Can a West Virginia lawyer agree with a liability insurer to defend the insurer's insureds for a fixed or flat fee?

Plain-English summary

The Lawyer Disciplinary Board considered whether a lawyer or law firm may agree with a liability insurer to defend the insurer's insureds on a fixed or "flat" fee basis, where the fee is set in advance and the same amount is used for each case without regard to the complexity of an individual matter or the work it requires. The Board had received comment that, in practice, the amount paid might be insufficient to cover the cost of representation in some cases, possibly hampering or appearing to hamper the defense, while other lawyers reported the arrangement was satisfactory. This Amended L.E.I. 98-01 replaced and superseded the original L.E.I. 98-01 issued March 26, 1998, and was approved as amended on February 19, 1999.

The Board concluded that flat-fee arrangements do not constitute a per se violation of the Rules, but that their use creates the potential for a violation, so lawyers had to analyze the propriety of the arrangement case by case. In insurance defense, while the insurer pays, the lawyer's primary duty is to the insured client, and the lawyer had to provide a competent defense; to guard against harm to the insured, the lawyer had to ensure the fixed fee was sufficient to allow a competent defense. The opinion identified Rules 1.5(a), 1.7(b), and 1.8(f)(2) as central: a fee so low it forces less-than-competent performance is not reasonable under Rule 1.5; a fee so low the lawyer must put personal or financial interests ahead of the insured creates a conflict under Rule 1.7(b); and a fee so low it impairs independent professional judgment violates Rule 1.8(f)(2). Rules 1.1 (competence) and 1.3 (diligence) also applied, so a fee too low to permit competent or diligent representation would violate the lawyer's duties.

On disclosure, the opinion concluded that a lawyer accepting fixed-fee insurance defense had to disclose the arrangement in full to the insured client, following from Rule 1.8(f)'s requirement of client consent after consultation. The client had to be told the terms of payment (including specific dollar amounts and payment limits), what the lawyer was hired to do, and any limits imposed on the lawyer, in a manner understandable to the average client, and the lawyer had to affirm that he could competently defend the case under the disclosed fee arrangement.

Currency note

This opinion was issued in 1998 (and amended in 1999), before the West Virginia Supreme Court of Appeals' comprehensive 2015 revision of the West Virginia Rules of Professional Conduct (effective January 1, 2015). 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: Were flat-fee insurance defense arrangements banned in West Virginia?

A: No. The Board concluded such arrangements do not constitute a per se violation of the Rules, but cautioned that a particular arrangement could violate the Rules and had to be analyzed case by case.

Q: What made a flat fee improper under this opinion?

A: A fee so low that it impaired the lawyer's ability or incentive to provide competent (Rule 1.1) or diligent (Rule 1.3) representation, that was unreasonable under Rule 1.5, that forced the lawyer's interests ahead of the insured's under Rule 1.7(b), or that impaired independent judgment under Rule 1.8(f)(2).

Q: Did the lawyer have to tell the insured about the flat-fee deal with the insurer?

A: Yes. The opinion concluded the lawyer had to disclose the arrangement in full, including specific dollar amounts and payment limits, what the lawyer was hired to do, and any limits imposed, so the insured could consent under Rule 1.8(f).

Q: Was the lawyer responsible for evaluating the fee, or could it just accept the insurer's number?

A: The opinion concluded that, at a minimum, the lawyer was responsible for carefully evaluating the fixed fee offered and ensuring it was sufficient in each particular case for a competent defense.

Background and rules framework

The opinion interpreted West Virginia's Rules as they stood in 1998-1999. Rule 1.5(a) (Model Rule 1.5) required fees to be reasonable, and its comment cautioned against agreements whose terms might induce the lawyer to curtail services or perform them contrary to the client's interest. Rule 1.7(b) (Model Rule 1.7) addressed conflicts arising from the lawyer's own interests. Rule 1.8(f) (Model Rule 1.8) governed compensation from one other than the client, requiring client consent after consultation and no interference with independent professional judgment. Rules 1.1 and 1.3 (Model Rules 1.1 and 1.3) required competent and diligent representation. The Board noted its opinion addressed only the lawyer's obligations under the Rules, not whether flat-fee arrangements breach an insurer's duty to defend or indemnify.

