When an insurer asserts a PIP subrogation claim to settlement funds but the client tells the lawyer to pay only the client, what must the lawyer do with the money?

Plain-English summary

A lawyer represented a client on a contingent-fee basis for auto-accident injuries. The client's own insurer had paid $10,000 in personal injury protection (PIP) medical benefits under a policy providing that the insurer would be reimbursed, after the client is fully compensated, from any recovery. The lawyer (not a party to the policy) settled the client's claim against the responsible third party, obtained the insurer's PIP ledger and a letter asserting the insurer's right of recovery and asking the lawyer to "protect our subrogation interest." After receiving the settlement, the client instructed the lawyer not to repay the insurer. The lawyer asked about his ethical duties.

The committee concluded that, on these facts, the lawyer must hold the funds in trust or interplead them until the underlying client-insurer dispute is resolved. RPC 1.15A(f) requires promptly paying a client or third person the property they are entitled to receive, except as the rule states. RPC 1.15A(g) requires that, when two or more persons (possibly including the lawyer) claim interests in property, the lawyer hold it in trust until the dispute is resolved, promptly distribute undisputed portions, and take reasonable action to resolve the dispute, including interpleader when appropriate. The committee held that to trigger these duties a third-party claim must be specific to the funds in the lawyer's possession (not all of the client's property and not general unsecured creditors) and must have a valid, non-frivolous legal basis, a reasonable prima facie legal right such as an ownership interest, a statutory lien, or a contract between the client and claimant; to the extent this varied from Advisory Opinion 2166, that prior opinion was superseded. Here the insurer's contractual subrogation right, specific to the settlement proceeds and non-frivolous, plus its request to protect the subrogation interest, was enough to trigger RPC 1.15A(g). The exact resolution is fact-specific and beyond the opinion, with the lawyer required to promptly distribute undisputed portions and, per Comment 9, to expend dispute-resolution effort proportional to the amount and circumstances. The committee noted, per Comment 4, that these ethical duties neither create nor eliminate civil liability to the third party (citing Trask v. Butler and Hetzel v. Parks).

In practice

Under the Washington rules as they stood at the time of the opinion, the committee held that a client's instruction to pay only the client does not override the lawyer's safekeeping duty when a third party asserts a qualifying claim to the same funds. The opinion holds that an insurer's contractual PIP subrogation claim, specific to the settlement proceeds and non-frivolous, triggers RPC 1.15A(g), so the lawyer must hold or interplead the disputed amount, promptly release any undisputed portion, and take reasonable steps to resolve the dispute. It cabins the triggering claim to one specific to the funds with a prima facie legal basis, not the claims of general creditors, and it supersedes the contrary portion of Advisory Opinion 2166. The committee left the ultimate entitlement and any civil liability to other law.

Common questions

Q: The client told me to pay only him, but his insurer claims part of the settlement. What do I do?

A: The committee concluded you must hold the disputed funds in trust or interplead them until the client-insurer dispute is resolved, while promptly distributing any undisputed portion, under RPC 1.15A(f) and (g).

Q: What kind of third-party claim triggers the duty to hold funds?

A: One specific to the funds in your possession and with a valid, non-frivolous legal basis, such as an ownership interest, a statutory lien, or a contract between the client and the claimant. General unsecured creditor claims do not trigger it.

Q: Does an insurer's PIP subrogation letter count?

A: Yes, on these facts. The committee held the insurer's contractual subrogation right, specific to the settlement proceeds and non-frivolous, plus its request to protect that interest, triggered the lawyer's duties under RPC 1.15A(g).

Q: Does this make the lawyer liable to the insurer?

A: The committee said its ethical analysis neither creates nor eliminates civil liability to a third party, citing Comment 4 and Trask v. Butler and Hetzel v. Parks; entitlement and liability are matters of other law.

Background and rules framework

The opinion interpreted Washington RPC 1.15A(f) and (g) (Model Rule 1.15, prompt delivery of property and the duty to hold and resolve disputed property), with Comments 4 and 9. It addressed when a third-party claim, here an insurer's contractual PIP subrogation interest, is specific and non-frivolous enough to trigger the safekeeping duty, superseding the contrary portion of Advisory Opinion 2166.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / Washington RPC 1.15A(f), 1.15A(g) and Comments 4, 9 (prompt delivery; disputed property; interpleader)

Cases:

• Trask v. Butler, 123 Wn.2d 835, 872 P.2d 1080 (Wash. 1994), lawyer's liability to non-clients
• Hetzel v. Parks, 93 Wn. App. 929, 971 P.2d 115 (1999), lawyer's duties to third parties

Other opinions cited:

• WSBA Advisory Opinion 2166 (superseded in part by this opinion on what triggers the safekeeping duty)

See also

• WA Ethics Op. 2188: funds held in trust for a deceased client
• WA Ethics Op. 2176: keeping uncashed trust-account funds

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1658

Original opinion text

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

Advisory Opinion: 2213
Year Issued: 2011
RPC(s): RPC 1.15A(f), (g)
Subject: Disbursal of Settlement Funds; Claims by Third Party Insurer

This opinion concerns a lawyer’s duties when a third-party insurer makes a claim to funds in the lawyer’s possession, but the lawyer’s client has instructed the lawyer to disburse those funds solely to the client. On the facts presented, it is the lawyer’s duty to hold the funds in trust or to interplead them until the underlying dispute between the client and the client’s insurer is resolved.

