Can a Texas lawyer take an assignment of a client's insurance policy proceeds to pay legal fees?

Plain-English summary

The opinion addresses a lawyer who proposes to be paid by having a client, the beneficiary of a life insurance policy, assign a fixed dollar amount of the policy proceeds to the lawyer for fees, with the insurer paying that amount directly to the lawyer. The Committee notes that under Texas law causes of action are generally assignable absent a statutory or public-policy bar (citing State Farm Fire and Casualty Co. v. Gandy and PPG Industries v. JMB/Houston Centers), and it sees no bar to assigning life insurance proceeds to pay for services.

The Committee then sorts the analysis by timing and subject matter. If the legal services were completed before the assignment, the assignment is subject only to Rule 1.04's general fee requirements; payment by assignment rather than cash makes no difference. If the assignment is made before the services are completed, it is permissible if the fee arrangement satisfies Rule 1.04 and the insurance policy is not the subject of the litigation, provided the assignment and any payment received are held and accounted for separately under Rule 1.14 until the services are completed (citing Opinion 391).

The arrangement is prohibited, however, if the insurance policy is itself the subject of the litigation the lawyer is handling. Rule 1.08(h) bars a lawyer from acquiring a proprietary interest in the cause of action or subject matter of litigation, except for a permitted contingent fee under Rule 1.08(h)(2). Because the proposed assignment is a fixed amount that does not depend on the litigation outcome, it is not a contingent fee, so if it pays for services in litigation over a claim on that policy it is a prohibited proprietary interest.

In practice

Under this opinion, and under the Texas rules as they stood at the time, a lawyer can be paid through an assignment of insurance proceeds, but the analysis turns on two factors the Committee identifies: whether the work is already completed, and whether the policy is the subject of the lawyer's litigation. For uncompleted work on an unrelated matter, the proceeds must be held and accounted for under Rule 1.14 until the work is done. Where the policy is the litigation subject, only a contingent fee permitted by Rule 1.04 fits the Rule 1.08(h)(2) exception; a fixed assignment does not.

Common questions

Q: Can a client pay my fee by assigning me part of a life insurance payout?

A: Yes, if the fee meets Rule 1.04. Per Opinion 596, for completed work only Rule 1.04 applies; for future work the policy must not be the subject of the matter and you must hold the proceeds under Rule 1.14.

Q: What if the insurance policy is the very thing I'm litigating?

A: Then a fixed assignment is barred. The Committee holds it is a proprietary interest in the subject of the litigation under Rule 1.08(h), and only a permitted contingent fee fits the Rule 1.08(h)(2) exception.

Q: Why does a fixed assignment fail the contingent-fee exception?

A: Because it does not depend on the outcome. The Committee notes the contingent-fee exception applies only where the amount payable to the lawyer turns on the result of the litigation.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.04 (fees), corresponding to ABA Model Rule 1.5; Rule 1.14 (safekeeping and separate accounting of client and third-party property), corresponding to ABA Model Rule 1.15; and Rule 1.08(h) (a lawyer's acquisition of a proprietary interest in the cause of action or subject matter of litigation, with the contingent-fee exception at 1.08(h)(2)), corresponding to ABA Model Rule 1.8(i).

Citations and references

Rules of Professional Conduct:

• MR 1.5 (fees)
• MR 1.15 (safekeeping property)
• MR 1.8 (current-client specific rules, including proprietary interest in litigation at MR 1.8(i))
• Texas Disciplinary Rule 1.04
• Texas Disciplinary Rule 1.14
• Texas Disciplinary Rule 1.08(h), including 1.08(h)(2)

Cases:

• State Farm Fire and Casualty Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996), assignability of causes of action and a public-policy limit
• PPG Industries, Inc. v. JMB/Houston Centers Partners Ltd. P'ship, 146 S.W.3d 79 (Tex. 2004), invalid assignment of DTPA claims

Other opinions cited:

• Texas Ethics Opinion 391 (1978): holding assigned funds separately until services are completed

See also

• TX Ethics Op. 610: Security Interest in the Subject Matter of Litigation

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-596/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_596.pdf

Original opinion text

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

QUESTION PRESENTED

Is it permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer to accept an assignment of the proceeds of an insurance policy in payment of legal fees and expenses?

