Ethics Counsel on www.OKbar.org

OBA Ethics Counsel

Ethics Opinion No. 328

Issued: November 22, 2011

QUESTION:

As part of a settlement agreement release, may the Plaintiff's lawyer or law firm ethically agree to hold the Defendant and its insurer harmless for any future action against the Defendant or its insurer that may be asserted by lien holders or any federal or state agency or program that may have an interest in the settlement proceeds?

DISCUSSION:

In settlements of litigation it has become common for Defendants and their insurers to attempt to require not only the Plaintiff, but the Plaintiff's lawyer or law firm, to sign a release agreeing that the lawyer or law firm agrees to hold the Defendant and its insurer harmless for any future action that may be asserted against the insurer or Defendant by any lien holder or government entity that may have an interest in the settlement proceeds. While it is legitimate to require the represented Plaintiff to sign such a release, it is the opinion of the panel that no lawyer or law firm may ethically make itself liable as a guarantor for the debts or obligations of the client by signing such a release or hold-harmless agreement. This would constitute providing financial assistance to the client in violation of Rule 1.8(e) of the Oklahoma Rules of Professional Conduct ("ORPC"):

(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, the repayment of which maybe contingent on the outcome of the matter; and

(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

While the federal government under the Medicare Secondary Payor Act ("MSPA") may prosecute a subrogation cause of action for double damages against both the attorney for the Plaintiff and the attorney for the Defendant for failure to set aside proceeds for payment of any benefits the federal government has provided, it does not follow that the lawyer or law firm may voluntarily agree to directly indemnify the Defendant and its insurer from its own funds for such MSPA claims or for any other liens or claims regarding third party liability.In Ohio Ethics Opinion 2011-1, the Board of Commissioners on Grievances and Discipline of Ohio stated that "[s]uch a personal indemnification by a lawyer is in essence an agreement by the lawyer to provide financial assistance to the client. The lawyer is undertaking an obligation to pay the client's bills."

Florida has concurred in interpreting its identically worded Rule 4-1.8(e) to prohibit such hold-harmless agreements directly by the attorney. Florida Bar Staff Opinion 30310, issued April 4, 2011, at 3.

Additionally, as the Florida opinion further observes, "entering into such an indemnification agreement would result in a conflict of interest between the plaintiff's counsel and the counsel's client ... because it creates a substantial risk that the representation of the client would be materially limited by the lawyer's personal interest in not having to pay the client's debts." ORPC Rule 1.7(a)(2), identical to Florida's Rule 4-1.7(a)(2), provides that "[a] concurrent conflict of interest exists if . . . 2) there is a significant risk that the representation of one or more clients will be materially limited by ... a personal interest of the lawyer."

In a settlement agreement the attorney's signature on a release should only vouch for the fact that the client releases the defendant from third party or government liability, unless the lawyer is also releasing a claim for attorney fees. See Tennessee Ethics Opinion 97-F-1, quoted by Florida Bar Staff Opinion 30310, supra, at 3.

Finally, it is not ethical for a Defendant's lawyer or insurer's lawyer to ask for such a release to be signed by Plaintiff's attorney as indemnifier, except for release of Plaintiff's attorney's fees. This is professional misconduct under ORPC Rule 8.4(a), which provides that "[i]t is professional misconduct for a lawyer to 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. . . ." See also Kansas Bar Association Legal Ethics Opinion No. 11-02, issued April 12, 2011, stating "[b]ecause an attorney who agrees to indemnify an opposing party will violate Rule 4-1.8(e), it is a violation for another attorney to request or demand that an attorney enter into such an agreement. The second attorney will violate Rule 4-8.4."

As the Florida opinion observes, several other states and one municipality have issued similar opinions regarding such settlement releases, including North Carolina, Arizona, Illinois, Indiana, Missouri, South Carolina, Tennessee, Wisconsin, and New York City.[i]

In conclusion, a lawyer must not agree to sign a settlement release indemnifying the opposing party and consequently agreeing to be guarantor of the client's third party liability or statutory obligations of subrogation, because this is prohibited by ORPC Rules 1.7(a)(2) and 1.8(e).[ii] Furthermore, no lawyer should ask or require as a settlement condition that another lawyer enter into such an indemnification agreement, because to do so is prohibited by ORPC Rule 8.4(a).

For these reasons we answer the query in the negative.

MINORITY VIEWS

One panelist dissents, and would hold that lawyers agreeing to indemnifications to settle a claim resemble the consequences of rendering title opinions - while most counsel in those situations protect themselves with immunity from liability language, any issue of indemnification should be left to negotiations between the parties, and an agreement to indemnify is not a violation of the Rules of Professional Conduct.

Another panelist dissents in part, viewing indemnifications under Medicare and Medicaid to be permissible because such an agreement mirrors statutory obligations of the attorney as to government subrogation liability, but viewing non-governmentally mandated indemnifications as violating the Rules of Professional Conduct as reflected in the Majority opinion. This panelist writes: "I am not convinced that in the special case of an indemnity required as one way of the payer's dealing with its potential liability under the Medicare Secondary Payer Act constitutes the plaintiff's attorney providing financial assistance to the plaintiff in connection with pending or contemplated litigation as contemplated by Rule 1.8. I think the request for the opinion and the resulting opinion are too broad to the extent they purport to deal with this specific situation. Thus, I cannot concur with the conclusion in the opinion."


[i]. Ohio Ethics Opinion 2011-1; North Carolina State Bar Ethics Opinion RPC 228; Arizona Ethics Opinion 03-05; Illinois Ethics Opinion 06-01; Indiana Ethics Opinion 1(2005); Missouri Ethics Opinion 125; South Carolina Ethics Opinion 08-07; Tennessee Ethics Opinion 2010-F-154; Wisconsin Ethics Opinion E-87-11; New York City Formal Opinion 2010-3.

[ii]. See by analogy Oklahoma Ethics Opinion 323, which distinguishes between advancing attorney fees and indemnification of a client against attorney fees and costs. While the advancement of costs and fees, to be repaid whatever the outcome, is permitted, Rule 1.8(e) as interpreted by Ethic Opinion 323 forbids indemnification of the client against the award of attorney fees and costs to the opposing party.