Can a North Carolina lawyer buy litigation cost protection insurance for a contingency case and charge the premium back to the client out of any recovery?

Plain-English summary

The opinion concerns "litigation cost protection" insurance, which a lawyer buys case-by-case for a one-time premium and which reimburses the lawyer for litigation costs he advanced, but only in the event of a trial loss. The committee answers two questions: whether buying the insurance is permitted, and whether the lawyer may shift the premium to the client through the fee agreement.

On the first question, the opinion concludes the Rules do not prohibit buying the insurance. It acknowledges a Rule 1.7(a) concern: because the policy pays only on a trial loss, its terms can incentivize going to trial in some scenarios, and the lawyer and client may have different cost-benefit calculations. But the opinion observes that contingency cases already carry inherent conflicts (a lawyer may prefer a quick settlement; a client may prefer trial), and the client always holds ultimate authority over settlement under Rule 1.2(a)(1). The presence or absence of the insurance does not change that. The lawyer may buy the insurance so long as he does not let its terms adversely affect his independent professional judgment, the client-lawyer relationship (including the client's settlement authority), or the client's continuing best interests.

On the second question, the opinion concludes the lawyer may charge the premium to the client, but only on detailed conditions. Because the premium is an "other expense" deducted from any recovery, Rule 1.5 applies: the amount may not be clearly excessive, and the reimbursement terms must be clearly communicated and set out in the written, signed contingent-fee agreement (Rule 1.5(c)). The lawyer must describe what the insurance is, why he believes it serves the client's best interests, that other lawyers may advance costs without charging for such a policy, and must give the client the chance to review the policy. Drawing on Florida Bar Staff Opinion 37289 (Revised 2018), the opinion treats charging the premium to the client as a business transaction implicating Rule 1.8(a), requiring fair and fully disclosed terms in writing, written advice to seek independent counsel, and the client's informed written consent, after the lawyer makes an objectively reasonable determination that the insurance benefits the client.

In practice

Under the North Carolina rules as they stood at the time of the opinion, buying litigation cost protection insurance for contingency matters is permitted, provided the lawyer does not allow the coverage terms to adversely affect his independent professional judgment, the client-lawyer relationship (including the client's ultimate authority over settlement under Rule 1.2(a)(1)), or the client's continuing best interests. The opinion treats the conflict concern under Rule 1.7(a) as manageable because the client retains settlement authority regardless of the policy.

The opinion holds that shifting the premium to the client is permitted only on the eight conditions it lists, which combine Rule 1.5 and Rule 1.8(a): the charge is not clearly excessive; the reimbursement circumstances are clearly communicated and set out in the written fee agreement; the lawyer fully explains the insurance, its benefit to the client, and that other lawyers may advance costs without the charge; the client may review the policy; the terms are fair and reasonable; the client is advised in writing to seek independent counsel; the client gives informed written consent at the outset after the lawyer makes an objectively reasonable determination that the insurance benefits the client; and the lawyer does not let the coverage affect his judgment, the relationship, or the client's best interests.

Common questions

Q: Can a North Carolina lawyer buy litigation cost protection insurance for contingency cases?

A: Yes. Opinion #1 concludes the Rules do not prohibit it, so long as the lawyer does not let the coverage terms adversely affect his independent professional judgment, the client-lawyer relationship, or the client's continuing best interests.

Q: Doesn't insurance that pays only on a trial loss create a conflict?

A: The opinion recognizes a Rule 1.7(a) concern that the terms can incentivize trial, but concludes that contingency cases already carry inherent conflicts and the client retains ultimate settlement authority under Rule 1.2(a)(1), which the policy does not change.

Q: Can the lawyer charge the insurance premium back to the client?

A: Yes, on conditions. Opinion #2 treats the premium as an "other expense" under Rule 1.5(c) and concludes the lawyer may shift it to the client only if Rule 1.5 and Rule 1.8(a) are satisfied.

Q: What must the fee agreement say about the premium?

A: Per Opinion #2, the charge must not be clearly excessive, and the written, signed agreement must clearly set out when the client is responsible for reimbursing the premium, what the insurance is, why it serves the client's interests, and that other lawyers may advance costs without charging for such a policy.

