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Ethics Advisory Opinion 05-08

April 13, 2005

South Carolina Bar Ethics Advisory Opinion 05-08

RULES 1.15, 8.4(d)

Date March 18, 2005

Facts
Attorney settled a tort claim. Following the settlement but prior to the disbursement of any settlement funds, Attorney was notified by a health insurance carrier (“Carrier”) that Carrier holds a subrogation claim for the medical expenses paid in connection with Client’s injuries. Attorney has not promised Carrier to protect its claim from the proceeds of the settlement.

Client has instructed Attorney not to pay Carrier’s subrogation claim but instead indicated Client will pay the claim himself. Attorney believes Client will not pay the claim. Client has demanded Attorney disburse the settlement proceeds solely to Client.

Questions
Must Attorney pay the disputed funds to Client, notify Carrier that Attorney is about to do so, or hold the funds in trust?

How should Attorney handle the typical language of a release stating that Attorney “warrants” that all subrogation claims have been paid? Attorney understands Carrier wants indemnification for any claims by the carrier, but if Client wants the settlement funds without paying the subrogation claim, how can Attorney settle the case and sign the release with the “warranty” language?

Summary
Because Attorney has actual knowledge of Carrier’s “subrogation claim,” Rule 1.15 of the South Carolina Rules of Professional Conduct requires Attorney to hold the disputed funds in trust until such time as the dispute between Client and Carrier is resolved.

It would be improper for Attorney to execute a release warranting that all subrogation claims have been paid until such time as they have, in fact, been paid.

Opinion
Although Rule 1.15 of the South Carolina Rules of Professional Conduct does not specifically address how Attorney should handle the present dispute between Client and Carrier. However, an analysis of these situations has been presented in an authoritative text.

When a client has assigned an interest in a potential recovery to a creditor, the lawyer may honor the assignment when disbursing funds, unless the client objects. S.C. Bar Ethics Adv. Op. # 92-06. If the client directs the lawyer to ignore the assignment, the lawyer should notify the assignee and hold the funds in trust until the dispute between the client and the assignee is resolved. The lawyer has these obligations even if the lawyer is not a party to the assignment or has not agreed to protect the assignee’s interests. . . . Accord S.C. Bar Ethics Adv. Op. # 93-14 (disagreeing with prior Bar opinions that had held that the lawyer should follow the client’s instructions unless the lawyer was a party to the assignment) and S.C. Bar Ethics Adv. Op. # 94-20 (obligation applies if lawyer has knowledge of doctor’s lien even in absence of provision in engagement agreement). . . .

However, if an insurer has a potential subrogation claim but has not notified the lawyer that it is seeking subrogation, the lawyer does not have an affirmative duty to contact the insurer to inform it that the lawyer has received funds. The lawyer should disburse funds to the client, but should advise the client of the health care provider’s right to seek subrogation. S.C. Bar Ethics Adv. Op. # 93-31.

Robert M. Wilcox and Nathan P. Crystal, Annotated South Carolina Rules of Professional Conduct (2002 ed.), p. 132-33.

Because Attorney has knowledge of an actual “subrogation claim” and not merely the potential of one, Attorney has an affirmative duty to hold the disputed funds in trust until such time as the dispute between Carrier and Client is resolved.

It would be improper for Attorney to execute a release in which Attorney warranted all subrogation claims had been paid, when Attorney had knowledge that one such claim had not yet been paid, particular in light of Carrier’s demand to Attorney for payment. Rule 8.4(d).

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