Can a North Carolina lawyer agree to buy title insurance exclusively from one agency in exchange for a referring party's continued real estate referrals?

Plain-English summary

A referring party who sends real estate closings to a lawyer, and who is affiliated with a title insurance agency, asks the lawyer to agree, as a condition of further referrals, to procure title insurance exclusively from that agency on every referred transaction. The opinion concludes the lawyer may not agree. An exclusive reciprocal referral agreement with a service provider impairs the lawyer's ability to exercise independent professional judgment in violation of Rules 2.1 and 5.4(c), amounts to improper compensation for referrals in violation of Rule 7.2(b), and creates a non-consentable conflict of interest between lawyer and client under Rule 1.7.

The opinion explains what the lawyer can and cannot do. In a typical real estate transaction the client delegates the choice of title insurer to the lawyer, who must act in the client's best interest, weighing factors such as the insurer's fees, financial stability, willingness to cover title matters, and ability to meet the client's needs. The lawyer may also consider a beneficial working relationship with a particular insurer, even one affiliated with the source of the referral, and may cultivate relationships and provide service that lead others to recommend the lawyer. What the lawyer cannot do is let a person who recommends the lawyer's services direct or regulate the lawyer's professional judgment. If the client prefers an insurer the lawyer thinks is not the best choice, the lawyer's role is to counsel the client so the client can make an informed decision; the ultimate choice belongs to the client in consultation with the lawyer.

On the second inquiry, the opinion addresses a lawyer who learns that another lawyer has made such an exclusive arrangement. Under Rule 8.3(a), a lawyer must report another lawyer's violation that raises a substantial question about honesty, trustworthiness, or fitness. The opinion directs the lawyer first to communicate his concerns to the other lawyer and recommend that lawyer seek an ethics opinion about continuing in the arrangement; if the lawyer then knows the other lawyer continues to participate in the improper arrangement, he must report it to the State Bar.

In practice

Under the North Carolina rules as they stood at the time of the opinion, conduct in which a lawyer trades exclusive use of a referral source's affiliated service provider for referrals is prohibited. Per the opinion, the lawyer must keep the choice of title insurer a matter of independent professional judgment exercised for the client, and may not let the referral source dictate it.

Per the opinion, a lawyer may still build and rely on beneficial working relationships with particular insurers and earn referrals through good service, and a client retains the ultimate choice of insurer after counseling. On reporting, the opinion holds that once a lawyer knows another lawyer is continuing an improper exclusive referral arrangement, after the lawyer has raised the concern, Rule 8.3(a) requires a report to the State Bar.

Common questions

Q: Can a lawyer agree to use one title insurer exclusively to keep getting referrals?

A: No. Opinion #1 concludes an exclusive reciprocal referral agreement with a service provider is prohibited because it impairs independent judgment (Rules 2.1 and 5.4(c)), is improper compensation for referrals (Rule 7.2(b)), and creates a non-consentable conflict under Rule 1.7.

Q: Can a lawyer favor an insurer the lawyer has a good relationship with?

A: Yes, within limits. The opinion permits the lawyer to consider a beneficial working relationship with a particular insurer, even one tied to the referral source, so long as the referral source does not direct or regulate the lawyer's professional judgment.

Q: Who ultimately chooses the title insurer?

A: Per the opinion, the choice belongs to the client in consultation with the lawyer; if the client prefers an insurer the lawyer thinks is not the best option, the lawyer counsels the client so the client can make an informed decision.

Q: Must a lawyer report another lawyer who makes such an arrangement?

A: Opinion #2 says yes, after a step: the lawyer should raise the concern with the other lawyer and suggest seeking an ethics opinion, and if the lawyer then knows the other lawyer continues the improper arrangement, Rule 8.3(a) requires reporting it to the State Bar.