Q: Does the client have to consent in writing?

A: Yes. Drawing on Rule 1.8(a), Opinion #2 requires the lawyer to advise the client in writing to seek independent counsel and to obtain the client's informed written consent, after the lawyer makes an objectively reasonable determination that the insurance benefits the client.

Background and rules framework

The opinion interprets several North Carolina rules together. Rule 1.7 (Model Rule 1.7) addresses concurrent conflicts where the representation is materially limited by the lawyer's personal interest; Rule 1.2(a)(1) (Model Rule 1.2) reserves to the client the ultimate authority over settlement. Rule 1.5 (Model Rule 1.5) prohibits a clearly excessive fee or expense charge and requires that contingent-fee agreements be in a signed writing stating the method of the fee and the expenses deducted from recovery (Rule 1.5(c)). Rule 1.8(a) (Model Rule 1.8) governs business transactions with a client, requiring fair and fully disclosed written terms, written advice to seek independent counsel, and the client's informed written consent.

The opinion relies on Florida Bar Staff Opinion 37289 (Revised 2018), which treated litigation cost protection insurance as part of a business arrangement resembling the conflicts addressed by Rule 1.8(a) and required an objectively reasonable determination that the insurance benefits the client before seeking informed consent. The opinion notes Florida's Rule 1.8(a) is substantially the same as the North Carolina rule.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.7 / NC Rule 1.7(a) (conflict where representation is materially limited by the lawyer's personal interest)
• Model Rule 1.2 / NC Rule 1.2(a)(1) (client's ultimate authority over settlement)
• Model Rule 1.5 / NC Rule 1.5(a), 1.5(b), 1.5(c) (no clearly excessive fee or expense; written contingent-fee agreement; expenses disclosed)
• Model Rule 1.8 / NC Rule 1.8(a) (business transaction with a client; informed written consent)

Other opinions cited:

• Florida Bar Staff Opinion 37289 (Revised 2018): litigation cost protection insurance analyzed as a business transaction under Rule 1.8(a).

See also

• ABA Formal Op. 484: Client Fee Financing Companies
• ABA Formal Op. 02-427: Taking a Security Interest to Secure a Fee
• CA COPRAC Op. 1976-38: Advancing Litigation Costs for a Client

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2018-formal-ethics-opinion-6/

Original opinion text

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

Inquiry:

Lawyer would like to purchase “litigation cost protection” insurance for matters he handles on a contingency fee basis. The insurance is purchased by a lawyer on a case-by-case basis for a one-time premium payment. The insurance is available for purchase up until 90 days after the initial complaint has been served upon the defendant(s). The insurance reimburses a lawyer for litigation costs advanced by the lawyer only in the event of a trial loss.

Inquiry #1:

Do the Rules of Professional Conduct prohibit a lawyer from purchasing litigation cost protection insurance for his contingency fee cases?

Opinion #1:

No. A lawyer has a duty to avoid conflicts of interest with his client. According to Rule 1.7(a), a lawyer has a conflict of interest if the representation of a client will be materially limited by a personal interest of the lawyer. The purpose of the insurance policy is to protect the lawyer’s investment in the costs and expenses of litigation. However, the insurance reimburses the lawyer only in the event of a trial loss. The lawyer and the client may have different cost-benefit calculations. Therefore, the terms of the policy incentivize going to trial in certain scenarios, which raises the possibility of a conflict of interests between the lawyer and the client.

However, there are inherent conflicts of interests present in every case taken on a contingency basis. A lawyer may prefer that his client accept a low settlement offer to ensure that the lawyer receives his fee, while the client wants to reject a settlement offer and take his chances at trial. In either event, the client has the ultimate authority regarding settlement of the client’s matter. Rule 1.2(a)(1). The presence or absence of a litigation cost protection insurance policy does not alter this dynamic of the client-lawyer relationship.

Lawyer may purchase litigation cost protection insurance so long as Lawyer does not allow the terms of the coverage to adversely affect Lawyer’s independent professional judgment, the client-lawyer relationship (including the client’s ultimate authority as to settlement), or the client’s continuing best interests.