Lawyer represents Client on a contingent fee basis for injuries and damages Client suffered in an automobile accident. Client has an automobile insurance policy with Insurer that includes personal injury protection (“PIP”) benefits. Pursuant to the policy’s PIP provision, Insurer paid $10,000 of Client’s medical bills stemming from the accident. The policy contains a clause providing that Insurer “shall be reimbursed to the extent of [Insurer’s] payment after [Client] has been fully compensated for his or her loss.” The policy is a contract between the Client and Insurer; Lawyer is not a party to the policy, nor has Lawyer promised to pay Insurer or otherwise to protect Insurer’s interests, pursuant to the policy.

Lawyer, with Client’s approval, negotiates a settlement of Client’s personal injury claim against the responsible third party. Lawyer requested and received from Insurer a copy of Insurer’s PIP ledger, and a letter stating:

"This letter is to advise you of our rights of recovery to the extent of our payment minus an appropriate share of attorney fees where required by state law. Please contact me prior to settling the case to confirm the amount due back to us. Attached is a medical ledger of payments tendered on behalf of your client. . . . Our insured’s policy states, in part, if we make a payment under this policy and the person to or for whom payment is made recovers damages from another, that person shall: 1) Hold in trust for us the proceeds of recovery; and 2) reimburse us to the extent of our payment. . . . We respectfully request you to protect our subrogation interest. I would appreciate receiving your response within the next 30 days."

After Lawyer receives the settlement proceeds, Client specifically instructs Lawyer not to repay Insurer for any PIP benefits paid on Client’s behalf. Lawyer has requested an advisory opinion on his ethical obligations in these circumstances.

RPC 1.15A(f) provides that, “[e]xcept as stated in this Rule, a lawyer must promptly pay or deliver to the client or third person the property which the client or third person is entitled to receive.” Under RPC 1.15A(g):

If a lawyer possesses property in which two or more persons (one of which may be the lawyer) claim interests, the lawyer must maintain the property in trust until the dispute is resolved. The lawyer must promptly distribute all undisputed portions of the property. The lawyer must take reasonable action to resolve the dispute, including, when appropriate, interpleading the disputed funds.

To trigger the lawyer’s safekeeping duties under RPC 1.15A(g), a claim by a third party must be specific to the funds in the lawyer’s possession, because the rule only applies to “property in which two or more persons . . . claim interests,” and not to all property of the client. Moreover, it is unreasonable to require a lawyer to protect all claims of all creditors of a client or to pay general unsecured creditors of a client, including general judgment creditors who have not attached or garnished any specific funds. That would unduly compromise the lawyer’s duties to the client, and would unreasonably burden the lawyer’s ability to use a trust account to facilitate the client’s provision and receipt of funds in connection with matters on which an attorney is providing representation.

The third-party claim also must have a valid legal basis and be non-frivolous. This does not require the lawyer to be the ultimate arbiter of the dispute. Rather, it requires the claimant to establish a reasonable prima facie legal right to the property in the lawyer’s possession before the ethical duties under RPC 1.15A will apply. Such a right could be established, for instance, by an existing ownership interest, a statutorily created lien, or a claim based on a contract entered into by the client and the claimant. To the extent the conclusion of this paragraph varies with the conclusion reached in Advisory Opinion no. 2166, that portion of the prior opinion is superseded.

An insurer’s claim to settlement proceeds, if based on a contractual right to recover prior payments from such proceeds, is a “claim” that subjects the lawyer to the duties under RPC 1.15A(g). That claim is specific to the funds (property) in the lawyer’s possession, is agreed to between the client and insurer under the terms of their insurance contract, and is a non-frivolous assertion of that contractual right. Under the facts presented, the insurer’s citation of its contractual right to the funds, plus the insurer’s request for the lawyer to “protect our subrogation interest,” is the assertion of a claimed interest in the property sufficient to trigger the lawyer’s duties under RPC 1.15A(g).

The lawyer’s exact resolution of the dispute between client and insurer is beyond the scope of this opinion, and will be fact-specific. Under RPC 1.15A(g), the lawyer is required to “promptly distribute all undisputed portions of the property.” After that, pursuant to the rule’s Comment [9], “the extent of the efforts that a lawyer is obligated to take to resolve a dispute depend on the amount in dispute, the availability of methods for alternative dispute resolution, and the likelihood of informal resolution.”

Although also beyond the scope of this opinion, it is notable that the lawyer’s ethical duties in these circumstances neither create nor eliminate potential civil liability to the third-party claimant. Under Comment [4] to the rule, “[t]he inclusion of ethical obligations to third persons in the handling of trust funds and property is not intended to expand or otherwise affect existing law regarding a Washington lawyer’s liability to third parties other than clients.” (citing Trask v. Butler, 123 Wn.2d 835, 872 P.2d 1080 (1994); Hetzel v. Parks, 93 Wn.App. 929, 971 P.2d 115 (1999))

[Amended 2012]