Can an insurance-defense lawyer paid a flat fee put his own money toward a settlement to close the gap and resolve the case faster?

Plain-English summary

An insurance company retained an attorney to defend its insured under a flat-fee arrangement (60% at the start, 40% at the conclusion) that did not vary with hours worked, so the attorney earned a higher effective hourly rate the faster he resolved a case. The attorney could sometimes negotiate a reasonable settlement the insurer was unwilling to pay, and the insured was not expected to contribute. He asked whether he could contribute his own money toward a settlement to resolve the case more quickly, and if so, whether he had to disclose it.

The Committee concluded the attorney may not contribute a portion of his fee directly to a settlement, as that would violate the Rules of Professional Conduct. He may instead inform the insurance company of his desire to reduce his fee so the insurer has more money to put toward the settlement, which can benefit the client and be cost-effective. The Committee required disclosure to both the insurance company and the client to satisfy Rules 1.4 and 5.4(c).

The Rules do not address the issue directly, so the Committee analyzed it under several rules. It emphasized that the lawyer's actions must serve his client (citing Sentry Select Insurance Co. v. Maybank Law Firm), noting the client benefits from a fast resolution, and that reducing fees to effectuate a settlement is a common practice among plaintiffs' lawyers. The benefit to the lawyer, a secondary consideration, must be viewed through Rule 1.8(a) to analyze the potential conflict of interest and whether it is waivable. Under that rule, the lawyer could not pay the plaintiff directly, as that would create a pecuniary interest in his client's case; analyzed under Rule 1.8(e), the distinction is that the lawyer is not giving money to the client but reducing his fee so the insurer can increase its settlement offer.

The Committee cautioned bar members to avoid circumstances that could appear to be unfair or fraudulent dealing (citing In re Edwards). It explained that under Rule 1.4, the lawyer must inform his client of the decision and should seek the client's permission to contact the insurance company, after which the lawyer may tell the insurer of his wish to reduce his fee so the difference can be added to the settlement offer. Finally, under Rule 5.4(c), the lawyer must not allow the insurer, as the person paying for the legal services, to direct or regulate his professional judgment.

In practice

Under this opinion, a flat-fee insurance-defense lawyer may not pay part of his fee directly into a settlement, because that creates a prohibited personal financial interest in the client's case. The opinion holds that the lawyer may instead offer to reduce his fee so the insurer can apply that amount to its offer, must communicate the decision to the client and obtain permission before approaching the insurer under Rule 1.4, must disclose his actions to both the insurer and the client, and must not let the insurer, as payor, direct his professional judgment under Rule 5.4(c).

Common questions

Q: Can a defense lawyer pay part of his own fee into a settlement to close the gap?

A: No. The opinion concludes a lawyer may not contribute a portion of his fee directly to a settlement, because that would create a prohibited personal financial interest in the client's case.

Q: Is there a permissible way to use the lawyer's fee to help fund a settlement?

A: Yes. The opinion concludes the lawyer may reduce his fee so the insurer can add that amount to its settlement offer, distinguishing a fee reduction from giving money to the client.

Q: Whom must the lawyer tell before reducing his fee toward a settlement?

A: Both. The opinion concludes the lawyer must disclose his actions to the client and the insurer to satisfy Rules 1.4 and 5.4(c), and should obtain the client's permission before contacting the insurer.

Q: Can the insurer that pays the lawyer control how he handles the case?

A: No. The opinion concludes that under Rule 5.4(c) the lawyer must not allow the insurer, as the payor, to direct or regulate his professional judgment.

Background and rules framework

The opinion interprets Rule 1.4 (communication), Rule 1.8 (current-client conflicts, including 1.8(a) business transactions and personal interests and 1.8(e) financial assistance), and Rule 5.4(c) (no interference with professional judgment by a third-party payor). South Carolina's rules correspond to the ABA Model Rules. The Committee grounded the client-first analysis in Sentry Select Insurance Co. v. Maybank Law Firm and cautioned against the appearance of unfair dealing, citing In re Edwards.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / SC RPC 1.8(a), 1.8(e) (current-client conflicts; personal financial interest; financial assistance)
• MR 5.4 / SC RPC 5.4(c) (professional independence; payor not directing judgment)
• MR 1.4 / SC RPC 1.4 (communication)

Cases:

• Sentry Select Insurance Co. v. Maybank Law Firm, LLC, 2016-001351, insurer-retained counsel's duty to the insured.
• In re Edwards (1994), appearance of unfair or fraudulent dealing where a lawyer's financial interest was undisclosed.

