Can a contingency-fee firm charge the client for the cost of litigation cost insurance, payable only if the client recovers?

Plain-English summary

The Committee considered whether a firm that takes cases on contingency may charge the client for the cost of a litigation insurance policy, where the client's liability for costs is contingent on a recovery. Contingency-fee lawyers often advance large sums as "costs" during litigation and recover them only if the case succeeds; some buy insurance to cover those costs in the event of a loss or a small recovery. The question is whether the lawyer may pass the cost of that insurance to the client upon a recovery.

The Committee concluded the arrangement is not prohibited, subject to conditions. A contingent fee must comply with Rule 1.5, which bars unreasonable fees or expenses and requires a written contingent-fee agreement stating how the fee is determined and how expenses are deducted. Because the firm buys the policy and contracts for reimbursement of the premium on recovery, Rule 1.8(a) (business transaction with a client) may apply, so the terms must be fair and reasonable, fully disclosed in writing the client can understand, the client advised in writing to seek independent counsel and given a chance to do so, and the client's informed written consent obtained. In the event of a loss, the firm effectively receives payment for the representation from someone other than the client, implicating Rule 1.8(f): the client must give informed consent, the insurer must not interfere with the firm's independent professional judgment or the attorney-client relationship, and client information stays protected under Rule 1.6.

The Committee added that the amount charged must be reasonable both when charged and when collected under Rule 1.5; if charging the premium on top of the fee and expenses would substantially deplete a smaller-than-expected recovery, charging it may be unreasonable and the firm must not enforce that part of the agreement. The opinion acknowledged the policy can create a potential conflict (for example, an incentive to go to trial rather than settle), but observed that contingency cases always carry such tensions, and Rules 1.2(a) and 1.4 require the lawyer to abide by the client's decisions about objectives and settlement and to consult on the means.

In practice

The opinion holds that, under the Utah rules as they stood at the time, a contingency-fee firm may charge a client for the cost of litigation cost insurance upon recovery if the conditions it lists are met: fair and reasonable terms, full written disclosure the client can understand, written advice to seek independent counsel and an opportunity to do so, the client's written agreement, and an insurer with no decision-making power over the case. Per the opinion, the premium must be reasonable both when charged and when collected under Rule 1.5, and the firm must not enforce a premium charge that would be unreasonable given the size of the recovery.

Common questions

Q: Can a contingency firm pass the cost of litigation cost insurance to the client?

A: Yes, conditionally. The opinion concludes the Utah rules do not preclude charging the client the cost of a litigation insurance policy on recovery if the listed safeguards are satisfied.

Q: What conditions must the fee agreement meet?

A: The opinion lists fair and reasonable terms fully disclosed in writing, written advice to seek independent counsel with a chance to do so, the client's signed agreement to assume the cost on recovery, and an insurer with no decision-making power and no interference with the firm's independent judgment.

Q: What if charging the premium would eat up most of a small recovery?

A: The opinion concludes that the premium must be reasonable both when charged and when collected under Rule 1.5, and that if the charge would substantially deplete the client's recovery it may be unreasonable, in which case the firm must not enforce that part of the agreement.

Q: Does buying cost insurance create a conflict of interest?

A: The opinion notes it can (for example, an incentive to try rather than settle), but explains that contingency cases inherently carry such tensions, and Rules 1.2(a) and 1.4 require the lawyer to abide by the client's decisions on objectives and settlement.

Background and rules framework

The opinion interprets Utah Rules of Professional Conduct 1.5 (fees), 1.8(a) (business transactions with a client), and 1.8(f) (compensation from a third party), and references Rules 1.2(a) (scope and settlement authority), 1.4 (communication), 1.6 (confidentiality), and 1.7 (conflicts), all corresponding to the same-numbered ABA Model Rules. The analysis treats a firm's purchase of cost insurance and reimbursement from the client on recovery as a transaction governed by the fee-reasonableness and business-transaction safeguards, distinguishing it from the firm financing the litigation itself.

