balancing their best advice against their own
financial or business interests.

Conclusion

It is understood that to mitigate risk, defendants and their insurers may attempt to
include in settlement agreements indemnification provisions by which the
plaintiff's lawyer promises to hold the defendant or its insurer harmless from any
lien claims that might be asserted, and to indemnify them against any claims that
the plaintiff should have paid out of the settlement proceeds. Plaintiffs' lawyers
are likely a more reliable source of indemnity than are their clients. While
plaintiffs’ counsel may be more reliable, the proposed indemnification is not a
bargaining chip available for use in Montana. This practice presents a number of
professional responsibility challenges. In addition to the creation of direct conflict
6

between counsel and client, the arrangement violates the prohibition on direct
financial assistance, as well as undermines the attorney-client balance on whether
to settle a matter, impairing the lawyer’s role as advisor. The proposed overbroad
indemnification should not be accepted by plaintiff’s counsel.

                THIS OPINION IS ADVISORY ONLY




                                                                                 7