Can a plaintiff's lawyer agree, as part of a settlement, to hold the defendant and insurer harmless from the client's liens or government claims, and can defense counsel demand it?

Plain-English summary

The inquiry asked whether, as part of a settlement release, a plaintiff's lawyer or firm may agree to hold the defendant and its insurer harmless from any future action by lien holders or a federal or state agency that may have an interest in the settlement proceeds. The committee concluded the lawyer may not.

The committee reasoned that while it is legitimate to require the represented plaintiff to sign such a release, no lawyer may ethically make itself a guarantor of the client's debts or obligations by signing a hold-harmless agreement, because that constitutes providing financial assistance to the client in violation of Rule 1.8(e). It noted that although the federal government may pursue a subrogation claim for double damages under the Medicare Secondary Payer Act against both plaintiff's and defendant's counsel, it does not follow that a lawyer may voluntarily indemnify the defendant from the lawyer's own funds. The committee aligned itself with Ohio Ethics Opinion 2011-1 (such personal indemnification is in essence the lawyer agreeing to pay the client's bills) and Florida Bar Staff Opinion 30310 (same conclusion under identically worded Rule 4-1.8(e)), and adopted the Florida opinion's further point that the indemnification creates a Rule 1.7(a)(2) conflict, because there is a substantial risk the representation would be materially limited by the lawyer's personal interest in not having to pay the client's debts.

The committee added that a lawyer's signature on a release should only vouch that the client releases the defendant, unless the lawyer is also releasing a claim for attorney fees. Finally, it concluded that asking a plaintiff's attorney to sign such a release as indemnifier (except to release the attorney's own fee claim) is professional misconduct under Rule 8.4(a), citing Kansas Legal Ethics Opinion 11-02. Two panelists dissented in part: one would leave indemnification to negotiation between the parties, and another viewed indemnifications mirroring statutory Medicare/Medicaid subrogation obligations as permissible while agreeing the broader majority rule applies to non-governmentally-mandated indemnifications.

In practice

The committee held that, under the Oklahoma rules as they stood at the time of the opinion, a lawyer must not agree to sign a settlement release indemnifying the opposing party and thereby guarantee the client's third-party liability or statutory subrogation obligations, because that is prohibited by Rules 1.7(a)(2) and 1.8(e). It also held that no lawyer should ask or require, as a settlement condition, that another lawyer enter into such an indemnification agreement, because doing so violates Rule 8.4(a). The committee carved out one exception: the attorney's signature may release the attorney's own claim for fees.

Common questions

Q: Can a plaintiff's lawyer sign a hold-harmless or indemnity for the client's liens as part of a settlement?

A: No. The committee concluded that a lawyer who guarantees the client's lien or subrogation liability provides prohibited financial assistance under Rule 1.8(e) and creates a conflict under Rule 1.7(a)(2).

Q: Why does the committee treat the indemnity as a conflict of interest?

A: Following the Florida opinion, the committee concluded the indemnity creates a substantial risk that the representation would be materially limited by the lawyer's personal interest in not having to pay the client's debts, which is a Rule 1.7(a)(2) conflict.

Q: Can defense counsel demand that the plaintiff's lawyer sign such an indemnity?

A: No. The committee concluded that asking or requiring another lawyer to enter such an agreement (other than to release the attorney's own fees) is professional misconduct under Rule 8.4(a).

Q: Does the Medicare Secondary Payer Act change the analysis?

A: The committee said no for the majority: even though the government may pursue subrogation against both counsel, a lawyer may not voluntarily indemnify the defendant from the lawyer's own funds. One dissenting panelist would treat indemnifications mirroring statutory Medicare/Medicaid obligations as permissible.

Background and rules framework

The opinion interprets Oklahoma RPC 1.8(e) (no financial assistance to a client in connection with litigation), 1.7(a)(2) (material-limitation conflict from the lawyer's personal interest), and 8.4(a) (misconduct to violate the rules or induce another to do so). These track the like-numbered Model Rules. The committee read them against the federal Medicare Secondary Payer Act and a body of out-of-state opinions reaching the same result.

