Can a plaintiff's lawyer agree, as a condition of settlement, to personally indemnify the defendant and defense counsel against Medicare or Medicaid subrogation lien claims on the settlement proceeds?

Plain-English summary

Plaintiff's counsel (Attorney A) orally settled an auto accident case for a sum exhausting most of the applicable policy limits. Defense counsel (Attorney B) then sent a confirmation letter adding language, not part of the negotiation, requiring Attorney A to confirm that she and her client would indemnify, defend, and protect the insurance carrier, the defense firm, and the defendant against any Medicare or Medicaid subrogation claim to the settlement proceeds, and asking her to sign and return the letter. The question was whether it is unethical for Attorney A to agree to indemnify Attorney B and his clients against subrogation lien claims on the settlement proceeds.

The committee answered that a lawyer may not agree to serve as an indemnitor on behalf of her client to protect released parties against third-party lien claims. It first set aside the legal questions, whether the settlement is binding and what a lawyer's legal obligations are when disbursing funds subject to liens, as beyond its authority, noting that Rule 1.15(a), (d), (e), and (f) and Comment 4 govern the ethical handling of disputed funds. The narrower ethical question, whether Attorney A may agree to indemnify Attorney B and his clients, the committee answered no, for three reasons.

First, citing Arizona Ethics Opinion 2003-05, the demand creates a potential Rule 1.7 conflict between lawyer and client: a client's medical expenses may be substantial, and the lawyer's ethical refusal to indemnify as a settlement condition could prevent the client from effecting a settlement the client wants, or could cause the lawyer to recommend rejecting an offer in the client's interest to avoid exposing the lawyer to large lien liabilities. Second, even if a lawyer were permitted and willing to accept that financial burden, doing so might compromise the lawyer's exercise of independent professional judgment in violation of Rule 2.1. Third, Rule 1.8 prohibits providing financial assistance to clients except as specified, and (citing Opinions 90-40 and 89-12) agreeing to act as indemnitor, and thus ultimate guarantor of the client's medical expenses, indirectly provides financial assistance the lawyer could not provide directly. The committee noted other states have found such indemnity agreements unethical (Arizona Op. 2003-05, North Carolina RPC 228, Kansas Op. 01-05).

In practice

Under this opinion, a plaintiff's lawyer faced with a settlement condition demanding that the lawyer indemnify the released parties against Medicare or Medicaid subrogation liens may not agree to it. The committee held the demand creates a Rule 1.7 conflict between lawyer and client (because the lawyer's exposure can pull against the client's settlement interest), that accepting the burden may compromise the lawyer's independent judgment under Rule 2.1, and that acting as indemnitor indirectly furnishes client financial assistance barred by Rule 1.8(e). It separately noted that handling funds actually subject to liens is governed by Rule 1.15.

Common questions

Q: Can a plaintiff's lawyer personally guarantee that Medicare or Medicaid liens will be satisfied to close a settlement?

A: No. The committee concluded a lawyer may not agree to serve as an indemnitor for the released parties against third-party lien claims on the settlement proceeds.

Q: Why is indemnifying the released parties a conflict?

A: Citing Arizona Opinion 2003-05, the committee explained the demand creates a Rule 1.7 conflict because the lawyer's potential lien exposure could push the lawyer to advise rejecting a settlement the client wants, or prevent the client from settling at all.

Q: What other rules does the indemnity demand implicate?

A: The committee said accepting the financial burden might compromise the lawyer's independent professional judgment under Rule 2.1, and that agreeing to guarantee the client's medical expenses indirectly provides financial assistance prohibited by Rule 1.8(e).

Q: How should the lawyer handle funds actually subject to a lien?

A: The committee pointed to Rule 1.15(a), (d), (e), and (f) and Comment 4 as the ethical rules for disbursing disputed funds subject to third-party claims, while noting the legal obligations are beyond its authority.

