RI-343

January 25, 2008

SYLLABUS

It is not a violation of the Rules of Professional Conduct for a lawyer to contract with an insurance company to represent its insured on a fixed fee basis, so long as the arrangement does not adversely affect the lawyer's independent professional judgment and the lawyer represents the insured with competence and diligence.

Although there is nothing in the Rules that would require disclosure to an insured of the basis of the fee to be paid by the insurer to the lawyer, the lawyer may not agree with the insurer that it will not disclose to the insured information about the fee arrangements.

References: MRPC 1.1(b), 1.2 (b), 1.3, 1.4(a), 1.5, 1.7(b), 1.8(f) and 5.4(c). Florida Bar Ethics Opinion 98-2; New Hampshire Bar Association Formal Ethics Opinion 1990-91/5 , American Bar Association Formal Opinions 96-403, 01-421 and 03-430, Atlanta International Insurance Co. v. Bell, 438 Mich 512 (1991).

TEXT

This opinion addresses whether (i) it is ethical for a lawyer to enter into a contract or agreement with an insurance company to represent its insured when payment for the representation is set on a "fixed fee" basis; and, if so, (ii) a lawyer may enter into a confidentiality and nondisclosure agreement with the insurance company prohibiting disclosure of the "fixed fee" arrangement to the insured.

It is common under liability policies of insurance for the insurer to select counsel for its insured, since it has the primary financial stake in the matter. Under the insurance contract, the insured may delegate the right to defend and, if so, is required to cooperate with the insurer in the defense. Recognizing that in these circumstances there exists a "tripartite relationship" between insured, insurer and defense counsel, and that this presents a situation rife with the possibility of conflict, the Michigan Supreme Court has held that the attorney-client relationship exists only between the lawyer and the insured. Atlanta International Insurance Co. v. Bell, 438 Mich. 512 (1991)., regardless of the terms of the contract between the lawyer and the insurance company, the rules of professional conduct attach to the relationship between the lawyer and the insured.[1]

Under the Michigan Rules of Professional Conduct, it is the fundamental obligation of a lawyer to represent a client competently and diligently. Rule 1.1(b) provides that a lawyer must provide competent representation to a client, and forbids a lawyer from handling a matter without preparation adequate in the circumstances. Rule 1.3 provides that "a lawyer shall act with reasonable diligence and promptness in representing a client". This includes the duty to carry through to conclusion all matters undertaken. These Rules do not preclude the lawyer and the client from agreeing upon limited objectives of representation after consultation, for example, to matters covered by the insurance contract[2], but such a limitation cannot abrogate the lawyer's duty to provide competent representation of the client within the scope of the representation. See Comment to Rule 1.2.

When a lawyer is to be paid a fixed fee by the insurer, additional Rules are implicated. Although Rule 1.5(a) forbids only "excessive" fees, commentary to the Rule instructs that "an 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." The example that follows pertains to a lawyer's agreeing to provide services only up to a fixed amount when it is foreseeable that more extensive services will be required – unless the situation is adequately explained to the client.

Under Rule 1.7(b), a lawyer may not represent a client if the representation is materially limited by the lawyer's responsibilities to third persons or by the lawyer's own interests. As stated in the commentary to Rule 1.7: "The lawyer's own interests should not be permitted to have adverse effect on representation of a client. For example, a lawyer's need for income should not lead the lawyer to undertake matters that cannot be handled competently and at a reasonable fee." We do not believe that a fixed fee of itself causes a breach of those obligations.

The Rules also recognize the unique conflict that results when a lawyer is paid by someone other than the client. Rule 1.8(f) conditions the lawyer's ability to accept compensation for representing a client on the client's consent to that arrangement after consultation, and on the absence of interference with the lawyer's independent professional judgment or with the lawyer-client relationship. The principle that the independence of a lawyer's professional judgment must be preserved is further stated in Rule 5.4(c), which forbids a lawyer from permitting a person who pays the lawyer's fee to direct or regulate the lawyer's professional judgment in rendering legal services.

American Bar Association Formal Opinion 01-421 addresses the lawyer's dilemma in the context of a lawyer's compliance with the insurer's guidelines. If the lawyer believes his representation of the insured will be materially impaired by the insurer's guidelines, or if the insured objects to the defense as limited by the guidelines, the lawyer should consult with the insurer and the insured; and if the cause of the material impairment of the representation is not resolved and the insured refuses to consent to the limitations imposed, then the lawyer must withdraw, either under Rule 1.7(b) or Rule 1.16(b). Thus, so long as a lawyer does not allow the terms of the fixed fee arrangement to influence how the lawyer represents the interest of his or her client, there is no violation of the Rules of Professional Conduct. If the lawyer is unable to separate the method or amount of payment of the fee from the obligation to competently and diligently represent the client, then the lawyer should decline the representation.

Summarizing the applicable Rules, it is clear that a lawyer may not accept a fixed fee engagement if that will induce the lawyer to curtail providing competent and diligent representation of proper scope, and exercising independent professional judgment. Whether acceptance of the fixed fee for the matter would have such a result has no categorical answer, and requires a judgment to be made by the lawyer in each situation. We conclude that there is nothing in the Rules that would forbid such an arrangement in and of itself.