Citations and references

Rules of Professional Conduct:

• MR 1.5 / Utah RPC 1.5 (fees; reasonableness; written contingent-fee agreement)
• MR 1.8 / Utah RPC 1.8(a), (e), (f) (business transactions; financial assistance; third-party compensation)
• MR 1.7 / Utah RPC 1.7 (concurrent conflicts of interest)
• MR 1.4 / Utah RPC 1.4 (communication); MR 1.2 / Utah RPC 1.2(a) (settlement authority)
• MR 1.6 / Utah RPC 1.6 (confidentiality)

Other opinions cited:

• Utah Ethics Advisory Op. 02-01 Appx. (2002); Georgia Formal Op. 92-1 (1992); Texas Op. 465 (1991)

See also

• Utah Ethics Op. 02-01: Recourse Loans to Finance Litigation Costs
• Utah Ethics Op. 13-04: Waiving Ineffective Assistance in a Plea Agreement
• Utah Ethics Op. 25-02: Paying Referral Fees to Lawyers and Non-Lawyers

Source

• Landing page: https://www.utahbar.org/ethics-opinions/2019-01/
• Original PDF: https://www.utahbar.org/wp-content/uploads/2022/12/19-01.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor errors may remain; the linked PDF is authoritative.

Ethics Advisory Opinion Committee

Opinion No. 19-01

Issued March 8, 2019

ISSUE

1. Is it permissible for a firm to charge the cost of a litigation insurance policy to the client if the firm recovers funds for the client, through a settlement or positive trial verdict, and the client's liability for payment of costs is contingent on a recovery?

OPINION

2. A firm may charge the cost of a litigation insurance policy to the client if the firm recovers funds for the client, through settlement or positive trial verdict, and the client's liability for payment of costs is contingent on a recovery, as long as:

(1) the terms are fair and reasonable to the client, fully disclosed to the client, and transmitted in writing in a manner that can be reasonably understood by the client;

(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction;

(3) the client agrees, in a writing signed by the client, to assume the cost of the litigation insurance policy upon recovery; and

(4) the insurance company has no decision-making power in the client's case and the insurance policy does not in any way interfere with the law firm's independence of professional judgment or the attorney-client relationship.

BACKGROUND

3. Typically, attorneys who undertake cases on a contingency fee basis do not charge the client "costs," but recover costs if there is a recovery. Such attorneys often advance large sums of money as "costs" during the litigation. Some attorneys have purchased insurance to cover these costs in the event of a loss or a recovery too small to cover the costs. Now the question arises whether the attorney may ethically charge the cost of this insurance to the client if the firm recovers funds for the client through a settlement or positive trial verdict and the client's liability for payment of costs is contingent on a recovery.

ANALYSIS

4. The Utah Rules of Professional Conduct ("URPC") implicated in this opinion are the following:

• Rule 1.2(a). Scope of Representation and Allocation of Authority Between Client and Lawyer
• Rule 1.4. Communication
• Rule 1.5. Fees
• Rule 1.6. Confidentiality of Information
• Rule 1.7. Conflict of Interest: Current Clients
• Rule 1.8(a). Conflict of Interest: Current Clients: Specific Rules
• Rule 1.8(f). Conflict of Interest: Current Clients: Specific Rules

5. The proposed agreement between firm and client is not specifically prohibited by the Utah Rules of Professional Conduct. A contingent fee agreement must comply with Rule 1.5, which states, in pertinent part: "A lawyer shall not make an agreement for, charge or collect an unreasonable fee or an unreasonable amount for expenses." URPC Rule 1.5(a). Pursuant to Rule 1.5(c), a contingent fee agreement shall be in writing signed by the client, stating the method by which the fee is to be determined, and when and to what extent litigation and other expenses are to be deducted from the recovery. URPC Rule 1.5(c). Upon conclusion of a contingent fee matter, the firm shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.

6. The firm's purchase of an insurance policy to cover expenses in the event of a loss and contracting with the client to reimburse the premiums paid by the firm in the event of a recovery, may also invoke Rule 1.8(a) of the Utah Rules of Professional Conduct, as a business transaction with the client or the knowing acquisition of an ownership, possessory, security or other pecuniary interest adverse to the client. If so, the transaction and terms on which the firm acquires its interest must be fair and reasonable to the client, fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client. The client may need to be advised in writing of the desirability of seeking the advice of independent legal counsel on the transaction and given a reasonable opportunity to seek said counsel. And the client may need to give informed consent, in writing signed by the client, to the essential terms of the transaction and the firm's role in the transaction. [fn1: "Informed Consent" denotes the agreement by a person to a proposed course of action after the lawyer has communicated adequate information and explanation of the material risks of and reasonably available alternatives to the proposed course of action. See URPC Rule 1.0(f).]