The Board observed that other states had reached varying results: Kentucky banned flat-fee insurance defense (American Insurance Association v. Kentucky Bar Association), while Wisconsin, New Hampshire, Oregon, Iowa, and Ohio had found such arrangements not per se banned.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.1 / WV Rule 1.1 (competence)
• Model Rule 1.3 / WV Rule 1.3 (diligence)
• Model Rule 1.5 / WV Rule 1.5(a) (reasonable fees)
• Model Rule 1.7 / WV Rule 1.7(b) (conflict from lawyer's own interests)
• Model Rule 1.8 / WV Rule 1.8(f), 1.8(f)(2) (compensation from one other than the client; independent judgment)

Cases:

• American Insurance Association v. Kentucky Bar Association, 917 S.E.2d 568 (Ky. 1996), Kentucky ban on flat-fee insurance defense

Other opinions cited:

• Wisconsin Ethics Opinion E-83-15; New Hampshire Opinion PO 1990-91/5; Oregon Formal Opinion No. 1991-98; Iowa Formal Opinion 86-13; Ohio Opinion 97-7 (flat-fee arrangements not per se banned)

See also

• WV Ethics Op. 99-01: Insurance Company Captive Law Firms
• WV Ethics Op. 2005-01: Insurance Billing Guidelines
• ABA Formal Op. 01-421: Insurer Litigation Guidelines
• ABA Formal Op. 03-430: Insurance Staff Counsel

Source

• Landing page: https://wvodc.org/Legal-Ethics-Opinion
• Original PDF: https://storage.googleapis.com/msgsndr/Rgd68xOkcVdteTsBkf6O/media/66a7ea7d0fbd7b386facc1f4.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative. This is the Amended L.E.I. 98-01, which replaced and superseded the original L.E.I. 98-01 issued March 26, 1998.

AMENDED[1]
L.E.I. 98-01

FIXED OR "FLAT" FEE ARRANGEMENTS FOR INSURANCE DEFENSE WORK

The question has arisen whether, in accordance with the West Virginia Rules of Professional Conduct, an attorney or law firm may arrange with a liability insurance company to defend the company's insureds on a fixed or "flat" fee basis. The amount of the fee is arranged in advance between the lawyer and the insurer, and the lawyer will receive a fixed amount for handling future cases on behalf of insureds.[2] Current practice apparently involves a blanket arrangement, with the same fee used for each case. The fee arrangement does not take into account the complexity of an individual case or the amount of legal work performed on an individual case.

In response to request for comment, including a request published in The West Virginia Lawyer, the Board has received information that, in practice, the amount paid by the insurer may be insufficient to cover the cost of the representation in some cases, thus possibly hampering a lawyer's ability to adequately defend a claim or, at least, giving rise to an appearance or concern that the ability to defend is or will be compromised. However, the Board has also received public comment that the arrangement is satisfactory to some of the lawyers who are using it.

The Board has concluded that the use of fixed or "flat" fee arrangements does not constitute a per se violation of the Rules of Professional Conduct.[3] However, the use of such arrangements does create the potential for a violation and, as a result, lawyers are cautioned to be careful in this regard as the arrangements, in a particular case, could violate the Rules.[4] As discussed below, lawyers are advised to analyze, on a case by case basis, the propriety of the fixed or flat fee arrangement, in light of the matter at issue, pursuant to the Rules of Professional Conduct.[5]

ETHICAL ANALYSIS IN EACH CASE

In insurance defense matters, while the insurer may pay for the representation, the lawyer's primary duty is to the insured client. A lawyer is required to provide a competent defense. To guard against harm to the insured client, lawyers must insure that the fixed fee is sufficient to allow them to provide a competent defense.