When communicating the limitations of the representation to the insured, is the lawyer required to disclose the basis of the fee arrangement to the client? If so, then the lawyer could not agree to the insurer's requirement that the fee basis for the lawyer's retention may not be disclosed. Comment to Rule 1.8(f) indicates that the disclosure to be made to the client is the "fact" that the lawyer's services are being paid for by a third person. The underlying theory of this limited requirement is that the client is not responsible for payment, and has no interest in the basis of the fee, only in the scope of the representation. The Comment also notes, however, that if the fee arrangement creates a conflict of interest, the lawyer must comply with Rule 1.7. That Rule would require the insured's consent after consultation for the lawyer to continue representation. What must be disclosed in such a consultation is described in the present Rules as "information reasonably sufficient to permit the client to appreciate the significance of the matter in question."[3]

Other jurisdictions have considered issues related to a fixed-fee arrangement under Rules similar to Michigan's: New Hampshire, Wisconsin, Oregon, West Virginia, Colorado, Connecticut, Florida, and Kentucky.[4] Only Kentucky prohibits a fixed-fee retention. Only the opinions of the Florida[5] and West Virginia[6] Bars require disclosure of the fee arrangement as part of the information required to be communicated to the client under Rule 1.8(f).

The New Hampshire Bar Association's Formal Ethics Opinion 1990-91/5 questioned whether Rule 1.8(f) properly applies in the insurance defense context. The New Hampshire Opinion takes notice of the fact that insurance agreements provide the insurer the right to select counsel and, similarly, under such agreements the client cannot abrogate the insurance company's control of negotiations and litigation. The New Hampshire Opinion then concludes that the insured's consent to a fixed-fee arrangement is either "not required or is implicitly given under the terms of the policy." The opinion appears to equate the need for consent with an obligation to disclose, without analysis. Although we agree that the scope of representation is governed by that contract, we do not accept the conclusion that the insurance contract would govern the ethics obligations of the lawyer to his client.

We do not believe that disclosure of the fee basis is required under the MRPC. Rule 1.5(b)[7] requires the lawyer to disclose the basis or rate of fees and expenses only for which the client is responsible. The Rule does not require disclosure where the client is not responsible for payment, then Model Rule 1.5 does not require disclosure. Rule 1.8(f), the only Rule addressing the subject of fees for which the client is not responsible, does not require disclosure. The absence of such a requirement for disclosure of the basis of the fee in Model Rule 1.8(f) and its Comments, when such a requirement applies to Rule 1.5(b) that addresses the subject of fees, can be considered as evidencing the intent of the drafters of the Rules not to mandate such a requirement.

The question posed for this opinion does not require that we consider whether disclosure of the fee basis is required by the Rules. We are of the opinion that information about the fee basis of the representation may be information that can be discussed in the consultation with the client under Rule 1.8(f), and could be the subject of a "reasonable request" that the lawyer may conclude should be answered under Rule 1.4(a). Therefore, we conclude that the insurer's requiring the lawyer not to make such a disclosure may cause the lawyer to violate Rules 1.8(f) and 5.4(c) by permitting interference with the lawyer's independence of professional judgment.

We are persuaded that the basis of the fee is a matter that is independent of the obligation to represent the insured competently and diligently. Although we do not believe that disclosure of the basis of the fee is required, an agreement to prevent that disclosure is improper.

[1] As noted in American Bar Association Formal Opinion 03-430: "If the insured asks the insurance company to defend a lawsuit, and the suit falls within the insurance company's duty to defend, the insurance company is contractually bound to retain a lawyer to represent the insured . . . . The determination of when and to whom the client-lawyer relationship attaches is a matter of state law and not governed by the rules of professional responsibility. However, once the client-lawyer relationship attaches, the rules of professional responsibility, not the insurance contract or the lawyer's employer, govern the lawyer's ethical obligations to clients."

[2] The lawyer engaged to defend an insured must communicate limitations on his representation to the client to satisfy both Rule 1.2 and Rule 1.4. American Bar Association Formal Opinion 96-403 emphasizes that these Rules require a communication that is sufficient to apprise the insured of the limited nature of the representation and the right of the insurer to control the defense and to settle in its discretion.

[3]See Rule 1.0, Comment Terminology.  We note that Rule 1.5(b) requires communication to the client of the basis or rate of the fee when the lawyer has not regularly represented the client. A plain reading of that Rule would call for disclosure of the fee arrangement in representation of the insured by a lawyer who is not regularly the insured's lawyer. When Model Rule 1.5(b) was revised by the American Bar Association in 2003, it clarified that this requirement pertains when the client is responsible for payment. The change was presented as one that made no substantive change in the Rule. The proposed Rules published by the Michigan Supreme Court in ADR 2003-62, July 2, 2004, follows the Model Rule formulation. We decline to interpret and apply the present Michigan Rule literally in this situation. We believe the Rule as presently expressed is properly limited to those situations in which the client is paying the fee.

[4] In ABA Formal Opinion 03-430, the ABA Standing Committee on Ethics and Professional Responsibility, opining that Model Rule 1.8(f) required disclosure of an employment relationship with an insurer when counsel was either in-house or in a captive firm, did not mention or purport to consider disclosure of the basis or rate of the compensation received from the insurer/employer.

[5] Florida Bar Opinion 98-2 (1998).

[6] L.E.I. 98-01 (1998).

[7] See Note 3.