The Model Rule for Payee Notification is based upon Regulation 64 of the Department of Insurance of the State of New York, promulgated in 1988 (11 NYCRR 216.9 (A) & (B)), which requires notice to the payee in all insurance settlements in excess of $5,000. The regulation does not apply to no-fault payments from a claimant's own insurer. As implemented in various jurisdictions the provision for payee notification has been triggered by a dollar amount which ranges from $1,000 to $5,000.
In payment of liability claims, it is the customary practice of insurance carriers to deliver the settlement proceeds to the lawyer of record for the claimant, usually by check made payable jointly to the claimant and the claimant's lawyer. As the Supreme Court of New Jersey observed in Matter of Conroy, 56 N.J. 279, 266 A.2d 279 (1970), the underlying purpose for the practice is to "protect and preserve the interests of all three parties to the transaction" the insured, the successful claimant and the claimant's lawyer. In the payment process, the insurance carrier does not typically notify the claimant when it makes payment to the claimant's lawyer or other representative. This gap in the process permits dishonest practices to interfere with the settlement and payment of insurance claims.
If the dishonest conduct involves the claimant's lawyer instances of lawyer misconduct can include the unauthorized settlement of the client's claim with the defendant's insurer, forgery of the claimant's signature on a stipulation of settlement or other legal document that may be required to complete the settlement, forgery of the claimant's endorsement on the settlement draft itself, or misappropriation of the claimant's share of the proceeds.
It is not uncommon for a dishonest lawyer to successfully conceal the unauthorized settlement and misappropriation for several years and to be unable to restore the claimant's funds when the loss is finally discovered. As few client protection funds are able to provide full reimbursement for all eligible losses it is important that the legal profession devise and support methods of reducing losses resulting from dishonest conduct in the practice of law, including the misappropriation of personal injury settlements.
Experience in New York and other states demonstrates that the payee notification rule has had a salutary effect on lawyer misconduct, has demonstrated an effective protection device for clients and has benefitted the state lawyers' fund for client protection. A similar statute or regulation should have the same beneficial effect in other jurisdictions.
Written Notice to Claimants of Payment of Claims in Third Party Settlements.
Upon the payment of [insert desired dollar amount] or more in settlement of any third-party liability claim, the insurer shall provide written notice to the claimant where: (1) the claimant is a natural person, and (2) the payment is delivered to the claimant's lawyer or other representative by draft, check or otherwise. Such notice shall be required when payment is made to a claimant by the insurer or its representative, including the insurer's lawyer.
This rule shall not create any cause of action for any person against the insurer, other than a government agency, based upon the insurer's failure to provide notice to a claimant as required by this rule; nor shall this rule create a defense for any party to any cause of action based upon the insurer's failure to provide such notice.
This rule is intended to serve as a deterrent to the dishonest conduct of a claimant's lawyer with respect to the receipt of third-party liability claims. The intended salutary effects of including the payee in the claim payment process should obtain whether the rule is enacted as a statute or a regulation.
The written notice requirement of Paragraph A of this rule is reasonable and appropriate to advise the claimant of settlement of its liability claim by payment to its lawyer or other representative. Written notice provides the claimant with an independent and verifiable source of information concerning the facts of the settlement. It also provides the adverse party and insurer with certainty that the settlement has been concluded in a lawful manner.
The provisions of Paragraph B are intended to make clear that an insurance carrier's failure to comply with this rule does not create a new cause of action or defense for a party. The insurer, however, may be subject to appropriate action by a state regulatory or licensing agency.