Background and rules framework

The opinion applies South Carolina Rule 1.7 (concurrent conflicts), Rule 2.1 (independent professional judgment), and Rule 1.8(e) (no financial assistance to clients except as specified), which correspond to the like-numbered Model Rules, and references Rule 1.15 (safekeeping property) for handling disputed funds. It follows out-of-state authority finding lien-indemnity agreements improper.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / SC Rule 1.7 (concurrent conflicts of interest)
• MR 2.1 / SC Rule 2.1 (independent professional judgment)
• MR 1.8 / SC Rule 1.8(e) (no financial assistance to a client except as specified)
• SC Rule 1.15(a), (d), (e), (f) and Comment 4 (handling disputed funds subject to third-party claims)

Other opinions cited:

• Arizona Ethics Advisory Opinion 2003-05 (lien-indemnity demand creates a conflict)
• North Carolina RPC 228 (July 26, 1996); Kansas Ethics Advisory Opinion 01-05 (lien-indemnity agreements unethical)
• SC Ethics Advisory Opinions 90-40, 89-12 (limits on a lawyer paying a client's general medical expenses)

See also

• SC Bar Ethics Op. 06-04: Opposing Counsel and a Fee Lien
• SC Bar Ethics Op. 05-05: Lien Against a Former Client
• SC Bar Ethics Op. 08-03: Non-IOLTA Escrow for Big Deposits

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-08-07/
• Original PDF: https://www.scbar.org/media/obkoersm/08-07.pdf

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 08-07

Applicable SC Rules of Professional Conduct: 1.7; 1.8(e); 2.1

Facts

Attorney A orally settled an automobile accident case for a sum exhausting most of the limits of an insurance policy applicable to the accident. Attorney B, the defense counsel in the case, sent a letter confirming the settlement containing the following language:

. . . you will be solely responsible for satisfying any subrogation lien in favor of Medicare and/or Medicaid at the time of disbursement of the settlement proceeds. To that end, I need written confirmation that you and your client will indemnify, defend and protect the insurance carrier, my law firm, and the Defendant in the event there is any claim or lawsuit by Medicaid and/or Medicare in connection with any subrogated interest that either entity may claim to the settlement proceeds. I would appreciate your confirming that understanding for my file by signing and dating this letter and faxing it back to me.

This language was not part of the settlement negotiation between the parties.

Question

Is it unethical for Attorney A to agree to language in a settlement agreement obligating her or her firm to indemnify Attorney B and his clients for any subrogation lien claims asserted against them with regard to payment of the settlement proceeds?

Summary

An attorney may not agree to serve as an indemnitor on behalf of her client to protect released parties in a settlement against lien claims asserted by third parties regarding settlement proceeds.

Opinion

Whether the parties have a binding settlement that includes the language set forth above is a legal question that is beyond the scope of the Committee to address. Further, the legal obligations to others, if any, of a lawyer receiving and disbursing settlement funds subject to or potentially subject to a lien are beyond the scope of the Committee’s authority to address. Rule 1.15 (a), (d), (e), and (f), and comment 4 to that rule set forth the ethical requirements for lawyers when handling the disbursement of disputed funds subject to claims of third parties such as medical providers. Case law addresses the legal liability of attorneys for failing to properly account for and disburse settlement funds.

The ethical question posed is narrower: may Attorney A ethically agree to serve as an indemnitor of Attorney B and his clients on behalf of her client. She may not.

The request that Attorney A indemnify Attorney B and his clients is improper for three reasons.

First, as pointed out in Arizona State Bar Ethics Adv. Op. 2003-05, the demand creates a potential conflict between Attorney A and her client under Rule 1.7. The injured party's medical expenses associated with a matter may be substantial and represent a significant portion of the money obtained by settlement or judgment. As noted by the Arizona Bar:

The mere request that an attorney agree to indemnify Releases against lien claims creates a potential conflict of interest between the claimant and the claimant's attorney. The attorney'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.

The insistence upon an attorney's agreement to indemnify as a condition of settlement could, for example, 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.

Second, even if it a lawyer were permitted to and was willing to enter into such an agreement to accept such a financial burden, acceptance of such a duty might compromise the lawyer's exercise of independent professional judgment in violation of Rule 2.1.

Third, Rule 1.8 prohibits providing financial assistance to clients with certain specified exceptions. Payment of general medical treatment, apart from treatment necessary to pursue claims, is not generally permitted. See S.C. Ethics Adv. Ops. 90-40, 89-12. Agreeing to act as an indemnitor, and hence ultimate guarantor of payment of a client's medical expenses, as a condition of settlement indirectly provides financial assistance that could not otherwise be provided directly by the attorney to the client.

Other states considering the issue have found such indemnity agreements unethical. Ariz. Ethic Adv. Op. 2003-05, N.C. RPC 228 (July 26, 1996), Kan. Ethics Adv. Op. 01-05.