After an insurer overpays a client because of the lawyer's earlier statement, must the lawyer disclose the overpayment or release the refunded money to the client?

Plain-English summary

The South Carolina Bar publishes the identical opinion under both numbers 92-38 and 92-40. A client injured driving a company truck pursued both a workers' compensation claim and PIP coverage. The workers' compensation carrier had refused to pay a specialist's bill, so the client paid it and the attorney told the PIP carrier the workers' compensation carrier had not paid, prompting the PIP carrier to reimburse the client. The workers' compensation carrier then paid the specialist, who refunded the client's payment to the attorney, who now held the refund in trust. The client demanded the attorney not communicate with either carrier and release the funds, having maintained the PIP carrier was not entitled to a set-off. The questions were the attorney's disclosure duties (given that he had induced the PIP payment) and his responsibilities for the trust funds.

On disclosure, the committee concluded the attorney had no duty. Rule 4.1 bars a lawyer from making a false statement of material fact to a third person or failing to disclose a material fact when necessary to avoid assisting a client's crime or fraud, but a lawyer has no affirmative duty to inform an opposing party of relevant facts. The committee declined to define a fraudulent act, but noted that under Mendelsohn v. Whitfield a statement's truth is judged when made; if as a matter of law it is not fraud for the client to keep the money, the attorney has no duty to disclose to either carrier. Rule 1.6 reinforced this: the client had specifically demanded no disclosure, so the attorney could not disclose unless a Rule 1.6(b) exception (such as preventing a criminal act) applied, which the committee would not itself define. Rule 1.2(d) likewise bars counseling or assisting crime or fraud while allowing discussion of legal consequences. The committee acknowledged the result may be criticized as letting the client benefit from an erroneous earlier statement, but said the current rules require it absent fraud or a criminal act. On the trust funds, Rule 1.15(b) requires notifying a client or third person with an interest and promptly delivering funds the third person is entitled to receive, while its comment warns that a lawyer should not unilaterally arbitrate a dispute between the client and a third party.

Currency note

This opinion was issued in 1992, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Must a lawyer tell an insurer it overpaid because of the lawyer's earlier statement?

A: Not necessarily. The committee concluded that, absent a client fraud or crime, the lawyer has no affirmative duty to disclose to a third party, and Rule 4.1 imposes a disclosure duty only where needed to avoid assisting the client's crime or fraud.

Q: Can the lawyer release the refunded money to the client?

A: Yes, on demand, absent fraud or a criminal act. The committee said the attorney is obligated to turn the funds over to the client, while Rule 1.15(b) requires not unilaterally arbitrating a dispute with a third party.

Q: Does the client's demand for silence control?

A: Largely. Under Rule 1.6 the client's specific demand barred disclosure unless a Rule 1.6(b) exception applied, and the committee declined to define what would count as a crime or fraud triggering one.

Background and rules framework

The opinion applied Rule 4.1 (truthfulness to others), Rule 1.6 (confidentiality), Rule 1.2 (scope of representation), and Rule 1.15 (safekeeping property), which correspond to like-numbered Model Rules. The committee repeatedly declined to decide the underlying substantive-law question of what constitutes fraud or crime.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 4.1 / Model Rule 4.1: no false statement of material fact to a third person, and a duty to disclose only when necessary to avoid assisting a client's crime or fraud.
• South Carolina RPC 1.6 / Model Rule 1.6: confidentiality; disclosure barred absent consent or a 1.6(b) exception.
• South Carolina RPC 1.2(d) / Model Rule 1.2: a lawyer shall not counsel or assist a client's crime or fraud.
• South Carolina RPC 1.15(b) / Model Rule 1.15: notify and deliver to those entitled, without unilaterally arbitrating a dispute.

Cases:

• Mendelsohn v. Whitfield (S.C. Ct. App. 4/5/93), a statement's truth or falsity is determined at the time it is made.

See also

• SC Bar Ethics Op. 92-38: Disclosing an Insurer Overpayment (companion)
• SC Bar Ethics Op. 93-14: A Client's Doctor's Lien
• SC Bar Ethics Op. 92-35: Releasing Escrow Checks to Another Bar

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-92-40/

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 92-40

Client Smith was injured while driving a company truck in October of 1990. Smith proceeded with claims for workers' compensation and for PIP coverage on the truck. The workers' compensation carrier refused to pay the treatment bill of a specialist. The PIP carrier agreed to pay only medical expenses not paid under workers' compensation. In November of 1991, Client Smith agreed to a settlement and final release of a workers' compensation claim. The Order stated that the carrier was to be responsible for all authorized medical expenses.

