Can a plaintiff's lawyer agree to indemnify the defendant's insurer against unpaid liens as a condition of settling the case?

Plain-English summary

In the hypothetical, after a personal injury settlement is otherwise negotiated, the defendant's insurer (through staff counsel) demands that the plaintiff's lawyer personally agree to indemnify the insurer against any third-party liens that are not paid from the settlement proceeds or by the plaintiff. The committee addresses whether the plaintiff's lawyer may agree, and whether the defendant's lawyer may demand such an agreement as a condition of settlement.

The committee concludes the plaintiff's lawyer may not agree. First, the indemnification would obligate the lawyer to pay the client's debts, which is improper financial assistance to a client in connection with litigation under Rule 1.8(e); neither exception applies, because the liens are the client's personal expenses and the client is not indigent. Second, the demand creates a concurrent conflict under Rule 1.7(a)(2): because the insurer will not settle without the indemnity, the lawyer's personal interest in avoiding liability for the client's debts may be at odds with the client's desire to settle, so the lawyer cannot objectively evaluate whether settlement is in the client's best interests. The committee notes this does not change the lawyer's existing duties to third parties under Rule 1.15(b)(4) and (5): the lawyer must still protect a third party's valid claim to settlement proceeds in the lawyer's possession, but may not assume the further obligation to pay the client's debts if the lawyer properly disburses to the client and the client then fails to pay.

As to the defendant's lawyer, the committee concludes that insisting on the indemnification as a condition of settlement violates Rule 8.4(a), because it is an inducement to the plaintiff's lawyer to violate Rules 1.7(a) and 1.8(e). The committee notes that every state to consider the issue has reached the same conclusion.

In practice

Under the Virginia rules as they stood when the opinion issued, a plaintiff's lawyer may not agree to indemnify a defendant or insurer for third-party lien claims against the settlement proceeds. The opinion holds that such an agreement is improper financial assistance to the client under Rule 1.8(e) and creates a conflict of interest under Rule 1.7(a)(2) between the lawyer's personal exposure and the client's interest in settling. The opinion holds that the insurer's lawyer who demands the indemnification as a condition of settlement violates Rule 8.4(a) by inducing the plaintiff's lawyer to violate the rules. The opinion states that the lawyer's separate duties under Rule 1.15(b)(4) and (5) to protect a third party's valid claim to funds in the lawyer's possession are unaffected, but the lawyer may not assume an obligation to pay the client's debts after a proper disbursement to the client.

Common questions

Q: Can I agree to indemnify the insurer for my client's unpaid liens to get the settlement done?

A: No. The opinion concludes that agreeing to indemnify the insurer is improper financial assistance to the client under Rule 1.8(e) and creates a conflict under Rule 1.7(a)(2), because your personal exposure could be at odds with your client's interest in settling.

Q: Can the insurer's lawyer demand the indemnification as a condition of settlement?

A: No. The opinion concludes that insisting on the provision violates Rule 8.4(a), because it induces the plaintiff's lawyer to violate Rules 1.7(a) and 1.8(e).

Q: Does this change my duty to protect a third party's lien on the settlement funds?

A: No. The opinion states that the lawyer's duties under Rule 1.15(b)(4) and (5) to protect a third party's valid claim to funds in the lawyer's possession are unaffected; the lawyer simply may not assume the added obligation to pay the client's debts after properly disbursing the funds to the client.

Background and rules framework

The opinion interprets Rule 1.8(e) of the Virginia Rules of Professional Conduct (Model Rule 1.8(e)), which bars providing financial assistance to a client in connection with litigation except for advancing costs, and Rule 1.7(a)(2) (Model Rule 1.7), the concurrent-conflict rule, including conflicts arising from the lawyer's personal interest. It also applies Rule 8.4(a) (Model Rule 8.4(a)) to the lawyer who induces another to violate the rules, and distinguishes the lawyer's separate safekeeping duties under Rule 1.15(b).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8(e) / Va. Rule 1.8(e) (financial assistance to a client in litigation)
• Model Rule 1.7(a)(2) / Va. Rule 1.7(a)(2) (concurrent conflict; personal interest)
• Model Rule 8.4(a) / Va. Rule 8.4(a) (inducing another to violate the rules)
• Model Rule 1.15 / Va. Rule 1.15(b)(4), (5) (safekeeping; third-party claims)

Other opinions cited:

• NYC Bar Formal Op. 2010-3; Missouri Formal Op. 125; Arizona Op. 03-05; North Carolina RPC 228: indemnifying an insurer against client liens is unethical

See also

• VSB Ethics Op. 1865: Third-Party Liens on Settlement Funds
• VSB Ethics Op. 1863: Contacting an Insurer's Adjuster

Source

• Landing page: https://vsb.org/Site/about/rules-regulations/leo-opinions.aspx
• Original PDF: https://www.vsb.org/common/Uploaded%20files/LEOs/1858.pdf

Original opinion text

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

LEGAL ETHICS OPINION 1858

MAY A LAWYER AGREE TO
INDEMNIFY AN INSURANCE
COMPANY AS A CONDITION OF
SETTLEMENT?