Inquiry #2:

If Lawyer recovers funds for the client through a settlement or favorable trial verdict, Lawyer proposes to be reimbursed for the insurance premium from the judgment or settlement funds. Lawyer intends to disclose the cost of the insurance to the client as part of the representation agreement.

May Lawyer include in a client’s fee agreement a provision allowing Lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict?

Opinion #2:

Yes. A provision in a fee agreement requiring client reimbursement of a particular expense implicates a lawyer’s professional duties under Rule 1.5. Rule 1.5(a) provides that a lawyer shall not charge an illegal or clearly excessive fee or charge or collect a clearly excessive amount for expenses. Rule 1.5(b) requires a lawyer who has not regularly represented a client to communicate to the client the basis of the fee and expenses for which the client will be responsible. Specifically as to contingency fees, Rule 1.5(c) provides:

A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial, or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated [emphasis added]. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party....

The premium for the insurance is an “other expense” that Lawyer intends to deduct from any recovery. Therefore, the amount of the insurance premium must not be clearly excessive, and the circumstances under which the client is responsible for reimbursement of the premium must be clearly communicated to the client and clearly set out in the written fee agreement. Lawyer must describe with specificity what the insurance is and why Lawyer believes a litigation cost protection policy will serve the client’s best interests. Lawyer must also inform the client that other lawyers may choose not to purchase or to charge the client for the cost of a litigation cost protection policy. Finally, Lawyer must provide the client with the opportunity to review the insurance policy.

The Florida Bar determined that litigation cost protection insurance is “part of a business agreement, albeit with a third party rather than with the client, creating circumstances resembling the conflicts of interest that can arise, and be cured, pursuant to [Rule 1.8(a)].” Florida Bar Staff Opinion 37289 (Revised 2018). Florida’s version of Modal Rule 1.8(a) (which is substantially the same as NC Rule 1.8(a)) provides that a lawyer may enter into a business transaction with a client or acquire a pecuniary interest directly adverse to a client if: (1) the transaction and terms are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking, and is given a reasonable opportunity to seek, the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction.

The Florida Bar concluded that in each instance in which a lawyer wishes to purchase litigation cost protection insurance and shift the cost to the client, the lawyer must consider the ethics concerns set out in Rule 1.8(a). Florida Bar Staff Opinion 37289 (Revised 2018). The Florida Bar also concluded that, prior to seeking the client’s informed consent, the lawyer must make “an objectively reasonable determination” that purchasing the insurance benefits the client prior to seeking the client’s informed consent. Id.

Similarly, a North Carolina lawyer must satisfy these professional responsibilities, in addition to those implicated by Rule 1.5, when the lawyer intends to be reimbursed for the insurance premium from the judgment or settlement proceeds. The lawyer may include in a client’s fee agreement a provision allowing the lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict upon satisfying the following conditions:

(1) the amount to be charged to the client is not clearly excessive under the guidelines set out in Rule 1.5;

(2) the circumstances under which the client is responsible for reimbursement of the insurance premium are clearly communicated to the client and clearly set out in the written fee agreement;

(3) the lawyer fully explains to the client what litigation cost protection insurance is, why the lawyer believes a litigation cost protection policy will serve the client’s best interests, and that other lawyers may advance the client’s costs without charging the client the cost of a litigation cost protection policy;

(4) the lawyer provides the client with the opportunity to review the litigation cost protection policy;

(5) the transaction and terms are fair and reasonable to the client pursuant to the guidelines set out in Rule 1.8(a);

(6) the client is advised in writing of the desirability of seeking, and is given a reasonable opportunity to seek, the advice of independent legal counsel regarding the arrangement;

(7) the lawyer obtains the client’s informed consent in writing at the beginning of the representation; prior to seeking the required informed consent, the lawyer has to make an objectively reasonable determination that purchasing the insurance benefits the client; and

(8) the lawyer does not allow the terms or availability of coverage under the insurance policy to adversely affect the lawyer’s independent professional judgment, the client-lawyer relationship (including the client’s ultimate authority as to settlement), or the client’s continuing best interests.