When a client tells the lawyer not to contact a health insurer with a possible subrogation claim, what must the lawyer still do?

Plain-English summary

A plaintiff with over $60,000 in medical bills had only $14,000 in available tort coverage; her health insurer had paid nearly $60,000 and her policy contained a subrogation provision. No insurer had contacted the lawyer, and the client instructed her lawyer not to contact the health insurer, saying she would handle any subrogation claim herself. The committee was asked whether the lawyer had any ethical obligation beyond following the client's instruction.

The committee held the lawyer's obligation runs primarily to the client and noted the insurer's actual subrogation rights are questions of substantive law it would not decide. It concluded the lawyer has no affirmative duty to put the insurer on notice of the tort action. But the lawyer's duty of competence under Rule 1.1 requires analyzing the client's rights as to the insurer and advising the client of the lawyer's evaluation; where an insurer has a possible subrogation right but has not submitted a claim, the lawyer must, before disbursing settlement funds, inform the client that if the insurer later asserts its rights it may have a reimbursement claim against the client. The committee added that, where the lawyer does receive notice of a claimed subrogation interest, the lawyer must investigate its extent, advise the client of the third party's rights and the client's duties (which may require clarifying the lawyer's own fee and lien rights), and, under Rule 1.15, keep any disputed funds in trust until the dispute is resolved.

Currency note

This opinion was issued in 1993, 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 Treat this page as historical context, not current guidance.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 the lawyer notify the health insurer of the tort action?

A: The committee concluded no affirmative duty to notify the insurer exists; the lawyer's primary obligation is to the client.

Q: What does the lawyer still have to tell the client?

A: Under the Rule 1.1 duty of competence, before disbursing settlement funds the lawyer must inform the client that if the insurer later asserts its subrogation rights, it may have a right to reimbursement from the client.

Q: What changes if the insurer does assert a claim?

A: The lawyer must investigate the claim's extent, advise the client of the parties' rights and duties, and, under Rule 1.15, hold any disputed funds in trust until the dispute is resolved.

Background and rules framework

The opinion applied Rule 1.1 (competence), requiring analysis and disclosure of the client's position as to a possible subrogee, and Rule 1.15 (safekeeping property), requiring disputed funds to be held in trust once a claim is asserted. It treated the insurer's substantive subrogation rights as outside its role. The South Carolina rule numbers correspond to the like-numbered Model Rules.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.1 / Model Rule 1.1: competence.
• South Carolina RPC 1.15 / Model Rule 1.15: safekeeping property; holding disputed funds in trust.

Cases:

• Dedes v. Strickland, 414 S.E.2d 134 (S.C. 1992); Pee Dee State Bank v. Prosser, 295 S.C. 229, 367 S.E.2d 708 (Ct. App. 1988); United Carolina Bank v. Caroprop., Ltd., 429 S.E.2d 197 (Ct. App. 1993): elements of equitable subrogation.

See also

• SC Bar Ethics Op. 94-20: Honoring a Doctor's Lien the Lawyer Never Signed
• SC Bar Ethics Op. 93-33: Contingency Fees and Subrogated Recoveries
• SC Bar Ethics Op. 94-21: Successor Lawyer and a Prior Fee

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-93-31/

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 93-31

Plaintiff in an automobile accident case has over $60,000 in medical bills. The total amount of available insurance to cover his tort claim is only $14,000. The plaintiff's health insurer has paid close to $60,000 for the claimant's medical bills. In the plaintiff's action against the tortfeasor's liability insurance carrier, the total sum of $14,000 is available even though in addition to the $60,000 in medical bills, the plaintiff suffered significant pain and suffering incidental to his accident and injuries, for which he would be entitled to be compensated under the tort liability laws of South Carolina.

The plaintiff's attorney has not received any correspondence from the health insurer of the plaintiff with regard to subrogation. The plaintiff has advised her attorney that her accident and health insurance policy contains a subrogation provision. The plaintiff has instructed her attorney not to contact the health insurer and has stated that the plaintiff will deal with any subrogation claim herself if the health insurer attempts to assert it at a later date. The plaintiff has received no correspondence from her insurer regarding any subrogation claim nor has there been any contact either direct or indirect between the health insurer and the plaintiff's attorney.

Question:
Is the plaintiff's attorney under any ethical obligation to do anything with respect to the accident and health insurer other than as directed by the plaintiff?

Summary:
The lawyer's ethical obligation runs primarily to the lawyer's client. However, where the lawyer receives information that a subrogation interest is claimed, the lawyer must:

1) investigate and ascertain the extent of the third person's subrogation rights; 2) advise the client about the third person's legal rights, the client's legal duties to the third person, and the possible impact of the third person's subrogation rights on the lawyer's representation. This may entail the need for the lawyer to clarify with the client the lawyer's fee and lien rights; 3) if the insurance company has notified the attorney of its subrogation claim, then, pursuant to Rule 1.15, keep any disputed funds in trust until the dispute is resolved.

