Opinion #204. Prohibition of Attorney Entering Into a Hold Harmless or Indemnification Agreement in Favor of an Adverse Party Making Payment to the Attorney’s Client in Settlement of a Personal Injury Claim
Issued by the Professional Ethics Commission
Date Issued: April 22, 2011
Attorney A represents an injured party, Client C (hereinafter “C”) in a personal injury action. In resolving that action, the parties responsible for C’s injuries and their insurers have asked that C indemnify them against subrogation interest, reimbursement claims and statutory and common law liens asserted by health insurance carriers, wage replacement carriers, governmental entities and health care providers who have provided services to C and/or may have reimbursed C for damages suffered by C as the result of C’s injuries. Now Attorney A has also been asked to execute an Indemnification Agreement in which Attorney A would agree to personally indemnify the party responsible for C’s injuries, as well as that party’s insurers, in the event that there is a failure on the part of C to satisfy claims by any third party who asserts an interest in the monies paid to settle C’s claim.
Is it a violation of the Maine Rules of Professional Conduct (MRPC) for a Maine attorney to personally enter into a Hold Harmless or Indemnification Agreement in favor of an adverse party or its insurance carrier as part of the adverse party’s settlement with the attorney’s client in resolution of the client’s personal injury claim?
Resolution of this question requires review of a number of the Maine Rules of Professional Conduct. These rules include the following:
(a) Rule 1.2(a), which requires that, among other things, “a lawyer shall abide by a client’s decision whether to settle a matter. . . .”
(b) Rule 1.7(a)(2), which prohibits representation if the attorney’s representation would be materially limited by the lawyer’s responsibilities to, inter alia, a third person or by a personal interest of the lawyer;
(c) Rule 1.8(e), which provides that an attorney may not provide financial assistance to a client in connection with a pending or contemplated litigation, subject to exceptions not relevant here;
(d) Rules 1.1(b)(2)(iv) and 1.15(d), which require an attorney to promptly pay or deliver to the client, as requested by the client, funds in the possession of the attorney and, upon receiving funds or other property in which the client or third person has an interest, notifying the client and third person and otherwise making payment of those funds as appropriate; and
(e) Rule 2.1, which requires that an attorney exercise independent professional judgment and render candid advice in his or her representation of a client.
In view of the foregoing rules, it is the opinion of the Professional Ethics Commission that it is improper for an attorney to personally enter into a Hold Harmless or Indemnification Agreement in favor of third parties as part of the attorney’s representation of a client in a personal injury action. Such an agreement could impose financial obligations on the attorney which are adverse to the client, could significantly impair the attorney’s ability to exercise independent legal judgment on behalf of the client, and could result in the attorney having financial interests which are directly adverse to the interest of the client.
Such agreements to hold harmless and indemnify third persons essentially make the attorney a guarantor against lien claims that are or may be asserted against the attorney’s client. In such a circumstance, the lawyer’s interests will clearly be placed at odds with his or her client’s interests. This may well create violations of Rule 1.2(a), Rule 1.7(a)(2) and Rule 2.1(a). Moreover, Rule 1.8(e) provides narrow limits within which an attorney may provide financial assistance to a client. The attorney’s potential responsibility for the client’s obligation to pay third parties who are strangers to the direct representation for which the attorney has been retained would constitute both a prohibited acquisition of a financial interest in the cause of action or subject matter of the litigation that the attorney is conducting, and an improper advance of financial assistance to the client. Lastly, Rule 1.15 and its predecessor, Maine Bar Rule 3.6(e)(2), made clear that an attorney shall be bound by the direction of the client with regard to client funds in the possession of the attorney. A requirement that the attorney indemnify third parties against the distribution of such funds may well be contrary to the client’s rights to direct the distribution of the client’s funds.
This issue has arisen in a number of other jurisdictions dealing with Rules identical and/or analogous to the Maine Rules of Professional Conduct referenced above. Those jurisdictions are unanimous in holding that it is improper for an attorney to personally enter into an Indemnification and/or Hold Harmless Agreement as part of the settlement of the attorney’s client’s personal injury claim. See Arizona Opinion 0305 (2003); Indiana Opinion No. 1 of 2005; Illinois Adv. Op. 06-10-2006; Kansas Op. 01-05 (2001); Missouri Formal Op. 125 (2008); North Carolina State Bar Ethics Op. RPC 228 (1996); Ohio Sup.Ct., Bd. Comm’rs on Grievances & Discipline, Op. 2011-1 (issued February 11, 2011); South Carolina Ethics Adv. Op. 08-07 (2008); Tennessee Formal Op. 2010-F-154 (2010); Wisconsin Formal Op. E-87-11 (1987). See also Association of the Bar of the City of New York Committee on Professional and Judicial Ethics, Formal Op. 2010-3: Settlement Agreements Requiring the Financial Assistance of Counsel (2010).
Although the Professional Ethics Commission has not previously been asked to deal with the specific factual scenario presented here, this Opinion is consistent with the Commission’s Opinion Nos. 27, 116 and 127. Those opinions state that the task of the lawyer is to follow his or her client’s instructions unless the client has been legally divested of his or her right to receive the funds that are in the attorney’s possession. Opinion No. 127, P.2.
The Commission recognizes that it is not appropriate for it to provide opinions with regard to lawyers’ legal, as opposed to ethical, responsibilities and potential liabilities. Rather, it simply provides opinions with regard to ethical issues under the Maine Rules of Professional Conduct. However, the Commission does caution attorneys to be mindful of their potential obligations to third parties which may be in tension with the attorney’s obligations to his or her client under the Maine Rules of Professional Conduct. See Opinion No. 116, P.3. See also Chapman v. Rideout, 568 A.2d 829 (Me. 1990); Restatement (2d) of Torts, § 552(1) (1977). Further, to the extent that the attorney provides an evaluation of a matter or provides factual information for the use of third persons, the attorney must comply with the provisions of Rules 2.3 (evaluation for use by third persons) and Rule 4.1 (truthfulness in statements to others).
The Commission has also been asked to provide an opinion with regard to the propriety of an attorney representing a settling party in personal injury litigation seeking indemnification against third party claims from his or her attorney opponent. The question inferred that such a request would violate Rule 8.4(a), by insisting or inducing another to violate the Maine Rules of Professional Conduct. Although a number of other Professional Ethics Advisory groups have answered these questions, the Professional Ethics Commission feels that it would be inappropriate to do so in this case. Essentially the Commission is being asked to evaluate the conduct of other attorneys, rather than that of the attorney seeking this opinion. Answering such a question would violate Board Regulation No. 28. See also Opinion No. 67.
It is the opinion of the Professional Ethics Commission that the Maine Rules of Professional Conduct prohibit a Maine attorney from entering into a Hold Harmless or Indemnification Agreement in favor of an adverse party making payment to the attorney’s client in settlement of a personal injury claim.