Remarks of William T. Barker Re: Proposed Rule 1.8(f) - Public Discussion Draft - Center for Professional Responsibility

Remarks of William T. Barker, American Insurance Association

Suggested Revision to
Center for Professional Responsibility
Proposed Rule 1.8(f) - Public Discussion Draft

Ethics 2000 Commission

March 23, 1999

 

PERMITTING IMPLIED CONSENT TO
THIRD-PARTY PAYMENT OR DIRECTION
WHERE CLIENT INFORMED AND NO
SIGNIFICANT RISK OF MATERIAL LIMITATION

Under the Commission’s proposal, informed written consent is required in every representation where there is third party payment or direction, regardless of whether the third party is a co-client and even if there is no conflict requiring consent under Rule 1.7. That requirement necessarily includes all representations under standard liability insurance policies. Under Opinion 96-403 of the Standing Committee on Ethics and Professional Responsibility, most such representations (those not involving conflicts) can be undertaken on the basis of the insured’s acquiescence, after being adequately informed of the ways in which involvement of the insurer might affect the representation. That rule was adopted in the Restatement (§ 215, comment f). The revision here would reaffirm and generalize Opinion 96-403. It would also clarify the comments in various ways.

Reliance on acquiescence would be limited to cases where "the lawyer reasonably determines, after consultation with the client, that there is no significant risk that the representation of the client will be materially limited as a result of the third party’s interests." We believe that such a determination is often possible in insured suits: the insured frequently has no interest in how the suit is handled, so long as the insurer pays any judgment or settlement. It is possible in the great majority of cases to conclude that there is no significant risk of personal financial exposure to the insured. In our experience, it is distinctly unusual for an insured (outside the area of professional liability) to have reputational or other nonfinancial interests that create concerns about the way the case is handled, where there is no apparent financial risk.

If the insured does not care (or have reason to care) how the case is handled, no limitation on the representation can be material. Of course, the lawyer cannot know what interests the insured may have without consulting the insured. But if such consultation discloses no interests where insurer direction would pose a significant risk to the insured, requiring written consent may actually mislead the insured and foment disputes where there is no reason for them. A major purpose of the requirement of a writing is to "impress upon clients the seriousness of the decision the client is being asked to make." Requiring a writing where the decision is clearly not serious would likely induce unwarranted doubts and even some refusals to sign. It would also generate expense and inconvenience with no apparent purpose.

The suggested revision, like Opinion 96-403, requires that the insured be informed about the representation and any evident limits on it. The revision accepts the requirement, proposed by the Commission, that the information be put in writing. The revision emphasizes that "absent an informed written consent permitting such action, the lawyer may not accept direction from the third party that would disadvantage the client or interfere with the lawyer 's exercise of independent professional judgment on the client's behalf." It also requires the lawyer to remain alert to any new risks that may develop during the representation and to obtain written informed consent should such developments create a significant risk that did not exist before.

In addition to the main suggestion, we seek several clarifications of the comments. Comment [10] says that the third party might be "an indemnitor (such as a liability insurance company) or a co-client." Some might read this to imply that the insurance company is not (or usually not) a co-client. Insertion of the words "and/or"before "a co-client" should dispel any such implication, without taking any position one way or the other.

That comment also says that third-party payers frequently have interests of certain types "in conflict with the client." But whether those described interests really are in conflict depends on the particular facts: if the client does not care how the case is handled, a desire to minimize the amount spent creates no conflict. So we suggest saying that "[t]hird-party payers normally have interests in such things as minimizing the amount spent on the representation and in learning how the representation is progressing. Where such interests (and others) conflict with those of the client, lawyers are prohibited from accepting or continuing such representations unless" the conditions of the Rule are met.

Comment [11] treats every co-client representation as involving a material limitation, but that is so only if "there is a significant risk that the interests of the clients in conduct of the matter or access to information would diverge." We suggest making that qualification explicit.

Comment [14] requires that a lawyer "refuse to comply" with third-party direction to omit a deposition in certain circumstances. This might suggest that the lawyer has an affirmative duty to take the deposition. But the lawyer might also withdraw. We suggest saying that the lawyer "cannot continue the representation without taking the deposition" instead of "must refuse to comply with the direction." If the latter phrase is carefully read, the meaning is the same, but not all readers are so careful.

With the proposed revisions, the Rule would read as follows. Deletions are in strikeout type and additions in italics.

CONCURRENT CONFLICT OF INTEREST:

SPECIFIC RULES

* * *

(f) A lawyer shall not accept compensation or direction for representing a client from one other than the client unless:

(1) the client has been provided sufficient written information about the terms of the arrangement to render any consent informed and either (A) the lawyer reasonably determines, after consultation with the client, that there is no significant risk that the representation of the client will be materially limited as a result of the third party’s interests or (B) the client gives informed consent in writing under the conditions stated in Rule 1.7;

(2) there is no interference with the lawyer's independence of professional judgment or with the lawyer-client relationship; and

(3) information relating to representation of a client is protected as required by Rule 1.6.