In this hypothetical, a lawyer represents a plaintiff in a personal injury suit. The
defendant is represented by her insurance company’s staff counsel. After all other
aspects of a settlement offer were negotiated, the defendant’s lawyer notified the plaintiff
that the insurance company requires plaintiff’s lawyer to agree to indemnify the insurer
against liens in the event that they are not paid from the settlement proceeds or the
plaintiff. Plaintiff’s lawyer refuses to agree to indemnify the insurer, arguing that to do
so would violate the Rules of Professional Conduct by making him personally
responsible for the debts of his client. The defendant’s lawyer refuses to finalize the
settlement without this agreement and is willing to proceed to trial if plaintiff’s lawyer
refuses to accept the indemnification provision.
QUESTIONS PRESENTED
1. May a plaintiff’s lawyer agree to indemnify a defendant and/or his insurer for any
third-party lien claim against settlement proceeds received by the plaintiff?
2. May the defendant’s counsel request or demand such an indemnification agreement as
a condition of settlement?
APPLICABLE RULES
The applicable Rules of Professional Conduct are Rules 1.7(a)(2)1, 1.8(e)2, and 8.4(a)3.
ANALYSIS
Every state to consider this issue has found that it violates multiple Rules of
Professional Conduct for the plaintiff’s lawyer to agree to indemnify the defendant’s
insurer against debts that are owed by the plaintiff or to be paid from the settlement

1

Rule 1.7 Conflict of Interest: General Rule
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves
a concurrent conflict of interest. A concurrent conflict of interest exists if:

(2) there is significant risk that the representation of one or more clients will be materially limited
by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest
of the lawyer.

2

Rule 1.8 Conflict of Interest: Prohibited Transactions
(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated
litigation, except that:
(1) a lawyer may advance court costs and expenses of litigation, provided the client remains
ultimately liable for such costs and expenses; and
(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on
behalf of the client.

3

Rule 8.4 Misconduct
It is professional misconduct for a lawyer to:
(a) violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to
do so, or do so through the acts of another;

LEO 1858
Page 2
proceeds.4 While not all of those opinions address the role of the defendant’s lawyer in
the transaction, those that do so uniformly find that it is also unethical for the defendant’s
lawyer to draft, propose or participate in an agreement that contains such an
indemnification provision.5
Plaintiff’s lawyer
The Committee agrees that the plaintiff’s lawyer may not agree to indemnify the
defendant’s insurer for future claims resulting from the plaintiff’s failure to pay liens
which he was obligated to pay from the settlement proceeds.
First, the proposed agreement violates Rule 1.8(e). Because the indemnification
agreement would obligate the lawyer to pay the client’s debts, the agreement constitutes
improper financial assistance to the client. According to the hypothetical, the expenses
for which the lawyer is assuming responsibility are the subject of the lawsuit, and
therefore are undoubtedly connected to the pending or contemplated litigation. Neither
of the exceptions to Rule 1.8(e) applies, as the expenses at issue are personal expenses of
the client and the hypothetical does not indicate that the client is indigent; in any event,
the demand for an indemnification agreement is not limited to cases in which the client is
indigent.
Secondly, the proposed agreement creates a conflict of interest between the
plaintiff and his lawyer pursuant to Rule 1.7(a). Because the insurer will not agree to the
settlement in the absence of an indemnification agreement, the lawyer’s personal interest
in avoiding liability for the debts of his client may be at odds with his client’s desire to
settle the case. The lawyer cannot reasonably be expected to provide an objective
evaluation of whether the settlement is in his client’s best interests when a settlement of
any amount could result in personal liability for the lawyer, while any outcome of trial
ensures that the lawyer will not be personally liable.
This opinion does not affect the lawyer’s responsibilities to third parties as
established by Rule 1.15(b)(4) and (5).6 To the extent that a third party has a claim to an
interest in the settlement proceeds, the lawyer is obligated to protect that claim when the
lawyer is in possession of the settlement proceeds. The lawyer does not have, and may
not assume, the further obligation to pay his client’s debts if the lawyer ethically
disburses the settlement proceeds to the client but the client does not fulfill his
obligations to third parties.
Defendant’s lawyer

4

Tennessee Formal Op. 2010-F-154 (2010), New York City Bar Association Formal Opinion 2010-3
(2010), Missouri Formal Op. 125 (2008), South Carolina Ethics Adv. Op. 08-07 (2008), Indiana Opinion
No. 1 of 2005 (2005), Arizona Opinion 03-05 (2003), North Carolina Ethics Op. RPC 228 (1996),
Wisconsin Formal Op. E-87-11 (1987).

5

New York City Bar Association Formal Opinion 2010-3 (2010), Missouri Formal Op. 125 (2008),
Arizona Opinion 03-05 (2003), Wisconsin Formal Op. E-87-11 (1987).

6

Rule 1.15 Safekeeping Property
(b) Specific Duties. A lawyer shall:

(4) promptly pay or deliver to the client or another as requested by such person the funds,
securities, or other properties in the possession of the lawyer that such person is entitled to receive; and
(5) not disburse funds or use property of a client or third party without their consent or convert
funds or property of a client or third party, except as directed by a tribunal.

LEO 1858
Page 2
The Committee is of the opinion that it is a violation of Rule 8.4(a) for the
insurer’s lawyer to include this provision in settlement agreements. According to the
hypothetical, the insurer, through its counsel, refuses to offer a settlement that does not
include this provision. The insurer’s lawyer’s insistence that the plaintiff’s lawyer enter
into this indemnification agreement, as a condition to settlement, is an inducement to the
plaintiff’s lawyer to violate Rules 1.7(a) and 1.8(e).
This opinion is advisory only based upon the facts as presented, and not binding
on any court or tribunal.
Committee Opinion
July 27, 2011