STATEMENT OF FACTS

A lawyer proposes to enter into an employment agreement with a client who is the beneficiary of a life insurance policy on a decedent. The client will assign to the lawyer a specific dollar amount of the proceeds from the policy in payment of the lawyer’s fees agreed upon by the lawyer and client. Under the assignment, the assigned portion of the proceeds will be paid by the insurance company directly to the lawyer.

DISCUSSION

In general, under Texas law, causes of action may be freely assigned absent a statutory bar. State Farm Fire and Casualty Company v. Gandy, 925 S.W.2d 696, 707 (Tex. 1996). However certain types of assignments have been held invalid based on considerations of public policy. See e.g. PPG Industries, Inc. v. JMB/Houston Centers Partners Limited Partnership, 146 S.W.3d 79 (Tex. 2004) (assignments of claims under the Texas Deceptive Trade Practices-Consumer Protection Act invalid); State Farm Fire and Casualty Company v. Gandy, 925 S.W.2d 696 (Tex. 1996) (holding invalid defendant’s assignment to plaintiff of defendant’s claim against liability insurer as part of a settlement arrangement involving an agreed judgment and agreement not to collect judgment from defendant). The Committee is aware of no public policy or other grounds that would under Texas law generally require invalidating an assignment of life insurance policy proceeds to pay for services.

If legal services have been completed before an assignment of insurance proceeds in payment of legal fees, such an assignment will be subject only to the generally applicable requirements concerning legal fees of Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct. The fact that payment is made by an assignment of insurance proceeds rather than by payment of money will not be significant under the Texas Disciplinary Rules.

In the circumstances here considered, the employment agreement is entered into and the insurance policy proceeds are assigned before the legal services have been completed. If the fee arrangement complies with the requirements of Rule 1.04 and the insurance policy is not the subject of the litigation for which the lawyer has been retained, such a fee arrangement will be permissible provided that the assignment and any payment relating thereto when received by the lawyer are held and accounted for separately in compliance with Rule 1.14 until the completion of the legal services for which the assignment is compensation. See Professional Ethics Committee Opinion 391 (February 1978).

However, the proposed assignment will be prohibited if the insurance policy in question is also the subject of litigation for which the lawyer will be compensated by means of the assignment. Rule 1.08(h) provides in pertinent part as follows:
“A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:
.. .
(2) contract in a civil case with a client for a contingent fee that is permissible under Rule 1.04.”
The exception in subparagraph (2) of Rule 1.08(h) for contingent fees would apply if the insurance policy were the subject of the litigation and the amount payable to the lawyer was dependent on the outcome of the litigation. However, in the circumstances presented, the proposed assignment is for an amount that does not depend on the litigation outcome. Hence the proposed assignment, if it were in payment for the lawyer’s services in litigation concerning a claim under the insurance policy, would be prohibited as a lawyer’s acquisition of a proprietary interest in a claim where the proprietary interest is not a permitted contingent fee.

CONCLUSION

Under the Texas Disciplinary Rule of Professional Conduct, a lawyer may receive an assignment of insurance proceeds as compensation for legal services already completed at the time of the assignment, subject only to the generally applicable requirements concerning legal fees as set forth in Rule 1.04. If a proposed assignment of insurance proceeds to a lawyer is compensation for legal services that have not been completed at the time of the assignment, the lawyer may receive such assignment provided the insurance recovery is not the subject of the legal services and provided the assignment and any payment relating thereto are held and accounted for in compliance with Rule 1.14 until the completion of the services. A lawyer may not receive an assignment of proceeds of an insurance policy if the assignment is compensation for legal services in litigation that has not been completed with respect to a claim on the insurance policy and the assignment to the lawyer is not a permissible contingent fee for the representation.

Tex. Comm. On Professional Ethics, Op. 596 (2010)