Background and rules framework

The opinion applies several North Carolina rules. Rule 2.1 (independent professional judgment and candid advice) and Rule 5.4(c) (no third-party direction of the lawyer's judgment) are the analogues of Model Rules 2.1 and 5.4. Rule 7.2(b) (no giving anything of value for a recommendation, the analogue of Model Rule 7.2) addresses the compensation-for-referrals problem, and Rule 1.7 (concurrent conflicts, Model Rule 1.7) supplies the non-consentable conflict. The reporting analysis applies Rule 8.3(a) (reporting professional misconduct, Model Rule 8.3).

Citations and references

Rules of Professional Conduct:

• MR 2.1 / NC Rule 2.1 (independent professional judgment)
• MR 5.4 / NC Rule 5.4(c) (no third-party direction of professional judgment)
• MR 7.2 / NC Rule 7.2(b) (compensation for recommendations)
• MR 1.7 / NC Rule 1.7 (non-consentable conflict of interest)
• MR 8.3 / NC Rule 8.3(a) (reporting professional misconduct)

See also

• ABA Formal Op. 474: Referral Fees and Conflicts
• ABA Formal Op. 04-433: Reporting a Non-Practicing Lawyer
• NY State Bar Op. 799: Online Lawyer-Matching Services

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2011-formal-ethics-opinion-4/

Original opinion text

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

Inquiry #1:

Attorney has developed a good working relationship with Referring Party who, over time, has referred real estate closings to Attorney’s office. Referring Party has some affiliation with Title Insurance Agency. Attorney desires to maintain this working relationship with Referring Party. As a condition of receiving further referrals, Referring Party asks that Attorney agree to procure title insurance exclusively from Title Insurance Agency on every transaction referred to Attorney by Referring Party. May Attorney agree to such a referral arrangement with Title Insurance Agency?

Opinion #1:

No. The ethical duties set forth in the Rules of Professional Conduct prohibit a lawyer from entering into an exclusive reciprocal referral agreement with any service provider. Such an arrangement impairs the lawyer’s ability to provide independent professional judgment in violation of Rules 2.1 and 5.4(c). In addition, the arrangement amounts to improper compensation for referrals in violation of Rule 7.2(b). Finally, such an arrangement creates a nonconsentable conflict of interest between the lawyer and the client. See Rule 1.7.

In most real estate transactions, the client delegates the choice of title insurer to the lawyer, who is charged with acting in the best interest of the client. In determining what is in the best interests of the client, it is appropriate for the lawyer to consider among other things the fees charged for title insurance, the financial stability of the insurer and/or title insurance underwriter, the willingness of the title insurer to provide coverage regarding title matters, and the ability of the insurer to meet the needs of the client with regard to the transaction.

The lawyer may also consider the lawyer’s working relationship with a specific title insurer, particularly where the relationship may prove beneficial to the client. This is true even where the client has been referred to the lawyer by someone affiliated with the specific title insurer. The lawyer may, and should, strive to cultivate the types of business relationships and provide the quality of legal services that will encourage clients and other professionals to recommend the lawyer’s services. What a lawyer cannot do, however, is permit a person who recommends the lawyer’s services to direct or regulate the lawyer's professional judgment in rendering the legal services. See Rule 5.4(c).

If the client indicates a preference as to a particular title insurance company that the lawyer does not believe is the best selection for the client, the lawyer’s role is to counsel the client so that the client may make an informed decision. Ultimately, the choice of the title insurer in a real estate transaction is in the province of the client acting in consultation with the lawyer.

Inquiry #2:

Upon becoming aware that another lawyer has agreed to procure title insurance exclusively from a title insurance agency on every transaction referred to the lawyer by someone associated with the title insurance company, is Attorney under an ethical obligation to report and refer the other lawyer’s conduct to the State Bar?

Opinion #2:

Rule 8.3(a) requires a lawyer to inform the State Bar if the lawyer knows that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyer's honesty, trustworthiness, or fitness as a lawyer. Attorney should communicate his concerns to the other lawyer and recommend that the lawyer contact the State Bar for an ethics opinion as to his continuing participation in what appears to be an improper referral arrangement. After this communication, if Attorney has knowledge that the lawyer has continued his participation in an improper referral arrangement, Attorney must report the lawyer to the State Bar.