Client Smith and his attorney thought that the specialist's bill was not covered in the order, and Client Smith paid the entire expense. The attorney told the PIP carrier that the workers' compensation carrier did not pay this bill and consequently the PIP carrier paid this expense to Client Smith.

The workers' compensation carrier then paid the medical specialist, and the specialist reimbursed to Client Smith's attorney the amount paid directly by Smith. The attorney now holds the refund in trust.

Client Smith demands that his attorney refrain from communicating with either insurance carrier. He demands that the funds be released to him. Throughout the previous negotiations, Client Smith and his attorney always insisted that the PIP carrier was not entitled to a set-off for the amount paid by the workers' compensation carrier.

Questions:

1. What are the attorney's duties of disclosure, especially considering that he induced the PIP carrier to pay the bill based upon a representation that the workers' compensation carrier refused to pay the bill?
2. What are the attorney's ethical responsibilities in regard to the sum in trust?

Summary:
The attorney does not have a duty of disclosure to a third party unless the disclosure is necessary to prevent a fraudulent act by his client. The attorney is obligated to turn over the funds to his client upon demand.

Opinion:
Rule 4.1 states that in the course of representing a client, a lawyer shall not knowingly: (a) make false statement of material fact to a third person or (b) fail to disclose a material fact to a third person when a disclosure is necessary to avoid assisting a criminal or fraudulent act by a client. The comment points out that a lawyer is required to be truthful when dealing with others on a client's behalf. On the other hand, the lawyer has no affirmative duty to inform an opposing party of relevant facts.

This committee will not define what constitutes a fraudulent act. If, as a matter of the law, the failure to disclose the payment would be fraudulent or would assist the client in a fraudulent act, the lawyer would disclose the information. However, in Mendelsohn v. Whitfield (S.C. Ct. App. 4/5/93), the court said that a statement's truth or falsity is determined at the time it is made. If as a matter of the law, therefore, it is not fraud for the client to keep the money which has been paid, it follows that the attorney has no duty of disclosure to either of the insurance carriers.

Rule 1.6 describes as attorney's obligations regarding confidentiality of information. Rule 1.6(a) states that a lawyer shall not reveal information relating to representation of a client "unless the client consents after consultation," except for impliedly authorized disclosures. In this factual situation, the client has specifically demanded that his attorney not make a disclosure. It is clear then that the attorney should not make such disclosure unless the facts fall within the further exceptions stated in Rule 1.6(b).

Rule 1.6(b) defines two exceptions which allow an attorney to reveal information. On exception is allowed by 1.6(b)91) "to prevent the client from committing a criminal act." Again, this committee will not seek to define a criminal act. Unless the attorney is convinced that his client will be committing a criminal act, however, he may not make the disclosure.

Rule 1.2 which defines Scope of Representation, continues in the same vein. Rule 1.2(a) states that a lawyer shall abide by a client's decisions concerning the objectives of representation, subject to certain provisions. Rule 1.2(d) states that a lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent. The lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel a client to make a good faith effort to determine the application of the law.

We recognize that a rule requiring a lawyer not to disclose to the PIP carrier the existence of the workers' compensation carrier's payment may be criticized as permitting the client to benefit by virtue of an erroneous earlier statement. However, it appears the current rules require that result absent fraud or criminal act.

Rule 1.15 addresses the issue concerning the attorney's ethical responsibilities in regard to the money in trust. Rule 1.15(b) states that upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. This rule goes on to state that "except as stated in this Rule or otherwise permitted by law or by agreement with the client, the lawyer shall promptly deliver to the client or third person, any funds or other property that the third person is entitled to receive, and, upon request by the client or third person, shall promptly render full accounting regarding such property." The Comment to this Rule points out that third parties, such as a client's creditors, may have just claims against funds in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third party claims against wrongful interference by the client. The comment states that "however, a lawyer should not unilaterally assume to arbitrate a dispute between a client and the third party."