See also

• SC Bar Ethics Op. 19-04: Insurer-Retained Counsel Defending a Missing Insured
• ABA Formal Op. 96-403: Insured Objecting to Settlement
• TX Ethics Op. 669: Insurance-Defense Withdrawal and a Non-Cooperating Insured

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-20-02/
• Original PDF: https://www.scbar.org/media/4euaigw2/eao-2020_02.pdf

Original opinion text

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

Ethics Advisory Opinion

20-02

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.

S.C.R. Prof. Conduct: Rules 1.4; 1.8; 5.4(c)

Factual Background: Attorney is retained by Insurance Company to provide a defense on behalf of Client pursuant to Client's insurance policy issued by Insurance Company. As payment to Attorney for representation of Client, Insurance Company pays Attorney a flat fee exclusive of costs, and regardless of the amount of time involved in the case. The fee covers all phases of the case from filing an answer until the beginning of trial. The flat fee is paid to Attorney in 2 parts: 60% at the beginning of the assignment, and 40% at the conclusion of the case. Because of the nature of a flat fee arrangement, Attorney receives a higher net per hour fee if he is able to resolve the matter quickly. Often, Attorney is able to negotiate a settlement amount that is reasonable, but that Insurance Company is unwilling to pay. The Client/defendant is not expected to contribute in any way to the settlement. In certain circumstances, it would be financially advantageous, based on the posture of the case, for Attorney A to contribute his own money towards settlement on behalf of Client Z rather than expend more time on the case.

Question Presented: May Attorney contribute money towards a settlement on behalf of his defendant Client in order for the case to resolvemore quickly? If so, must attorney disclose what he is doing to either Insurance Company or Client?

Summary: Attorney may not contribute a portion of the attorney's fee directly to a settlement, as to do so would violate the Rules of Professional Conduct. The attorney may, however, inform the insurance company of his desire to reduce his fee in order to allow the insurance company to have more money to put toward the settlement, thus allowing for an outcome that benefits the client, and also is cost-effective for the attorney and the insurance company. Attorney must disclose his actions to both insurance company and to client, in order to satisfy Rules 1.4. and 5.4(c).

Response: In the facts presented, an attorney would like to "close the gap" in a settlement negotiation where the plaintiff and his client, the defendant who is indemnified by Insurance Company, are close to a monetary settlement. The lawyer's purpose is both to achieve a good outcome for his client, and to receive the higher net per-hour fee resulting from a timely settlement.

The Rules of Professional Conduct do not address this issue directly. Instead, the Committee considered the issue in the context of several separate rules to reach its conclusion.

Most importantly, the lawyer's actions must serve his client (See Sentry Select Insurance Company v. Maybank Law Firm, LLC, and Roy P. Maybank, 2016-001351). In this case, his client receives the benefit of a fast resolution, and avoids the typical economical and emotional strains of an ongoing legal matter. The Committee notes that, among plaintiff's lawyers, reducing attorney's fees in order to effectuate a settlement is a common practice.

The benefit to the lawyer, which is the secondary consideration, must be viewed through the lens of Rule 1.8(a) to analyze the potential conflict of interest that the transaction might create, and whether the conflict is waivable. Pursuant to the Rule, the lawyer could not pay the plaintiff directly, as that would create a pecuniary interest (although somewhat counter-intuitive) in his client's case. Specifically, if this matter is analyzed using Rule 1.8(e), the distinction is that the lawyer is not giving money to the client, but instead is reducing his fee in order for the insurance company to increase the settlement offer to the plaintiff.

Although the facts here do not give any indication appearing as such, Bar members are cautioned to avoid circumstances that could appear to be an "unfair or fraudulent dealing" In re Edwards (1994). (where lawyer failed to disclose lawyer's financial interest in the buyer, which resold property at twice original purchase price).

As Rule 1.4, Communication, indicates, the lawyer must inform his client of his decision, and should seek his client's permission to contact the Insurance Company. Then, the lawyer may inform the insurance company of his wish to reduce his fee so that the difference may be included in the amount offered to settle with the plaintiff.

Finally, the lawyer should be cognizant of Rule 5.4(c), and should disallow any direction or regulation of the lawyer's professional judgment by the person who is paying the lawyer to render legal services for another, here the Insurance Company.