UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 90-16
A law firm's estate planning clients frequently ask for advice about life insurance, including whether to purchase life insurance, the type of policy that should be purchased, and analysis of competing proposals from life insurance agents.
The principals of the law firm propose to form a life insurance agency in which they would have at least a fifty percent (50%) ownership interest, the other owners being licensed to sell life insurance in the State of South Carolina. Clients of the law firm will be referred to the agency if an attorney of the firm believes the purchase of life insurance is appropriate. Commissions on sales of life insurance policies will be paid to the agency and the principals of the law firm will share in those commissions. Any attorney who refers a client to the agency will make full written disclosure of its ownership.
Question:
Would the establishment of the agency, participation in its ownership by the principals of the law firm and the sharing of life insurance commissions on policies sold to clients of the law firm violate the Rules of Professional Conduct?
Summary:
Under the Rules of Professional Conduct, it would appear to be permissible for an attorney to own an interest in a life insurance agency and refer clients thereto. The attorney who refers a client to the insurance agency must make full disclosure of all relevant factors which might cause the attorney to have a conflict of interest. The terms of the client's dealing with the insurance agency must be set forth in writing and the client's consent to the arrangement must be in writing. The attorney must constantly act in the best interests of the client without regard to the attorney's own financial interest in profiting from the arrangement. This will be difficult at best, and as a practical matter, may not be possible. In addition, certain other ethical principles, more fully set forth in the full text of the opinion, may affect the arrangement.
Opinion:
An attorney may act as a evaluator by examining a client's legal affairs and reporting about them to the client or others. If an attorney has a conflict of interest, where the representation of a client may be materially limited by the attorney's own interest, the attorney may represent the client so long as he believes that there will be no adverse effect on his relationship with the client and if the client consents after consultation. An attorney should be loyal to his client. Loyalty is impaired when an attorney cannot consider, recommend, or carry out an appropriate course of action for the client because of the attorney's other responsibilities or interests. The conflict, in effect forecloses alternatives that would otherwise be available to the client. An attorney may not allow related business interests to affect his representation, for example, by referring clients to an enterprise in which the attorney has an undisclosed interest. Rule 1.7.
An attorney should not enter into a business transaction with the client unless the terms of the transaction are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client, the client is given a reasonable opportunity to seek the advice of independent counsel, and the client consents in writing thereto. Rule 1.8.
An attorney shall not make a false or misleading communication about the attorney or about the attorney's services. Communication is false and misleading if it is likely to create an unjustified expectation about the results he can achieve. Rule 7.1.
There appears to be no basic difference between furnishing life insurance products to clients through a life insurance agency owned by an attorney, and furnishing title insurance through a title insurance agency owned by an attorney. Although it is true that in some cases title insurance may be required by a third party, owner's title insurance is almost never so required, and the ethical considerations appear to be similar. In both cases, the client must be fully informed as to possible conflicts of interest, and consent in writing thereto. Many ethics opinions have been written in other states concerning title insurance; some states prohibit the sale of title insurance by attorneys, and others allow it. In Advisory Opinion 85-04 (2/86), this committee opined that an attorney could represent both an individual client and a title insurance company and receive commissions on title policies sold to the client.
Under the Rules of Professional Conduct, it would appear that full disclosure by the attorney of all material matters and written consent by the client thereto will allow the arrangement described above to be carried out; however, the attorney must constantly act in the best interests of the client without regard to the attorney's own financial interest in profiting from the arrangement. The test of the Rules of Professional Conduct is a subjective one: does the attorney believe that he will be able to represent the best interests of his client in spite of the attorney's conflicting interest? It is left entirely up to the attorney to decide if he can. Doing so will be difficult at best, and the American Bar Association, in Informal Opinion 556 (5-31-62) concluded that as a practical matter it would not be possible. As to what constitutes full disclosure under the circumstances, a 1989 opinion of the Ohio Bar (Ohio Opinion #37, 7-3-89) (concerning title insurance) stated that an attorney must disclose his beneficial interest in the insurance company, compensation paid to the insurance company, any indemnity agreement that the attorney has with the company and the amount of fees or commission to be paid to the attorney, together with any impact such arrangement might have on the attorney's professional judgment. The opinion also suggested that an attorney might receive an excessive fee (prohibited by Rule 5) if he receives a fee for legal services provided for the client together with a commission from the insurance company.
The facts show that referrals will be made from the law firm to the insurance agency, but are silent as to whether referrals will be made from the insurance agency to the law firm. It is possible that such referrals could constitute personal solicitation, which is prohibited under Rule 7.3, although the rule does not directly address a similar situation. The purpose of the rule appears to be the prevention of misrepresentation in advertising, as well as discouraging the promotion of litigation by attorneys. Neither of these concerns are apropos under the present factual situations, so long as the attorney in fact makes no misleading statements to the client, as no litigation is involved.
The attorney may not assist any employee or agent of the insurance agency to engage in any part of the practice of law, as such conduct is prohibited under Rule 5.5. The rule contains an exception for the provision of professional advice by attorneys to non-lawyers whose employment requires knowledge of law. This exception should apply to insurance agents, who must have a working knowledge of the laws involved in estate planning in order to perform their work.
Where the line is to be drawn between the practice of law and the work of the insurance agent is a question beyond the scope of this committee's duties as it involves a question of law, and should be referred to the Unauthorized Practice of Law Committee. Rule 5.4, which prohibits fee sharing with non-attorneys, could apply here, if the two businesses are not sufficiently separated. Members of the law firm should not represent that the insurance agency will provide better prices or service than other agencies without a factual basis for such claims. Rule 7.1.