Rules to be considered when performing this ethical analysis include, but are not limited to, Rules 1.5(a), 1.7(b) and 1.8(f)(2). For example, the comment to Rule 1.5 specifically notes that "[a]n agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client's interest". Rule 1.5 requires that fees be reasonable. If a fee is so low that it forces the lawyer to perform less than competently, the fee would not be reasonable and would be insufficient. Additionally, if the fee is so low that the lawyer must put his own personal and financial interests ahead of the interests of the insured client, a conflict of interest as addressed in Rule 1.7(b) would result. Furthermore, if a fee is so low as to impair the lawyer's independent professional judgment, Rule 1.8(f)(2) would be violated.

As with all cases, other rules obviously also apply, such as Rule 1.1, which requires that the lawyer provide competent representation, and Rule 1.3, which requires that the lawyer act diligently. To the extent that a fixed fee is so low that it impairs an attorney's ability and/or incentive to provide competent representation or to act diligently, acceptance of a fixed fee in the insurance defense context violates an attorney's duties to his clients under the Rules of Professional Conduct.

In conclusion, an attorney agreeing to accept insurance defense work on a fixed fee basis is, at a minimum, responsible for carefully evaluating the fixed fee offered by the insurance company and ensuring that, in each particular case, the fee is sufficient for the attorney to provide a competent defense consistent with the ethical rules cited above. To the extent that the fixed fee is not sufficient to satisfy these concerns, the arrangement will violate the Rules.

DISCLOSURE OF THE FEE ARRANGEMENT TO THE INSURED

An attorney who enters into an agreement with an insurance company to represent an insured for a fixed fee has a duty to disclose the arrangement, in full, to the insured client. This follows from Rule 1.8(f) which provides that "[a] lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client consents after consultation ...". In order to comply with Rule 1.8(f), and in light of the concerns articulated above, the insured client must receive a complete and full disclosure of the attorney's arrangement with the insurance company.

In order for the insured client to understand, and thus consent to the representation, the client must be told the terms of payment, including specific dollar amounts and payment limits; what activities the lawyer is hired to do; and limits imposed on the lawyer. The Board believes that this disclosure must be made in such a way that is understandable to the average client. Further, the lawyer must provide an affirmation to the insured client that he can competently defend the insured's case under the applicable, and disclosed, fee arrangement.

APPROVED AS AMENDED on February 19, 1999.

David J. Romano, Chair
Lawyer Disciplinary Board

[1] This Amended L.E.I. 98-01 replaces and supersedes the L.E.I. 98-01 which was issued by the Lawyer Disciplinary Board on March 26, 1998.
[2] These fee arrangements might also be based on handling different portions of a case, for example, a fixed amount would be paid for discovery and a fixed amount would be paid for attending the trial.
[3] By contrast, pursuant to the Kentucky Rules of Professional Conduct, the Supreme Court of Kentucky banned the use of flat fee arrangements in insurance defense work. American Insurance Association v. Kentucky Bar Association, 917 S.E.2d 568 (Ky. 1996). However, the disciplinary authorities of other states have decided that under their versions of the ethics rules, these arrangements are not per se banned. Wisconsin Ethics Opinion E-83-15; New Hampshire Opinion, PO 1990-91/5; Oregon Formal Opinion No. 1991-98, Iowa Formal Opinion, 86-13; Ohio Opinion 97-7.
[4] This opinion is not intended to suggest that flat fee arrangements do or do not breach the insurer's duty to defend and/or indemnify. Rather, this opinion deals solely with the lawyer's obligations under the Rules of Professional Conduct.
[5] The Board's opinion is based upon the general idea behind a fixed or "flat" fee arrangement. However, as discussed infra, it is not intended to imply that all fixed or flat fee arrangements are acceptable. The Board recognizes that the issue may need to be reexamined if the evolution of these arrangements between insurance companies and defense counsel leads to additional and/or unanticipated issues.