* * *

Comment

* * *

Third-Party Payment or Direction

[10] Lawyers are frequently asked to represent a client under circumstances in which a third person will compensate the lawyer, in whole or in part. The third person might be a relative or friend, an indemnitor (such as a liability insurance company), and/or a co-client (such as a corporation sued along with one or more of its employees). Because t Third-party payers normally have interests in conflict with the client, including interests in such things as minimizing the amount spent on the representation and in learning how the representation is progressing. Where such interests (and others) conflict with those of the client, lawyers are prohibited from accepting or continuing such representations unless there is informed consent from the client and (1) the lawyer reasonably determines that the representation will be competent and diligent and that the lawyer's loyalty to the client will not be compromised, (2) the client is fully informed in writing, and (3) there is either informed written consent by the client or the lawyer reasonably determines that there is no significant risk that the representation of the client will be materially limited by the third party’s interests. See Rule 1.7.

[10A] If the third party has agreed to indemnify the client and there is no significant risk of unindemnified liability, the client may have little or no interest in how the matter is handled. This is one basis on which it might be concluded, after consultation with the client, that there is no significant risk that representation of the client would be materially limited by the third party’s interests. If the lawyer finds that this is so and the client has been informed in writing of the material aspects of the representation, the client’s acquiescence is sufficient to permit the representation to proceed without written consent. Of course, absent an informed written consent permitting such action, the lawyer may not accept direction from the third party that would disadvantage the client or interfere with the lawyer 's exercise of independent professional judgment on the client's behalf. If, after commencement of the representation, a significant risk of material limitation of the representation becomes apparent, the lawyer must obtain informed written consent before continuing the representation.

[11] Sometimes, it will be sufficient for the lawyer to obtain the client's informed consent regarding the fact of the payment and the identity of the third-party payer. If, however, the fee arrangement creates a conflict of interest for the lawyer, then the lawyer must comply with Rule. 1.7. The lawyer must also conform to the requirements of Rule 1.6 concerning confidentiality. Under Rule 1.7(a), a conflict of interest exists if the lawyer's representation of the client may be materially limited by the lawyer's own interest in the fee arrangement or by the lawyer's responsibilities to the third-party payer (for example, when the third party-payer is a co-client and there is a significant risk that the interests of the clients in conduct of the matter or access to information would diverge). Under Rule 1.7(b), the lawyer may accept or continue the representation with the informed consent of each affected client, unless the conflict is non-consentable under that paragraph. Under Rule 1.7(c), the informed consent must be confirmed in a writing signed by the client.

[12] Just as when the client is paying his or her own legal fees, the client can always designate an agent to make decisions on the client 's behalf, and that agent could be the person compensating the lawyer. For example, a client planning to be out of the country could designate a close relative to make decisions on the client 's behalf, regardless of whether the relative is a third-party payer. In these situations both the lawyer and the agent are obligated to act solely in the client's interests; thus, the lawyer may not accept direction from the agent that would disadvantage the client or interfere with the lawyer 's exercise of independent professional judgment on the client's behalf.

[13] In some cases, the third party may have assumed obligations to the client, such as the obligation to indemnify the client against any judgment rendered, that give the third party an interest in the outcome of a matter. In such cases, the lawyer may accept direction from the third party that is reasonable in scope and character and consistent with the client's interests.

[14] It is not always easy for the lawyer to determine when following the direction of a third party protecting its own interests will interfere with the lawyer's independent professional judgment on behalf of the client. For example, an insurance company that pays the lawyer to defend an insured in an action under a liability policy may direct the lawyer not to take an additional deposition. If the lawyer reasonably believes that failure to take the deposition will not harm the client's interests, then the lawyer may comply with the direction without further consultation with the client. If, however, the lawyer has reason to believe that the client may be harmed, as when the deposition is critical and there is significant risk of a judgment in excess of the policy limits, then the lawyer must refuse to comply with the direction cannot continue the representation without taking the deposition unless the client gives informed consent under the conditions stated in Rule 1.7(b).

[15] Similar problems arise when an employer agrees to pay for the legal expenses of an employee, particularly when the employer is also a client. Before agreeing to representation under these circumstances, the lawyer must consider whether the fee arrangement is likely to undermine the lawyer's ability to provide competent and diligent representation, as when the lawyer believes there is a significant likelihood that the employer will want to avoid criminal liability by providing information incriminating to the employee. Even when the potential liability is civil and the employer has agreed to indemnify the employee, the lawyer should consider whether the employee's interests in reputation or continued employment may conflict with the employer's desire to settle the case or terminate the employment relationship. Once the lawyer determines that the representation is consentable under the conditions stated in Rule 1.7, the lawyer should obtain the informed consent of both employer and employee. If, as the representation proceeds, circumstances pose additional significant risks to the employee, then the lawyer must withdraw when required or consult further with the client before continuing the representation under the direction of the employer.

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