Citations and references

Rules of Professional Conduct:

• Oklahoma RPC 1.8(e) / Model Rule 1.8(e): no financial assistance to a client in connection with litigation.
• Oklahoma RPC 1.7(a)(2) / Model Rule 1.7(a)(2): material-limitation conflict from the lawyer's personal interest.
• Oklahoma RPC 8.4(a) / Model Rule 8.4(a): misconduct to violate the rules or knowingly induce another to do so.

Statutes:

• Medicare Secondary Payer Act (subrogation for double damages).

Other opinions cited:

• Ohio Ethics Op. 2011-1; Florida Bar Staff Op. 30310; Kansas Legal Ethics Op. 11-02; Tennessee Ethics Op. 97-F-1; and similar opinions from North Carolina (RPC 228), Arizona (03-05), Illinois (06-01), Indiana (1(2005)), Missouri (125), South Carolina (08-07), Wisconsin (E-87-11), and New York City (Formal Op. 2010-3).
• Okla. Bar Ass'n Ethics Op. 323 (distinguishing advancement of costs from indemnification of a client against fees and costs).

See also

• Okla. Bar Ethics Op. 323: Indemnifying a client against the opposing party's fees
• TX Ethics Op. 694: Plaintiff lawyer's personal indemnity for medical liens
• Ala. Bar Ethics Op. 2011-01: Lawyer's indemnification of defendants for unpaid liens

Source

• Landing page: https://www.okbar.org/ethics/ethics-opinion-no-328/

Original opinion text

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

Issued: November 22, 2011

QUESTION:

As part of a settlement agreement release, may the Plaintiff’s lawyer or law firm ethically agree to hold the Defendant and its insurer harmless for any future action against the Defendant or its insurer that may be asserted by lien holders or any federal or state agency or program that may have an interest in the settlement proceeds?

DISCUSSION:

In settlements of litigation it has become common for Defendants and their insurers to attempt to require not only the Plaintiff, but the Plaintiff’s lawyer or law firm, to sign a release agreeing that the lawyer or law firm agrees to hold the Defendant and its insurer harmless for any future action that may be asserted against the insurer or Defendant by any lien holder or government entity that may have an interest in the settlement proceeds. While it is legitimate to require the represented Plaintiff to sign such a release, it is the opinion of the panel that no lawyer or law firm may ethically make itself liable as a guarantor for the debts or obligations of the client by signing such a release or hold-harmless agreement. This would constitute providing financial assistance to the client in violation of Rule 1.8(e) of the Oklahoma Rules of Professional Conduct (“ORPC”):

(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 maybe contingent on the outcome of the matter; and

(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

While the federal government under the Medicare Secondary Payor Act (“MSPA”) may prosecute a subrogation cause of action for double damages against both the attorney for the Plaintiff and the attorney for the Defendant for failure to set aside proceeds for payment of any benefits the federal government has provided, it does not follow that the lawyer or law firm may voluntarily agree to directly indemnify the Defendant and its insurer from its own funds for such MSPA claims or for any other liens or claims regarding third party liability.In Ohio Ethics Opinion 2011-1, the Board of Commissioners on Grievances and Discipline of Ohio stated that “[s]uch a personal indemnification by a lawyer is in essence an agreement by the lawyer to provide financial assistance to the client. The lawyer is undertaking an obligation to pay the client’s bills.”

Florida has concurred in interpreting its identically worded Rule 4-1.8(e) to prohibit such hold-harmless agreements directly by the attorney. Florida Bar Staff Opinion 30310, issued April 4, 2011, at 3.