Opinion:
According to Black's Law Dictionary 1427 (6th ed. 1979), subrogation means:

The substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities .... Subrogation denotes the exchange of a third person who has paid a debt in the place of the creditor to whom he has paid it, so that he may exercise against the debtor all the rights which the creditor, if unpaid, might have done. Subrogation appears commonly in construction contracts, insurance contracts, suretyship, and negotiable instrument law. Insurance companies, guarantors and bonding companies generally have the right to step into the shoes of the party whom they compensate and sue any party whom the compensated party could have sued. The right of one who has paid an obligation which another should have paid to be indemnified by the other .... A device adopted by equity to compel ultimate discharge of an obligation by him who in good conscience ought to pay it.

South Carolina's Court of Appeals has described the rights of a party claiming subrogation as follows:

A party claiming the right of equitable subrogation for having paid the debt of another must have had a direct interest in the discharge of the debt or of the lien and must have been secondarily liable for the debt or for the discharge of the lien. Even then, the right to be equitably subrogated will not be granted if the other party would suffer injustice were subrogation allowed. Dedes v. Strickland, ___ S.C. ___, 414 S.E. 2d 134 (1992); Pee Dee State Bank v. Prosser, 295 S.C. 229, 367 S.E. 2d 708 (Ct. App. 1988); United Carolina Bank v. Caroprop., Ltd., 429 S.E. 2d 197, 198 (Ct. App. 1993).

In Pee Dee State Bank v. Prosser, 295 S.C. 229, 367 S.E.2d 708, 712 (Ct. App. 1988), our Court of Appeals enumerated the elements necessary to establish a right to equitable subrogation. They are:

1) The party claiming subrogation has paid the debt.
2) The party was not a volunteer but had a direct interest in the discharge of the debt or lien.
3) The party was secondarily liable for the debt or for the discharge of the lien.
4) No injustice will be done to the other party by the allowance of the equity.

The existence and extent of any substantive right of equitable subrogation depends on the contractual dealings between the client and the subrogee insurer, the facts of the particular case, and on the application of equitable principles to those facts.

The insurer's legal right to payment depends on the application of substantive law, not ethical principles. The Committee expresses no opinion on what the health insurer's possible subrogation rights may be in the hypothetical fact situation set out above.

Writing about the interface between legal ethics and subrogation rights, one commentator has observed:

An ethical problem arises when the attorney, having discovered the subrogation interest of a health insurer, for example, is instructed by the client neither to notify nor negotiate with the subrogated insurer. The subrogee is not the client, so no legal duty is owed to the insurer when the lawyer is instructed by the client not to notify this subrogee. However, the failure to address the subrogated interest is an invitation to disaster for both lawyer and client.

The better result is to persuade the client to allow a negotiated compromise of the subrogation claim. Otherwise, the client should be confidentially advised, in writing, of the client's legal obligation for subrogation so as to avoid any later malpractice claim. Conversely, settlement of a claim by plaintiff or defendant counsel without discovery and consideration of a subrogation interest gives rise to malpractice exposure. Miller, "Subrogation: Principles and Practice Pointers", 20 Colo. Lawyer 11 (1991).

The Committee expresses no opinion as to what substantive advice a South Carolina lawyer should offer his or her client with respect to dealing with the health insurer under the hypothetical facts. The proper course of action will depend on the circumstances, including the likelihood that the insurer will seek to assert a subrogation claim, and may change as litigation proceeds.

The lawyer's duty of competence requires that the lawyer analyze the client's rights vis-a-vis the health insurer and advise the client of the lawyer's evaluation of the parties' relative rights. In a particular case the lawyer may conclude that the client will be best served by seeking to negotiate a settlement between the client and the insurer. Whether such action would be appropriate and should be recommended depends on the lawyer's professional judgment under the facts of the particular case.

The Committee concludes that the lawyer does not have an affirmative duty to put the insurer on notice of the tort action. The Committee concludes that the lawyer's primary obligation is to his or her own client. If the insurer subsequently attempts to assert a subrogation right, the lawyer will need to analyze the claim in light of the facts and advise the client as to the best course of action under the circumstances. Where an insurer has a possible right to subrogation but has not submitted a claim, the lawyer's duty of competence set forth in Rule 1.1 requires the lawyer to inform the client, before disbursing settlement funds, that if the insurer later asserts its subrogation rights it may have a right to reimbursement from the client.