NYC-BAR November 4, 2010

Can a plaintiff's lawyer agree to personally indemnify the defendant against liens on settlement payments?

Short answer: No. The opinion concludes that plaintiff's counsel may not agree to hold the defendant harmless from third-party claims (such as insurer or Medicare liens) arising out of settlement payments, because that guarantees financial assistance to the client under Rule 1.8(e) and creates a personal-interest conflict under Rule 1.7(a). Defense counsel may not request such a guarantee, which would violate Rule 8.4(a).

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This page answers the general question as of 2010. Ezel answers yours: whether it's allowed on your facts, under the current New York Rules of Professional Conduct, with citations.

Disclaimer: Advisory only. Not binding precedent.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked on this page as a PDF) is the authoritative source for any reliance.

View original ethics opinion (PDF)

Plain-English summary

The committee addresses a practice in personal-injury settlements: a defendant, aware that settlement payments may be subject to liens or claims by the plaintiff's insurers or other creditors, demands that plaintiff's counsel personally guarantee the client's indemnification obligation and hold the defendant harmless from any third-party claims. The committee concludes plaintiff's counsel may not agree to such a provision, and defense counsel may not request it.

The core problem is Rule 1.8(e), which bars a lawyer from advancing or guaranteeing financial assistance to a client in connection with litigation, except for court costs and litigation expenses repayable contingent on the outcome. A client's obligation to satisfy a lien out of settlement proceeds is the client's personal obligation, indistinguishable from rent or medical bills, and a lawyer's guarantee of it is prohibited financial assistance. The narrow cost-and-expense exception does not apply, because it covers only the costs of litigating the case (copying, transcripts), not post-settlement liabilities under the agreement.

The committee adds that such a covenant also implicates Rule 1.7(a)(2): once the client decides to settle, Rule 1.2(a) requires the lawyer to effectuate the settlement, but the lawyer's own financial interest in not assuming open-ended, possibly large indemnity liability (including unknown future claims and the defendant's legal fees) can conflict with the duty to complete the settlement the client directed. Because plaintiff's counsel may not give the hold-harmless guarantee, the committee concludes under Rule 8.4(a) that defense counsel may not ask for it, as that would be inducing another lawyer to violate the Rules. A footnote notes the lawyer's separate Rule 1.15(c) duties to notify, segregate, and pay over funds subject to a known lien.

In practice

The opinion holds that, under the New York rules as they stood at the time, a plaintiff's lawyer cannot personally indemnify or hold a defendant harmless for third-party claims arising from settlement payments, because it both is prohibited financial assistance under Rule 1.8(e) and creates a Rule 1.7(a) conflict. Per the opinion, defense counsel's request for such a guarantee independently violates Rule 8.4(a). The lawyer's distinct lien-handling duties run through Rule 1.15(c): notify, segregate, and pay over funds a third party is entitled to receive.

Common questions

Q: The defendant wants my client and me to indemnify them against any liens. Can I sign?

A: No. The opinion concludes plaintiff's counsel may not guarantee the client's indemnification obligation, because it is prohibited financial assistance to the client under Rule 1.8(e) and creates a personal-interest conflict under Rule 1.7(a).

Q: Doesn't the exception for advancing litigation costs cover this?

A: No. Per the opinion, the Rule 1.8(e)(1) exception is limited to costs and expenses of litigating the case (such as copying or deposition transcripts) and does not cover post-settlement liabilities arising under the settlement agreement.

Q: Can I, as defense counsel, even ask for that hold-harmless from plaintiff's lawyer?

A: No. The opinion concludes that because plaintiff's counsel may not agree to it, requesting it violates Rule 8.4(a)'s bar on inducing another lawyer to violate the Rules.

Q: What should I do about a lien on the settlement funds?

A: The opinion notes Rule 1.15(c) duties: where the lawyer knows of a lien or claim against settlement funds, the lawyer must notify the claimant, segregate and protect the funds, and pay them over if the claimant is entitled to receive them.

Background and rules framework

The opinion interprets New York Rule 1.8(e) (financial assistance to a client in litigation; Model Rule 1.8) and Rule 1.7(a)(2) (personal-interest conflict; Model Rule 1.7), together with Rule 1.2(a) (client's decision to settle; Model Rule 1.2), Rule 8.4(a) (inducing another's violation; Model Rule 8.4), and the trust-account duties of Rule 1.15(c) (Model Rule 1.15).

Citations and references

Rules of Professional Conduct:

Model Rule 1.8(e) / NY RPC 1.8(e) (no advancing or guaranteeing financial assistance)
Model Rule 1.7 / NY RPC 1.7(a)(2) (personal-interest conflict)
Model Rule 1.2 / NY RPC 1.2(a) (abide by client's decision to settle)
Model Rule 8.4 / NY RPC 8.4(a) (inducing another lawyer's violation)
Model Rule 1.15 / NY RPC 1.15(c) (notify, segregate, and pay over funds subject to a claim)

Other opinions cited:

Missouri Advisory Op. 125 (2008); Illinois Advisory Op. 06-01 (2006); Indiana Op. 1 (2005): same conclusion barring counsel hold-harmless guarantees

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