Additionally, as the Florida opinion further observes, “entering into such an indemnification agreement would result in a conflict of interest between the plaintiff’s counsel and the counsel’s client … because it creates a substantial risk that the representation of the client would be materially limited by the lawyer’s personal interest in not having to pay the client’s debts.” ORPC Rule 1.7(a)(2), identical to Florida’s Rule 4-1.7(a)(2), provides that “[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 … a personal interest of the lawyer.”

In a settlement agreement the attorney’s signature on a release should only vouch for the fact that the client releases the defendant from third party or government liability, unless the lawyer is also releasing a claim for attorney fees. See Tennessee Ethics Opinion 97-F-1, quoted by Florida Bar Staff Opinion 30310, supra, at 3.

Finally, it is not ethical for a Defendant’s lawyer or insurer’s lawyer to ask for such a release to be signed by Plaintiff’s attorney as indemnifier, except for release of Plaintiff’s attorney’s fees. This is professional misconduct under ORPC Rule 8.4(a), which provides that “[i]t is professional misconduct for a lawyer to violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another. . . .” See also Kansas Bar Association Legal Ethics Opinion No. 11-02, issued April 12, 2011, stating “[b]ecause an attorney who agrees to indemnify an opposing party will violate Rule 4-1.8(e), it is a violation for another attorney to request or demand that an attorney enter into such an agreement. The second attorney will violate Rule 4-8.4.”

As the Florida opinion observes, several other states and one municipality have issued similar opinions regarding such settlement releases, including North Carolina, Arizona, Illinois, Indiana, Missouri, South Carolina, Tennessee, Wisconsin, and New York City.[i]

In conclusion, a lawyer must not agree to sign a settlement release indemnifying the opposing party and consequently agreeing to be guarantor of the client’s third party liability or statutory obligations of subrogation, because this is prohibited by ORPC Rules 1.7(a)(2) and 1.8(e).[ii]Furthermore, no lawyer should ask or require as a settlement condition that another lawyer enter into such an indemnification agreement, because to do so is prohibited by ORPC Rule 8.4(a).

For these reasons we answer the query in the negative.

MINORITY VIEWS

One panelist dissents, and would hold that lawyers agreeing to indemnifications to settle a claim resemble the consequences of rendering title opinions – while most counsel in those situations protect themselves with immunity from liability language, any issue of indemnification should be left to negotiations between the parties, and an agreement to indemnify is not a violation of the Rules of Professional Conduct.

Another panelist dissents in part, viewing indemnifications under Medicare and Medicaid to be permissible because such an agreement mirrors statutory obligations of the attorney as to government subrogation liability, but viewing non-governmentally mandated indemnifications as violating the Rules of Professional Conduct as reflected in the Majority opinion. This panelist writes: “I am not convinced that in the special case of an indemnity required as one way of the payer’s dealing with its potential liability under the Medicare Secondary Payer Act constitutes the plaintiff’s attorney providing financial assistance to the plaintiff in connection with pending or contemplated litigation as contemplated by Rule 1.8. I think the request for the opinion and the resulting opinion are too broad to the extent they purport to deal with this specific situation. Thus, I cannot concur with the conclusion in the opinion.”

[i]. Ohio Ethics Opinion 2011-1; North Carolina State Bar Ethics Opinion RPC 228; Arizona Ethics Opinion 03-05; Illinois Ethics Opinion 06-01; Indiana Ethics Opinion 1(2005); Missouri Ethics Opinion 125; South Carolina Ethics Opinion 08-07; Tennessee Ethics Opinion 2010-F-154; Wisconsin Ethics Opinion E-87-11; New York City Formal Opinion 2010-3.

[ii]. See by analogy Oklahoma Ethics Opinion 323, which distinguishes between advancing attorney fees and indemnification of a client against attorney fees and costs. While the advancement of costs and fees, to be repaid whatever the outcome, is permitted, Rule 1.8(e) as interpreted by Ethic Opinion 323 forbids indemnification of the client against the award of attorney fees and costs to the opposing party.