7. In the case of a loss, the firm is effectively accepting monies for its representation of a client from one other than the client, and Rule 1.8(f) of the Utah Rules of Professional Conduct applies. In this instance, the client must give informed consent, there shall be no interference with the firm's independence of professional judgment or with the attorney-client relationship, and information relating to representation of a client shall be protected as required by Rule 1.6 of the Utah Rules of Professional Conduct. As such, the firm shall ensure that the insurance company has no decision-making power in the client's case and that the policy itself does not interfere with the firm's independence of professional judgment or the attorney-client relationship. [fn2: Accord Utah Ethics Advisory Op. Comm. ("EAOC"), Op. 02-01 Appx. (2002) (citing Ga. State Bar, Formal Op. 92-1 (1992) (lawyer to ensure that bank understands that its contractual arrangement can in no way affect or compromise lawyer's obligation to client)).]

8. The ultimate amount the client is required to pay upon recovery for the insurance premium must be reasonable both when charged and when collected pursuant to Rule 1.5 of the Utah Rules of Professional Conduct. For example, if, in a particular case, the client settles or prevails at trial but is awarded a lesser sum than expected, such that charging the premium in addition to the contingent fee and expenses would substantially deplete the amount the client recovers, charging the premium to the client may be unreasonable. If the amount calculated in the fee agreement for the premium is thereby unreasonable, the firm must not enforce this part of the agreement. This is true even if the litigation costs and the percentage used to calculate the premium are reasonable and/or agreed as reasonable by the client.

9. The insurance coverage that protects monies advanced by the firm in a contingent fee arrangement may provide an indirect benefit to the client, because it gives the firm greater confidence in incurring costs litigating a client's case in a way that would maximize the results for the client. The client may well be willing to pay for this benefit in the form of reimbursement for the cost of insurance in the event of recovery. [fn3: Although the purchase of an insurance policy by the firm may provide an indirect benefit to the client, the policy itself, in the scenario presented to the EAOC, rather provides financial assistance to the firm in the event of a loss. Rule 1.8(e) of the Utah Rules of Professional Conduct states: "A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that: (e)(1) a lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter . . . ." Comment 10 to Rule 1.8(e) states: "Lawyers may not subsidize lawsuits or administrative proceedings brought on behalf of their clients, including making or guaranteeing loans to their clients for living expenses, because to do so would encourage clients to pursue lawsuits that might not otherwise be brought and because such assistance gives lawyers too great a financial stake in the litigation. These dangers do not warrant a prohibition on a lawyer lending a client court costs and litigation expenses . . . because these advances are virtually indistinguishable from contingent fees and help ensure access to the courts." An insurance policy that covers the costs of litigation in the event of a loss may reduce the lawyer's financial stake in the litigation, by reducing the lawyer's losses. The client's agreement to cover the cost of the insurance premium in the event of recovery may further reduce the lawyer's losses and financial stake in the litigation.]

10. Alternatively, such an insurance policy may encourage the firm to go to trial rather than accept a settlement offer for the client. For example, if costs in a particular case are substantial, this may motivate the firm itself to push for going to trial. This raises the possibility of a conflict of interest between the firm and the client. [fn4: If a conflict arises from the added component of litigation insurance, the firm would need to perform an analysis under Rule 1.7 of the Utah Rules of Professional Conduct.] However, certain conflicts of interest are inherent in contingency fee cases. For instance, a firm may prefer the client accept a low settlement offer so the firm receives some fees, while the client may desire to reject the offer and go to trial. As there is always the potential for such conflicts, the safeguards of Rules 1.2(a) and 1.4, Utah Rules of Professional Conduct, unless excepted otherwise, direct lawyers to abide by a client's decisions concerning the objectives of representation, consult with the client as to the means by which they are to be pursued, and abide by a client's decision whether to settle a matter. The purchase of litigation cost protection insurance does not alter this dynamic of the lawyer-client relationship.

CONCLUSION

11. The Utah Rules of Professional Conduct do not preclude a firm from purchasing a litigation insurance policy and charging the cost of the policy to the client upon recovery, as long as the terms are fair and reasonable, fully disclosed in writing in a manner that can be reasonably understood by the client, the client is advised to seek independent counsel and given the opportunity to do so, the client agrees in writing to the terms of the agreement, the insurance company has no decision-making power in the client's case, and the policy does not interfere with the firm's independence of professional judgment or the attorney-client relationship. [fn5: Accord Utah EAOC, Op. 02-01 Appx. (2002) (citing Tex. Comm'n on Prof'l Ethics, Op. 465 V. 54 Tex. B.J. 76 (1991) (attorney may borrow money from a lending institution for case expenses, and charge or pass on to the client the actual out of pocket interest or finance charges)).]